How to Value Your Business Idea

Investors and funders encounter people with business ideas across every industry, looking for funding.  In most cases, these would be entrepreneurs overvalue their ideas.  In some cases, they have no idea how valuable the idea they have is.  There is always an angle, perhaps a minor part of the entire premise that has potential beyond what they conceive.  There is no shame in a founder not recognising the true value of his idea.  When they deal with venture capital and angel investors, they are dealing with sharks, with years of experience, with a team of analysts. 

Here are some points to consider when assessing the true worth of what any founder brings to the table.  Of course, these are generalities.  There are people who are exceptions to the rule.  Exceptions to the rule tend to be straightforward and to the point. 

When meeting investors, there are three main scenarios.  If they ask polite questions, and then say they will contact you or consider it, they likely will not.  They are not interested, or the idea is simply not good enough.  Sometimes, especially with institutional investors, the questions are quite in depth and confrontational.  In such a case, due diligence has started, but they need to be convinced.  There may be a good proposition in there, but it does not have enough potential, or it needs some refining, or simply, it could be a great idea, but they do not believe in you or your team. 

Or, there is the third scenario.  This is when the investor asks questions about the structure of the company, the nature of the idea, the market positioning, the genesis of the idea, and so forth.  They want to know how it works, and how you came up with it.  The more confrontational the questions, the more probing they are, the more interested they are.  This is both a good sign and a dangerous one.  In such a case, you know you have hooked them.  What you want is their money.  You give them enough for them to understand what you are presenting, but not enough for them to take what they need and start it somewhere else. 

In such an interaction, you need to pay attention to the questions, and the direction it takes.  You need to note what they specifically ask for.  That is their angle.  That is what they are looking at.  At that juncture, you should go back and relook that specific aspect, and see if you can see the opportunity in it. 

If the idea has potential, there is likely an established company working on it.  In that confrontational series of questions, if the investors lip up and mention that a larger company is working on the same issue, it is a validation of your idea.  That larger company may have the resources and personnel, but it does not guarantee success.  The difference is that you have only this ideas, this one shot to succeed, and all your effort is poured into this.  For a larger corporation, it is likely one initiative our of a series of initiatives.  There are more layers of management, and they will move slower.  What you are now selling is exclusivity, something investors will not have with a larger company, where they are simply one our of a group of shareholders. 

It is important to remember is that when you pitch, you are not actually selling the idea.  You are really selling yourself as a credible, capable person, qualified and determined to implement that idea.  A person can have a great idea, but if the investors do not believe in his capabilities and qualities, they will pass, or they will look to buy you out of your own idea or company. 

There are two ways to gain this credibility.  The first is to have a successful exit.  Everyone loves a winner,  This does not solve the problem for people doing this for the first time.  The second way is to build your credibility as an industry expert.  This means writing about it, this means speaking about it, this means presenting about it in forums.  If you are capable of articulating your ideas, analysing industry trends, explaining consequences and developments; you are seen as an authority, and an authority in the industry gets those meetings with investors.  They get that funding and that backing.  This halo effect increases the value of your ideas. 

To get a sense of the value of your product, or service, speak to people who would constitute the target demographic.  People are invariably polite, even investors.  If what you present does not excite them, they are likely to say that this is a good idea, and they will give you advise.  This is a “no”.  If your deck, if your presentation does not excite them, go back to the drawing board.  When they start saying they are interested in getting it, or how it would take the market, or how it excites them; that means the deck works, and the value of the idea goes up.  This means people are willing to put money down, not just words. 

You know when your idea has traction when people are unhappy about the alternatives they have.  As long as there is some dissatisfaction, and you are able to address it, you have a market, and when you have a market, your idea has a value commensurate to that potential market and its immediate growth. 

In summary, if you only need a good enough idea; it does not have to be great.  As long as you are seen as a credible founder, you will get backing.  As long as you can address a need, that is your market.  As long as you can get people excited, you will have fans, not just customers.  When you can quantify those fans and the market, you have an idea what your idea is worth, and that puts you in a better position when you value your capitalisation table prior to seeking funding.