On Tuesday, January 26, 2010, a workshop titled “What You Need to Know About Valuing Your Early-Stage Company” was attended by 75 people, of whom 55 were entrepreneurs. The workshop was a joint undertaking by CTech (www.CTech-CT.org) and the Entrepreneurs Association of the Connecticut Venture Group (www.CVG.org).

At the beginning of the session, the attendees were asked how many of them were trying to raise funds for their startups. A sea of hands went up. The three panelists, Frank Morse (an investment banker), Konstantine Drakonakis (a venture capitalist) and John Seiffer (an angel and entrepreneur), spoke candidly about key issues to consider when raising funds and selling equity in one’s startup. There were some key takeaways from their presentations:

• There is often a huge difference between the entrepreneur’s and the investor’s estimate of value. The entrepreneur’s first priority should be to GET THE FUNDS. Traditional scientific approaches that rely on income, discounted cash flow or asset value to value a company do not always work for early-stage companies. The process is largely an “art,” the result of creative negotiations that result in a mutually accepted value. So, don’t get hung up on valuation, but work hard to get to an agreement with the investor, because getting the funds will propel your company forward.
• Investors invest in the belief that there will be future cash flow; they do not invest in products.
  
• Capital-efficient models – those in which small amounts of money are used to efficiently bring products to market – are preferred by investors.

The panel also discussed some factors that investors weigh when evaluating startups: (1) a proven technology or product, (2) some revenue, (3) reasonable cash flow break-even projections, (4) an experienced management team, (5) regulatory compliance systems in place, (6) intellectual property, and (6) an exit strategy.

A videotaped recording of the January 26 workshop is available on the CTech Web site. Please also check the site for details about future CTech workshops.

Charlie Moret
Managing Director, Business Development

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