You need to execute to justify valuations

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: How much will my stocks be worth in five years?” was the question the senior corporate executive asked the CEO of a start-up. “I don’t think my stocks are worth anything now, so I want a big salary raise considering the fact that I’ll be spending the next few productive years of my working life with you,” was the refrain from a senior manager of a young start-up. “What will your exit valuation be?” asked the junior VC partner to the entrepreneur as if anyone had the answer.

All too often such scenarios play out in young companies. These questions are not easy to answer with any certainty, given the state of the company. Yet, these questions need to be addressed. The trouble occurs when these perfectly legitimate questions consume the start-up team in such a way that enormous energy is expended in explanations and negotiations with employees and investors leaving the start-up shaky before take-off. It becomes really important to keep some basics in mind.

First, in the early stage start-ups, valuation is almost entirely subjective. Qualitative issues such as quality of the team, the market size and growth, market opportunity, uniqueness of the offering, the business model, the amount of capital being raised and likely to be raised, the kind of exit, the competitive pressures on the investor, investor’s investment model etc are factors that determine the valuation. Being subjective, the beauty lies in the eyes of the beholder. However, smart investors while negotiating hard generally do not squeeze the entrepreneur beyond a point knowing that the key to their success is a motivated and charged up entrepreneurial team. One cannot make money at the cost of the entrepreneur, so while starting valuations might seem tough, investors are open to parting with equity if the team executes to the plan. Assuming one has researched the investor(s), there must be some faith in their judgement.

At the same time, naivete should not be the cause of being handed a lemon of a deal. You too should be professional and demonstrate understanding.