Startup companies often struggle to determine valuation in the context of an acquisition or other significant transaction. While it is possible to peg enterprise value by seeking a qualified valuation or by hiring consultants, those methods are not always indicative of value as viewed through the prism of an acquirer or transaction partner. Large deals between large companies typically are priced to market; whereas deals involving smaller companies, especially when the counterparty is much larger, are priced to the value proposition. If that's true, then how should smaller companies think about their value proposition when typically they do not have sales revenue or products in the marketplace?
The key is to create a perception of value long enough to attract investment and, ultimately, exit. Perceived value can take many forms, but there are three essential ingredients to creating a market perception of value. First, the company must have data. One cannot underestimate the value of data to substantiate proof of concept, show progress toward stated goals, and demonstrate commercial potential. Obtaining data is expensive and the lack of sufficient funds is often the reason that early-stage companies do not have sufficient data. However, companies often cannot raise capital without significant data. Thus, it often becomes necessary to bootstrap funding in order to obtain data that will drive more substantial financings. Bootstrap financing may come in the form grants, loans, angel investors, family offices, or friends and family.
The second ingredient in creating a perception of value is to have the right patent protection in place. The “right” patent protection means focusing innovation on commercial opportunities in order to create effective barriers to entry. Patents, via their claims, are the expression of an exclusionary right that is provided by statute in exchange for full disclosure of the claimed barrier. Full disclosure is the quid pro quo for the exclusionary right and provides others with the opportunity and incentive to improve on the claimed invention. However, the value created by patents resides in their ability to impose effective barriers to entry in areas of commercial importance. Properly crafted, the barriers created by patent claims not only provide exclusivity but also level the playing field with respect to other, more sufficiently capitalized, entities (ignoring, for the moment, potential difficulties in enforcement). The best patent claims focus on exclusivity in broad areas of application of a technology. This often requires stepping back from the technology and focusing on its commercial applications. Patents, unlike peer-reviewed publications, are not about the technology, pe se. Rather, they are about translating that technology into the exclusionary right that is the purpose of the claims. Do this correctly and the enterprise value of your company will go up.
The final ingredient in creating the perception of value is to employ surrogates. These typically are key opinion leaders in the field, the kind of people everyone looks to as the domain experts in their field. It is always more powerful to have someone else say how great you are rather than saying it yourself. Moreover, the legitimizing effect of having luminaries vouch for a company's technology provides the assurance that many investors need. The leaders in a field are often willing, and flattered, to engage with a company as a technical advisor or scientific advisory board member. They will help identify problems and will often contribute to solving problems and plugging holes in the technology. However, the main value of having the right surrogates is the value of legitimacy, which promotes the perception of value.
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