Professional angel investor, speaker and business mentor Mark Lyttleton is the founder of Prana Partners, a venture conceived with the mission of investing in companies and sharing knowledge to bring a degree of collaboration and humanity to business. Committing to adding value to clients, Prana Partners offers a full spectrum of services, covering issues such as financial structuring, strategic advice and mentoring, as well as bespoke services tailored to the unique needs of each individual client.
This article will explore the topic of private company valuations and how this point-in-time snapshot helps founders to position their company for growth, particularly in terms of raising money to invest in the business.
Placing an accurate value on a company is as much an art as a science. The obvious starting point is to seek out similar companies to use as comparatives. Business owners then need to factor in metrics such as varying growth rates, client and product diversification, addressable market size, quality of management and balance sheet differences.
Company valuations are a crucial aspect of business, not only for business owners but also for existing and potential investors. A company valuation provides a measure of success, helping companies to track their performance compared with market rivals. Investors use these valuations to gauge the worth of potential investments, analysing information and data disclosed by the company.
A private company's valuation needs to be high enough to attract investors, yet at the same time it is crucial for founders to be realistic about their expectations. Where founders raise capital on the back of overinflated valuations, this presents the risk of disappointing investors with ‘down rounds' later on when the value of the company dips below its estimated worth in a previous fundraising round. Of course, there are exceptions to every rule, and a compelling narrative can go a long way towards instilling confidence in this regard.
While public companies were generally considered a more attractive investment option in the early 2010s, given the tremendous growth of new tech fuelled by huge investment in the private equity and venture capital markets this preference for public companies has largely reversed. Roblox, Uber, Block and other spectacularly successful companies have flourished under private ownership, triggering a stampede for shares when they eventually go public.
Determining the value of a public company is generally simpler than valuing a private company, since more information about public companies is a matter of public record. Nevertheless, private companies need investment in order to thrive, typically offering investors a share in the company in return for collateral. Private companies may offer employees the opportunity to invest, or alternatively seek private equity or venture capital investment. In trying to attract investment from outside parties, a company's valuation will be a primary consideration in investment decisions.
Comparable company analysis is the most common way of estimating the value of a private company. This involves identifying comparable publicly-traded companies that most closely resemble the private company, exploring aspects such as size, age and growth rate. Typically, several similar companies operating in the same industry as the target company are analysed. Once an industry group is identified, the next step is to calculate averages of their valuations and multiples to assess where the private company fits within its industry.
