How to value your startup

"What is the appropriate valuation of my business?" It's one of the questions I get the most often from aspiring entrepreneurs. And what usually sparks it is an upcoming financing or pending takeover offer.

The answer is quite simple: Just as with anything, your business is worth what somebody is willing to pay for it. And the methodologies applied by one buyer in one industry may be different from the methodologies applied by another buyer in another industry. 

Here are some ways to value your business in a way that will make sense to you and line up with investor expectations.

To start, let's not forget about the obvious: The natural economic principles of supply and demand apply to valuing your business as well. The more scarce a supply (e.g., your equity in a hot new patented technology business), the higher the demand (e.g., multiple interested investors competing for the deal, and taking up valuation in the process). And, if you cannot create "real demand" from multiple investors, "perceived demand" can often work the same when dealing with one investor.

So, never have an investor think they are the only investor pursuing your business. That will hurt your valuation. And, before you start soliciting investment, make sure your business will be perceived as new and unique to maximize your valuation. A competitive commodity business or "me too" story, will be less demanded, and hence require a lower valuation to close your financing.

Another important factor: the industry in which you operate. Each industry typically has its unique valuation methodologies. A next-generation biotech or clean energy business would get priced at a higher valuation than yet another family diner or widget manufacturer. As an example, a new restaurant may get valued at three to four times earnings before interest, taxes and other items, and a hot dot-com business with meteoric traffic growth could get valued at five to ten times revenues. So, before you approach investors with valuation expectations, make sure.......

Guest Post: Top Financial Pitfalls for New Entrepreneurs

If you’re just starting out on your entrepreneurial journey, you should know that you’ve got a long and potentially hard road ahead of you.

About a third of new businesses fail in the first year; half of new businesses close by the end of the third year. In some cases, businesses fail because of marketing mistakes, economic factors, or even mismanagement.
In some cases, however, new businesses fail because of financial mistakes that could have been avoided.

Here are some of the top financial pitfalls new entrepreneurs face, and what you can do about them:

Borrowing money because you can. Small businesses need cash to get going, but borrowing money adds to your overall financial burden in the form of interest. If you must borrow money to get started, do so, but don’t borrow more than you need. Take the time to choose the right loan program and lender as well.

Not paying payroll taxes in a timely fashion. This is one that gets a large percentage of small businesses When you pay your employees, you’re collecting a portion of their money in order to pay the government. This responsibility is squarely on your shoulders. Every time you cut payroll checks, you need to put the tax liability into a separate account that won’t mingle with operating funds. It’s no longer yours. Wait too long, and you’ll wind up with penalties, interest, and a painful struggle to catch up.

Offering credit. New businesses want to get off the ground. They’re hungry for sales. Yet, if you’re not able to collect on the money that customers promise to you, your business is going to close. Even if it’s accepted practice in your industry to extend credit and accounts receivable, think long and hard about doing this.

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7 Reasons Some Entrepreneurs Don’t Meet Their Potential

This post originally appeared on the American Express OPEN Forum, where Mashable regularly contributes articles about leveraging social media and technology in small business.
No one ever said being an entrepreneur is easy. Creating your own business and career path is tough — and succeeding in this lifestyle seems to require an elusive mix of traits.
After all, most of the entrepreneurs I know are intelligent. They are hardworking and usually at the top of their given field. However, all too often I’ve watched these smart people go from thriving in the workplace to struggling as a business owner.

There are numerous reasons why some entrepreneurs make it big, while others flounder. Here are seven key reasons why some entrepreneurs fail to live up to their potential.

1. They Don’t Have a Passion for Running a Business

Passion is usually not in short supply with entrepreneurs; however, this doesn’t mean that all entrepreneurs have a passion for what’s needed. Many times, people have tremendous passion for their product, service or technology — but this doesn’t necessarily translate into a passion for managing a company. Running a business doesn’t just mean developing a product; it takes sales, dealing with customers (and investors), finding partners, managing employees, vendors and more.

2. They Need to Please

Kindness is a wonderful trait — and one that we need more of in business today. However, a relentless need to please can be detrimental to the entrepreneur. People with this tendency often overextend themselves in the workplace and bend over backwards for others. In short, it’s hard to achieve your own goals when you’re constantly focused on trying to make everyone else in the room happy.
To succeed as an entrepreneur, you’ll need to recognize the difference between being generous (i.e. wanting to help a customer or colleague) and wanting to avoid conflict and disappoint others.

3. They Can’t Work Without a Playbook

13 Lessons From A Great Social Entrepreneur, Pamela Atkinson

Pamela Atkinson, an advisor to the last three governors in Utah, an Elder in the First Presbyterian Church and a tireless advocate for the homeless and refugees in Utah, still volunteers her time actively and personally among Utah’s poorest people and counts them as her friends.  She sat down with me recently to share her insights from her more than twenty years of humanitarian service.  The following are the lessons I drew from her:

