A business valuation depends on predicting its future
Promoting a business aims at “condensing” its future profit expectations in one single figure.
This represents a prerequisite in the frame:
- Of a divestiture: how much could taking back your company cost?
- Of fundraising: what percentage of your company will be held by the investor in the aftermath of fundraising?
The future of a “traditional” company is more predictable than that of a start-up…
A “traditional” company growth prospects (excluding external growth) are generally “limited” (up to 20% / year for the fastest growing companies), for two main reasons:
- They operate in a mature market (therefore slow growth)
- They already have a certain size (not easy to double in size on a yearly basis, to infinity…).
These companies have also achieved their normative profitability. Their expenses (structural costs, sales force, etc.) are particularly dimensioned to respond to their activity.
In other words, in the short to medium term (within a few years), these companies will be the same as nowadays, with results growing by a few percentages per year.
On the other hand, a start-up aims at achieving an exponential growth to reach a significant turnover in the medium term.
As for its current profitability, often negative (since it results in expenses and achieves little turnover, if at all), it does not represent the expected normative profitability. Otherwise, is it advisable to give up!?
…What implies various valuation methodologies?
In the framework of a traditional company, the most commonly used valuation methodologies are often based on the analysis of current financial metrics / in the near future (year N or N + 1): turnover, EBIT / operating margin and net income.
In light of the previous paragraph, you now know that these methodologies cannot operate in a start-up because the latter is far from its normative state (or the objective it seeks).
Therefore, in order to ensure the future value of your company and the benefit of investing in it, the investor will study the following elements: market, management and model (product / business model). I am not going to dwell on these elements which are well detailed on the net.
The significance of other metrics in the valuation of a start-up
The investor will also take the time to analyze other metrics to form a view on your start-up evolution trends:
User acquisition velocity:
- How many users have you acquired? And over how much time?
- Is your growth accelerating sharply? And is it indicating an exponential acceleration of your users and therefore of your potential income? This is what the VCs call “Hockey Stick”)
Retaining your users / your product recurrence of use:
- Are you able to maintain your user base?
- Do your active users regularly use your product?
Your product scalability:
- How much will your product cost to accommodate the projected growth?
The mobile app helps optimize these metrics, and therefore, it contributes to the valuation of the start-up in a fundraising framework.
A mobile app remains the most efficient means to spread quickly.
To this day, the mobile app remains the fastest way to reach your users and develop your concept.
It took the radio 38 years to reach 50 million houses. Television, the web, Facebook (via the web) took 13, 4 and 3 years respectively. However, the Angry Birds game took only 35 days!
More recent examples demonstrate the incredible ability to reach one’s audience using the Mobile:
- Super Mario Run has been downloaded 2.85 million times on the first day of its availability
- Pokemon Go has reached hundreds of millions of downloads within a few months
I can already hear someone in the back of the room saying “Yes, but I do not have the strength of Angry Birds, Pokemon Go or Mario Run! “
The recurrence of use is strong on Mobile.
In 2016, 86% of the time spent on the Mobile Web was generated by apps.
An average mobile user utilizes only a few apps such as Facebook, YouTube, Snapchat, Instagram, etc … Nonetheless, there remains 40% of places to be taken!
Being present in a user’s phone and consequently, in his/her pocket, is a privilege. He/she would be able to connect to your product with minimal effort and under any circumstances (at the office, while travelling …).
Through this means, you can “reactivate” this user in different ways (push notifications or E-Mails for the most conventional levers).
A mobile user is therefore captive … yet extremely demanding. On the mobile, the chances of losing a user following an installation are high (a low value proposition, the app being very heavy, slow or buggy). Uninstalling an app is rarely accompanied by a reinstallation.
According to the previous diagram, once downloaded, your app is 25 -30% likely to stay on the user’s phone after the first day.
The mobile challenge is, therefore, to retain this user by bringing them a strong value proposition and an appropriate experience to tempt them to reuse your product.
A mobile product has a high indigenous scalability.
This may not be the KPI that you will be most attached to during the launch of your start-up, but thinking about scalability from the very early stages of your product development will prevent many pitfalls during its launch and evolution stages.
Here is a simple instance:
When 1,000 users visit your website and do nothing after that, your server receives and sends 1,000 requests, which can quickly increase your costs.
When 1,000 users access your mobile app without doing anything after that, your server receives no requests. *
* Provided that your app does not load any external content once it is launched.
Beyond the valuation aspect in the introduction, you will thereupon understand that the purpose of this article is to show how a mobile app can help you reach your target in an accelerated way, and how to keep it active.
However, the stampede of creating a mobile app without first validating some basic assumptions (about your users, how to reach them, how to retain them …) is not the solution either.
These elements are too often overlooked by start-ups who simply want to realize a “perfect” product from the first shot, including maximum functionalities, in a record time and at the lowest price.