<Book value mattersMonday, December 3rd, 2012
by Roger Ehrenberg

Solving an important problem is generally the credo of most entrepreneurs. However, the solutions can take a variety of forms: core technology (e.g., a new database); business model (e.g., peer-to-peer lending); or service (e.g., next-gen mobile optimized retail banking). Certain businesses give rise to differentiated intellectual property which is sometimes patentable and often salable. Others leverage business models and processes which themselves might not be patentable but which create valuable data assets. But sometimes start-ups give rise to neither, and are hoping for advertising, e-commerce or lead generation revenues to fuel profitable businesses – if they work – at scale. These dynamics beg the following question:

Does creating intrinsic value matter in technology start-ups, or are operating cash flows all that really count to a (hopefully) fast-growing early stage business?

By “intrinsic value” I’m referring to the worth of a business if it were to cease operating, with buyers offered the chance to purchase all or part of its assets. In barest terms, if you were to turn off the lights, is the company worth anything? Given a founding team whose mission is to disrupt a large market or to create a new market, it is unlikely that the notion of intrinsic value comes up in casual conversation. But in the cold light of day, the chances of achieving parabolic growth and creating billions in enterprise value is pretty low. But what if a business that was taking a big swing was designed such that it had lots of exit options at different stages arising from the creation and compounding of intrinsic value?

In early days the value might largely be attributable to team, a tight-knit group of world-class engineers who have shipped beautiful software together. Later on it might be team plus an analytical framework for extracting insights from certain kinds of data relevant to the problem being solved, a framework that might be applicable to a range of potential acquirers’ problems. And eventually the business at scale might result in a hard-to-replicate data asset that can be leveraged and used as a channel for other types of commerce. This step-wise accretion of value can provide founders with a much wider range of exit options than simply focusing on the “flow” (dependent upon transaction volume) rather than the “stock” (asset value realizable in a liquidation).

Don’t get me wrong, as an investor most excited by teams driven to build large and truly disruptive businesses over time I’m in this thing for the long haul. But I have the benefit of diversification. Founders don’t. What I’m suggesting is that there is no reason why founders can’t be a little more thoughtful about the process of creating asset value rather than less tangible measures of success. Going for the big win and creating asset value along the way are by no means mutually exclusive. But attention to this particular detail can be the difference between a nice, unspectacular but life-altering outcome and a goose-egg. You make the choice.

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