Mythical Evaluations and Reality
The current marketplace is in a state of flux. Some people claim there’s a bubble, others reject this statement. Whatever the real state of today’s markets, it’s wise to reflect on the “evaluation vs opportunity” of costing items. I recently tried to buy a domain name from a squatter. They claimed they were building a startup but the startup’s domain had been registered for some years. I have worked in the startup community for a while and long term startups aren’t that common, in my experience.
I contacted the person and offered them a couple of thousand dollars for the domain. What happened next is pretty mind blowing. They claimed the domain is worth 250,000.00 US. With no negotiation. WOW.
First off, if this person has an idea that they are passionate about it, then that’s fantastic. But let’s evaluate what that domain is really worth by treating his idea like a real business and using this crazy concept called “data” to understand what it could actually be worth.
I know, I know. You believe you will be the next Google, Apple, Facebook or Uber. Yes, your idea will generate 100,000,000 users who cannot exist without using your idea 2–3 hours per day because it’s an addictive, brilliant premise..
Time for a reality check. Yes, there are exceptions but most startups will not match the phenomenal success of the Google, Apple, Facebook or Uber unicorns (those private companies claiming valuation of at least $1bn).
In 2015, only 14% of U.S. IPOs were done by tech companies, the smallest percentage since the mid-1990s, according to figures from Dealogic.
And many of those U.S. companies that went public have seen their stock prices suffer, reporting a median return of zero compared to their optimistic IPO price.
Just getting to the IPO stage is difficult enough as 80% of startups fail within the first 18 months, according to a study by Bloomberg, but getting your stats right can be a difficult business in itself. It’s safe to say though that the majority of startups do not see the global success of Google.
The most two common scenarios, in my experience, are that your startup grows and fails, or it’s acquired. Few end up going IPO or being acquired for billions.
And let’s get our language right here. Stop calling it a f*cking startup. If you started your business years ago and have launched nothing then it is a failed business. Or it’s just an idea. Calling it anything else just makes everyone who has run a startup look bad. A startup is a business. Nothing more, nothing less. Get real and remember your company’s worth is based on a few things:
- Paying customers
- The revenue you bring in and the term of that revenue
- The team you have built
- The intellectual property you have generated
- The strategic momentum you possess
Let’s go back to our optimistic domain squatter. Is your name really worth 250K with no paying customers, revenue and, most likely, no team or IP?
It’s just an idea and it’s time to get real. If you believe that idea needs to be cherished, then do not place a price on it. When you put a price on an idea then you are setting boundaries on what the company is worth. And how can you allocate a value to a company that does not exist?
For this specific case, I would say the domain was probably worth 1–5K. A good name is important, but who would have thought “Google” would be the #1 search engine.
As a founder, you have to look at every opportunity and get real with your expectations. If you don’t, then reality will soon make you get real or, even worse, fail.