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Art of Valuation: How to Balance Between Bargain and Bizarre?

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The question of value is of vital importance to a company looking for funding and even more important to someone building their investment portfolio.

A good valuation is a bridge between stories and numbers, says Aswath Damodaran, a professor of New York University’s Stern School of Business who recently talked in Nordic Business Forum in Helsinki about valuation. 

He likes to point out that valuation can never be just about numbers but that there has to be a story. Damodaran has done valuations for the biggest companies in the world like Amazon and Tesla.

The balance between the story and the numbers of the company is fascinating. Working with growth companies, it is easy to relate to Damodaran’s thinking that the younger the company is, the more important is its story. As the company matures, the numbers begin to be more and more important. In fact, the valuation of profit-making larger companies becomes very easy, as you will have a number of listed comparable companies available.

Startups often struggle with valuation. They feel the investors want numbers that they might not be able to provide yet. It might help them to think that it’s ok to concentrate on the building of a narrative that makes it easy for an investor to see the potential. 

Usually, credible stories revolve around megatrends, and it does not hurt to back them up with numbers from these trends.

Also, according to Damodaran, there are two types of investors, and a reasonable valuation speaks to both of them: the ones focusing on numbers and the ones focusing on narrative. There is obviously a fair percentage of spreadsheet lovers among investors, but especially people investing in growth companies have learned to expect a lot from the narrative.

Among Invesdorians, these two investor types seem to be equally present. 

What the number crunchers look for in a valuation?

  • Accounting statements
  • Cash flow projections
  • Statistical Measures
  • Pricing Data

Whereas the storytellers tend to appreciate:

  • Anecdotes
  • Megatrends shaping the future
  • Experience (own or others)
  • Behavioural evidence
  • Experience and composition of the team

At Invesdor we help growth companies with their often stressful task of valuation. At our platform, it is incredibly important. If it is inflated, the company’s round will not succeed. If the valuation is too modest, the company does not use all its potential.

Especially with loss-making companies, estimating the fair valuation can be a tough task. Generally, it is still always possible to define. VC or a professional investor makes his or her money by spotting the fair valuation, buying it with a substantial discount and then finally selling it high. Digital platforms increase transparency of valuation and make the bid-ask spread more narrow.

Today, the right valuation is even more crucial – especially when it is vetted by a large community of investors, not just a single VC looking for a bargain.

We at Invesdor want to make participation in finance easy and fair for everyone. If you want to have our help with valuation and fundraising, please click below to get in touch with our deal flow team.

Interested in raising funding? Get in touch ➤

(Image source: Shutterstock/zendograph)

Tagged: Points of view, Invesdor Insider, Investment-based crowdfunding

Lasse Mäkelä

Written by Lasse Mäkelä

An investment banker and CFO by experience, Lasse heads Invesdor as its CEO and co-founder.