This article on startup valuation was written with the help of serial entrepreneur, hometown hero, and friend/mentor Neil Senturia of Blackbird Ventures. He has found success as both a CEO and an investor during his life, with his companies being sold to the likes of Lockheed Martin and ViaSat, among others. Senturia’s insight will appear throughout, and it reflects his experience, rules to entrepreneurship, and sense of humor.
We know, there’s a ton of hype surrounding startup valuation. Shark Tank brought the concepts of startup valuation and equity to a mainstream audience. If you watch the show, you’ve seen the “sharks” argue and bicker about an entrepreneur’s proposed valuation.
I was curious what was really behind that heralded figure, that sacred numeric in the world of investment and opportunity. How much value should actually be placed upon a company’s valuation?
Over the past month, I’ve interviewed, researched, and broken down all the stages a startup passes through, and have come to a major, sweeping conclusion:
Startup Valuation Doesn’t Matter
When prompted with this idea, Neil Senturia agreed with the spirit of the concept. He added that as a seasoned investor and professional, he’s aware of the value he can add to businesses that fall into his niche.
It’s better to have happy investors aligned with your vision for the company, than to sweep away all your good juju by flooding your investors’ ears with your desired valuation.
Investment is a Game of Patterns
A golden rule resides deep within Neil, keeping him honest, humble, and realistic through all his ventures.
“You don’t know what you don’t know.”
Throughout all phases of evaluating a startup, it’s important to take stock and be able to recognize any aspects of the business or industry of which you aren’t knowledgable.
Neil consistently referred to pattern recognition, and his awareness of what types of startups he knows he can successfully invest in. He attributes his experience as the most critical component to shaping the patterns he looks for.
“I have a better sense if I’m interested from my pattern recognition, which comes from my experience.”
Before analyzing the valuation and making an offer, Neil Senturia evaluates the market, the CEO, the team, and the technology.
Read on for all the details and specifics, along with a couple of good stories.
When conducting proper market research and evaluating market opportunity, Neil focuses on how large the potential market is. No matter how great every other component of the company might be, if the market is too small, he won’t invest.
In conjunction with this, timing of the market is key. In the words of Neil:
“The problem with startups, you don’t want to be first or last. Wait for the market to be ready for you. I’ve had to sit on great technology before, until the market caught up to us. Don’t swim upstream.”
While this thought process may limit Neil’s ability to invest in disruptive technology, consider this: the last time I checked with research hub CB Insights, about 1.28% startups become unicorns (unicorn > $1B valuation). While there is a definite allure to truly revolutionizing, disruptive technology, it’s important to be realistic, and to know what you don’t know.
During our meeting, Neil walked me through a successful biotech company he’s been working with. The company focuses on point of care devices and precision dosage.
After 2+ years of waiting out the market, Congress had ruled to create additional restraints for pharma companies working to increase prices. Neil seized this opportunity:
“How do you justify pricing, recognizing you cannot raise the price? Precision dosage, and fewer visits to your doctor.”
Neil’s reward for his patience with this biotech company? In the past two months, they have received 11 phone calls from different pharma companies interested in the technology. Chalk one up to pattern recognition, folks.
Senturia has a list of 3-4 questions that he asks during the initial phone call or meeting with the CEO. This process is quick, to make sure Neil isn’t wasting his time with the wrong CEO and company.
“I’ll ask him 3-4 questions to inform my point of view. It’s like seeing a woman across the bar. You get maybe two questions with her to know if there’s a fit. Is it worth it to keep going?”
From there, Neil’s evaluation of a CEO has two components: personality is primary, reputation is secondary.
With regard to a company’s CEO, Neil looks for key personality traits to indicate future company profitability.
Neil is more likely to invest if the CEO is intelligent, yet realistic (you don’t know what you don’t know). The last thing Senturia wants is to watch as the CEO botches the initial meeting with angel investors due to an unrealistic valuation.
A blend of confidence and humility is also important. Successful leaders are likable, and people gravitate towards confidence, when checked by humility.
Neil seeks CEOs that are extremely driven and persistent. It’s not about how many times you fall, it’s about experiencing failure, learning from it, and improving your product. Over and over again.
Lastly, and there’s no way to quantify this: Senturia must be willing to bet on him/her. While an abstract concept, if Neil is hesitant to place a wager on the CEO’s success, there’s no chance for future investment.
In addition to a CEO’s personality, their reputation can be an influential factor. Senturia adds:
“Take Bezos or Ellison, extreme examples. With their reputation, anything they get their hands on is likely to be a success, whether the technology is innovative or not. But very few ever reach this level. That’s why reputation is secondary to personality.”
This one is really quite simple, boiling down to one “genius” rule.
Neil needs to feel like the dumbest guy in the room. Allow me to explain.
In an early meeting with the company’s team, if Neil feels like the smartest guy in the room, he has doubts about how truly innovative the technology really is.
If Neil gets the sense that he is the dumbest guy in the room, chances are the team is highly intelligent and going about things in a proprietary way.
Here we see Neil’s true humility, and here he reiterates: You don’t know what you don’t know.
Senturia insists he doesn’t need to feel like an expert on the technology to invest in it. He’s comfortable with what he doesn’t know, but he does need to be confident in the team as a unit, and their collective intelligence.
Neil’s strength is not his never-ending knowledge of every new product and tech trend. His strength is his ability to manage a diverse array of teams, so long as the people involved are smart, motivated, and hard-working.
Is the technology compelling?
Think of compelling as the intersection between innovation and readiness of the market. If the technology isn’t interesting and innovative, chances are the market will never be ready for it. However, if the product does fit this bill, patience is key, as illustrated in his prior biotech example.
Neil ultimately invests to make money, and compelling technology does just that.
Startup Valuation (Finally…Finally!)
Yes, we can now discuss startup valuation. If all the above factors fit into place, Neil then turns his attention to the valuation, and decides upon a number he thinks is reasonable.
It’s an art form to give himself enough equity to keep his interest, but not too much that he discourages the CEO from accepting his proposal. Restating Senturia’s thoughts from earlier, the right investor is more important than the initial valuation.
His advice to CEOs: don’t argue with his number!
It’s a long path to startup valuation, but Neil has been there before, and he senses the right patterns. If you think it’s formulaic, you’re both right and wrong.
Senturia will be the first to acknowledge that patterns play into it. But reducing his process to a mere formula undermines his combination of experience and natural instincts.
You’ve now gone on the long journey that leads to a “yes” from Neil Senturia. All investors are different, but following this half-blueprint, half-maze has led to success for Mr. Senturia on both sides of the table.
Thanks for Tuning In!
Enjoyed this article on startup valuation? Check out Seamgen’s Ultimate Guide to Hiring a Software Development Company.
If this article has piqued your interest about Neil Senturia, he’s written a book on his rules to entrepreneurship and life.
Thanks for reading and until next time…