Whether it is a start-up or a big public company; the resources are always limited. You need to achieve company goals with minimum possible expenditure of resources. Managers deal with day-to-day operations but at the end, a company’s success always depends on the results. Here are some important criteria that are taken into consideration during company valuation.
- Growth: Online businesses are expected to grow at very high rates. Growth can come from market itself, marketing efforts, bigger team or acquisitions; all are the investments that a company makes. A sustainable business is the one which gets the most from its investments. The most extreme example I have seen was the one where marketing costs were approximately 40% of the sales to achieve hyper growth. In order to create resource for the fixed costs such as payroll or general expense, your gross margin should be much higher than 60%; which is very difficult to achieve in most of the industries. Furthermore you won’t have any resource left in order to hire talent and grow your team. The growth rate itself only makes sense together with the methods used. That’s why investors started to give more importance to ROI instead of user growth rates.
- Margins: Margins are closely related to the product and its value proposition. If the only value you offer is low price, this will lead to decrease in margins, again will leave you with very limited resources to grow your business and make it profitable. I have seen these examples especially in e-commerce sector in Turkey, where most of the competitors try to sell exactly the same product with lower margins. The e-commerce companies that could not differentiate themselves in the market faced failures.
- Marketing: Building a sustainable business requires smart marketing decisions. Especially for online businesses, there are tons of tools to measure how we spend our marketing budget. It is a variable cost and the important metric here is the ROI. As I mentioned in the “Growth” part; marketing efficiency is closely related to sales. What percentage of sales do you spend on marketing? What’s the customer acquisition cost? How much does it cost to acquire a new customer from each marketing channel? The efficiency is closely related to how much sales or value you expect from each of your customer. Facebook ads is relatively cost efficient compared to AdWords. Or if your product is B2B, Linkedin might be a more expensive but an efficient channel to target the right audience.
- People: Without any doubt, one of the most important thing in a company’s success is “team”. We see many successful companies put talent acquisition their number one priority. It is important to hire the best people. Equally important is to make sure your organization is managed efficiently and you build the right performance measurement system to motivate and award the talent. Payroll costs are not variable like marketing costs but still there are some KPIs that we can look into. For example if you have a big sales team, or in other words you are a sales organization; one of the metrics that might be analyzed is “Sales per head”. You can compare your company’s sales per head with market average or each competitor to see whether you are managing your sales team efficiently.
- Cash Flow: “Cash is king” is an expression sometimes used in analyzing businesses or investment portfolios. It refers to the importance of cash flow in the overall fiscal health of the business. If there is a mismatch in your collections and payments, you need to manage the gap via different instruments. For example if you collect receivables in 3 months and make your payments in 2 months, then you need a financing for one month. If you are a start-up company and you are burning cash, you need to know how long your initial investment will be sufficient to run your operations. If you received an investment from a VC, you need to plan how to use that cash to grow your company and increase its value. Another challenge is the collection risk, for which most of the big companies make estimations and adjust their plans accordingly in order to minimize the risk.
These are the main principles in general, and may change from case to case. For example, start-ups burn cash in order to develop a product and gain market share and do not prioritize sustainability from day 1. Even if this is the case, they still need to know how much cash to be burned, how much to spend in marketing or team until they become profitable.