Wednesday, May 8, 2013

How much would you pay to "valuate your idea"


Recently an email request touched a raw nerve, perhaps more than it should have. Reproduced here for you to form your own opinion is the email exchange in its entirety - save for the name and details of the sender.

Notes: 
a) in the discussion below it is taken for granted that "the idea" is a tangible idea that can be commercialized;
b) it should also be noted that I do have high regard for this person - am noting this as some may believe my responses to reflect otherwise;
c) a lakh is 100,000; a crore is 10 million or a 100 lakhs.

The seemingly innocuous request
"Hope you are doing good. From the last 1 year i have traveled a lot and have been to a lot of people with various hats at different levels ( I mean founders who made millions, successful Startup teams, listed to investor talks, met people who have great ideas, etc,.)
And recently i have met an interesting person and made me to think of this -> " How much an entrepreneur would like to spend money to valuate his idea(a Million Dollar idea of an Entrepreneur) from a Real Expert, an expert who has great experience in Building Business". I would love to listen to your opinion
Please answer thinking of your own scenario."

My opinionated response (he was asking for an opinion!)
I think that the question you asked is a wrong question. Presumably the question is deemed relevant because an entrepreneur does not know if the investor is valuing the company fairly. 

No one knows the future and no one can therefore come up with a correct value - except by complete chance and that too only time can tell!

The better question would be: "how much would you pay someone to help you understand the parameters that will determine the value of the company".

An even better question would be: "how much would you pay someone to help you understand the parameters that will determine the value of the company and give you advice on how best you can optimize those parameters".

That said, how much one can pay would be a percent of perceived value - in other words a business whose valuation range is in lakhs would be willing to get an "unbiased opinion" for much less than someone whose valuation range is in 100's of crores!!!

Best thing for an entrepreneur is to come up with his/her own valuation and valuation range under various scenarios (good/bad/ugly etc.) based on as good an understanding of the product, client, competition and resource availability as possible.

Once that is arrived at, the entrepreneur has to be honest with himself/herself as to their ability to execute plans and strategies under various scenarios and factor that self-assessment in to the valuation.

Remember also that it is an iterative process. Should an investor be interested in your idea and not be put off by unrealistic valuations, chances are that if they believe you have to factor in some issues you have not considered, they will allow you to "run your numbers" again.

Another attempt by the sender
Hi Vishnu Thanks for your analysis and time spent on this, what i really wanted is not to valuate the value of the company rather i asked if the Entrepreneur would like to spend money to valuate the idea and the scalability of his product in market. There is a need for every 1 to evaluate his/her idea before they jump into the market.

..... but I am not having any of it!

The answer remains the same. There is no value to the idea if the idea is not in the market. If it is in the market, it is commercialized. If it is commercialized it is a business.
Of course there are ideas that are valuable but poorly executed and then one can argue that the idea had a different valuation than the business.
Yes, in hindsight, but not at the time of the valuation.

Even if given for free (i.e. you give away the product) all that it means is the value was not got by the person who commercialized it!

Some comments that were not a part of the emails

1) Perhaps I should explain the last sentence. The person who emailed implied (in my opinion) that the value of an idea is distinct from the value of that idea as a viable business. I therefore brought in the zero revenue aspect.
Should a valuable product be given for free, there is obviously no revenue, only cost. The value would then need to be measured on a basis other than revenue - but the cost and risk parameters would still need to understood and evaluated should the idea be sustainable.

2) Am I being unfair? You judge.
I believe that if you outsourced the evaluation and then some things changed,  you would very likely need to go back to an external agency to help you figure out your own business. Far better for you to get help on "how to value" rather than to outsource the valuation. 

3) I am fully aware that at the ideation stage, risks are higher because the unknowns are higher, and that therefore the valuation range could be wide. That is also precisely why, the ability to sense and make sense of, the parameters that will impact the value of the idea as a business becomes important. Far better to understand that, than to not.

All this reminds me of a quote that was made by some famous investor (forget who) which goes something like this: "I never buy a stock on somebody else's recommendation because then I would have to call them to know when to sell it."

Don't do it if you do not understand it (as well as you can!).

Stay true.

Vishnu.