1. Ego has no role in service:  Pamela describes herself as “an ordinary person” despite the fact that almost no one who knows her would describe her that way.  Years ago, she helped rally the town of Logan, Utah to create a health clinic for the uninsured poor there.  Although she was the driving force for the project, she focused on getting the community to own the project, which meant that she had to move quietly to the background as the community rallied to build their own clinic.
2. Collaboration:   There are three important “Cs” in relation to service:  coordinate, cooperate, and collaborate.  Of these, “collaborate” is the greatest, she says.  After she launched her homeless outreach program in 1991, visiting homeless in their camps each week, she welcomed the Utah Chapter of the Volunteers of America who wanted to run and expand the program.  She continues to participate in the expanded program more than twenty years later.
3. Don’t “be afraid to speak out”:  Serving as an advisor to three governors, she has learned not to be afraid to speak out.  “If I feel strongly about an injustice, an issue that is not being addressed in a collaborative and focused way, then I need to speak out,” she says.  She’s learned that even when everyone in the room openly opposes her, she’ll often get private indications of support from people who are grateful for her leadership.
4. Never let issues interfere with relationships: 

10 top reasons First-time entrepreneurs fail

"For entrepreneurs -- especially those just starting out -- businesses succeed as much as they fail. I’ve seen this time and again as a mentor and entrepreneur. But statistics also suggest that the failure rate for new startups within the first five years is as high as 50 percent.

Of course, real entrepreneurs treat business failure as a milestone on the road to success. They count on learning from their mistakes, and use the experience to move to the next idea. But why not learn from the mistakes of others, without all the pain and suffering?

Here is my list of 10 top startup failure causes -- and how to avoid them:

1. No written plan. Don’t believe the myth that a business plan isn’t worth the effort. The discipline of writing down a plan is the best way to make sure you actually understand how to transform your idea into a business.

2. Slim or no revenue model. Even a non-profit has to generate revenue (or donations) to offset operating costs. If your product is free, or you lose money on every sale, it’s hard to make it up in volume. You may have the solution to world hunger, but if your customers have no money, your business won’t last long.


3. Limited business opportunities. Not every good idea can become a blockbuster business. Just because you passionately believe that your product or service is great, and everyone needs it, doesn’t mean that everyone will buy it. There is no substitute for market research, written by domain experts, to supplement your informal poll of friends and family.

4. Can’t execute. When young entrepreneurs come to me with that “million dollar idea,” I have to tell them that an idea alone is really worth nothing. It’s all about the execution. If you’re not comfortable making hard decisions and taking risks, you won’t do well in this role.
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To Find Your Next Great Business Idea, Narrow Your Focus

When you’re just starting out in business, narrowing your target market can be difficult for fear you’ll be excluding part of your potential customer base.

But if you can clearly define a market and its needs upfront, you can tailor your product or service offerings narrowly to meet that demand and quickly gain more wallet share than your competitors.

Related: How to Target Your Message to Find Customers

What exactly does this mean?

1. You could be like the enterprising young woman in northern California who discovered a secondhand store’s almost hidden section of distinctive children’s clothes and toys. As it turned out, the store’s owners wanted out of what they saw as a dead-end business. The woman took over the lease and reoriented the entire operation to focus only on children’s products, turning a 1,200-square-foot “dead-end business” into an 800-square-foot startup that was profitable in six months and expanded into a new downtown location.

2. You could be like the mechanic who went through the lengthy and fairly expensive process of getting his auto dealer’s license so he could go to the local car auction to make bids, specifically on older model BMWs. He didn’t want to sell the whole cars, but rather to take them apart and create a line of aftermarket parts for BMW owners and mechanics.

3. You could be like the computer repair technician who decided to strike out on his own in the highly competitive field of information-technology services, only to discover a more specialized market that offered higher rates, more loyal customers and more referral business. That narrow market turned out to be Apple computers.

These examples illustrate a general truth about business opportunity: The true opportunity may not be apparent at the outset. Niches exist in every broad category, and your job as an entrepreneur is to figure out what they are and whether they offer a profitable business opportunity. Find More:

Want Great Marketing: Follow Apple’s Example

On August 20, 2012, Apple surpassed Microsoft to become the largest public company in history. It’s a fact that makes it easy to forget that, not that long ago, Apple didn’t even exist.

What’s contributed greatly to Apple’s success is great marketing. As most people know, Steve Jobs was a big believer in great, smart, creative marketing. It’s something he believed in from the very beginning of Apple.

Back in 1976 when Apple was just starting, Steve and his two partners had some big decisions to make. One, was about marketing. Unlike other startups and small businesses who see marketing as a questionable or unaffordable expense, Steve saw it as an important investment that was absolutely necessary to get the word out and grow the business – even with limited funds.

So, just months after incorporating, Jobs hired ad agency Regis McKenna. The agency designed Apple’s logo and handled all of Apple’s early advertising, marketing, and branding. Apple took off.

A few years later, after Regis was sold to Chiat/Day, Apple continued a close relationship with Chiat to produce some of the most brilliant advertising of all time. Steve Jobs will go down as one of the greatest marketers in history.  Yet he’d be the first to tell you that most of the credit belongs to the great advertising and marketing people he hired.

Because Steve was such a dynamic front man for Apple, it’s easy to think he deserves all the marketing and advertising credit. He was involved with all of it, and he had the final say, but he didn’t create it. Steve came up with the Apple name and that’s about it. The iconic “1984” and “Think Different” campaigns were created by the agency. The name “iMac” was created by the agency. All the advertising and marketing for the Mac, iMac, iPod, iPhone, including the brilliant “Mac vs PC” campaign was created by the agency. Read More: