2 schools of business valuation

A favourite game of entrepreneurs, especially in the technology industry is discussing whether companies are worth the price they are bought out for. $1.5 billion  for Youtube ………. Sales prices with infinite price earnings multiples (because there are no earnings, or they are loss making). Versus a company being sold for a few times it’s annual earnings with a long period of earnings history.

A more relevant discussion would be which school of business valuation was used during the transaction, and there are two:

1. Sale price representing believed potential

2. Sale price representing return on investment reality

Which is more valid? Well it depends on which side of the equation you are residing. I’d say when selling, we should be aiming for potential. When buying we should go with reality. When buying a business the simplest question to ask ourselves is this:

On current earnings, how many years will it take me to get back my original investment.

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There’s no doubt certain industries are more likely to sell using the potential valuation method. Burgeoning industries like the internet, IPO’s and even railways 200 years ago are good examples. To get away with selling on ‘potential’ the industry needs to be growing, the future unknown and your company well known. If your startup ever gets enough traction to sell to an incumbent, then take what you can get – sell on potential.

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Timing vs Time in

The timing versus time in argument is a long standing one in investment circles. And it gos a little bit like this:

People who are for ‘timing’ the market proclaim that smart investors should time their entry and exit for their investments. And that investors should exit when markets are too hot, for example when price earnings ratios are well above the long term average. And enter at the opposite end of the spectrum. Resulting in higher profits.

People are are for ‘time in’ the market proclaim that smart investors should stay in the market at all times. That when you enter or exit the market does not matter so long as the investment has been in market long enough. Which will result in a long term result of profitability due to the period of time in the market, allowing market averages to endure.

Both parties happen to be correct.

What neither side bothers to discuss is most important factor in either strategy. Probability. The probability of success of either the two different investment strategies. It turns out that it’s a pretty simple proposition related to risk and probability.

Timing the market – Can have very high returns (losses) but a much lower probability of success.

Time in the market – Has average returns (rarely losses) and a very high probability of success.

Numerous studies have proven the above to be fact.

How does this pertain top startups? Well it reminds me a lot of the internet and entrepreneurs attitude towards it. Most entrepreneurs believe that the only way to succeed is to win big. To sell out our startup to some digital behemoth. Our business brains have been hijacked by the Techcrunch stories and the large novelty checks presented to the likes of My Space, Facebook, Digg, Flickr and friends …

These are a little bit like investments where the market has been timed. It’s a low probability event. Sure there’s a lot more to it than a passive investment vehicle, but the probability of it happening is so to us, is so low that it’s not worth considering.

What we ought do instead is focus on the high probability events. In an entrepreneurial sense success is a very long term proposition. So our goal should be to remain in the entrepreneurial game as long as possible. As we do this we inevitability move up the learning curve and increase our chance of winning at some time in the future. Winning may not mean a cheque in the millions, but it might mean earning 5 times what we could in wages, as well as having a lot more fun doing it.

So how do we stay in the game?

Keep our costs low. Know how to bootstrap. Enjoy the simple things in life. Know that the having is in the doing, not in the owning of stuff.

Startup Blog says: Use probability to your advantage

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The techcrunch crowd

You’ve probably read or heard about techcrunch. Which is one of the most popular – technology / startup / silicon valley style blogs. Many tech savvy web addicts trawl it daily if not hourly for the 15+ updates a day.

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Not sure if you’ve ever bothered to read the comments. But they are literally 90% negative. Sure, some or a large part of the ideas or start ups on there will disappear, but it’s not as if every success story only has positive comments either. There is no discerning between any of them.

Rentoid got featured over 12 months ago and got bagged big time. More than 12 months later we are still here, while the pundits are “still in their cubicles”. Calling it from the cheap seats!

The techcrunch crowd – ‘the commentators’, are the type of people us entrepreneurs should stay away from. Their disease of negativity, isn’t worth catching.

The point of entrepreneurship is the journey into the unknown and excitment of creating change, and maybe even proving a few people wrong. Nothing wrong with that.

Any entrepreneur worth his salt is way too busy making their stuff happen, to spend time citicising other peoples efforts. So when someone looks down on your startup, smile and ask them to show you theirs.

Rentoid on techcrunch

We finally got ‘crunched’ – with a little spiel for rentoid on Tech Crunch.

In the first instance it’s given us a large membership boost and a very positive response. But it’s also given us our share of negative armchair experts, naysayers in the comments.

We say:

“That’s Ok – revolutionaries like us don’t care what naysayers think.”

But it’s a few thousand more people that know about rentoid.com too.

Actually we do care about what they think as it pertains to ideas to improve the service. We turn their negatives into a positive. But we always ignore an attitude which says something won’t work. It won’t for them – their attitude has already predetermined that!

In fact, some context here: We had many more positive comments and only a few negative. Also, both our membership and listings have been boosted as has our unique visiters today. But I thought I’d make this ‘blatant piece of self promotion’ worthy of a startup blog story by providing some insight!

You can check out the story here.

And add some comments here on the Crunch Base or on the story. We want to hear negative and postive sentiments. We want to improve our offer.