US President Obama receiving the Nobel Peace Prize based not on his accomplishments but to “encourage his vision” is not dissimilar to an entrepreneur trying to raise capital for the first time. Kim Wingerei explains.
There have been many comments made about President Obama winning the Nobel Peace Prize before he had actually achieved much beyond a lot of talking, and not much walking, at least not yet! The justification by the Norwegian Parliamentary committee that award the price was that it wanted to encourage his vision. Or, in other words, it used the awarding of the price to set an expectation of future achievements.
Despite being Norwegian and thus naturally proud of the Peace Prize and its role in world affairs, I must confess to being one of the many raised an eyebrow. After all, the Nobel Peace Prize has not always been universally lauded for its selections — the awarding of the prize to Henry Kissinger and Le Duc Tho in 1973 probably the most spectacular of its misjudgements, further exaggerated by the benefit of hindsight.
However, it also struck me that the justification used by the committee is indeed bold. As we celebrate the 20th anniversary of the fall of the Berlin Wall, the world is still an unsafe and uncertain place, with globalisation bringing about not just a more prosperous world, but also a world still riddled with conflict, poverty and injustice. More than ever, we need a leader who can build bridges and lead from the front. So in order to encourage Obama to do the walking, the Nobel Committee is giving him the prize not for what he has done, but for what it believes he may be able to achieve.
Which I am sure is not lost on Obama, and also quite interestingly not too different from when an entrepreneur is raising capital for the first time. Just as Obama is eloquently presenting his vision for the world, so is any budding Bill Gates trying to create a vision of future riches for potential investors.
And just as Obama will not do like Neville Chamberlain in 1938 and declare “Peace for Our Time“, the smart entrepreneur avoids setting a specific valuation for his or her future business.
In my recent blog-post — The top 10 lessons I learnt when my company collapsed — I wrote about how setting a high valuation in the early stages can make it more difficult to raise additional capital in later stages. As a matter of fact, some of the most successful entrepreneurs I have worked with over the years will flatly refuse to put a number on the future value of their venture. This can be difficult, but stand your ground, and the savvy investors will quietly respect you for it.
There are many ways to avoid providing specific expectations of future valuation, but the most common that I have seen is to draw parallels to other successful companies, to talk about the size and value of the market, and to emphasise growth potential. The most important is for your investors to “get” the picture of what your idea will do, the problem it will solve or the market niche it will create. When pressed, talk about ranges of valuation over time (at least three years) — but make it vague, and if including it in any written material, always choose the low point.
The real tricky part is to still be able to justify the investment in a language that the financial analysts can comprehend. Here, too, it is about creating the vision of a business that has the right characteristics as it pertains to your chosen market place — i.e. if the key numbers (market share, revenue, gross margin, costs and profit) that you present are clear and concise, you can then leave it to the analyst to draw their own conclusion about valuation.
However, you still want to be able to control as much as possible. Even if you avoid setting value expectation in dollars and cents, others may do that for you, whether you like it or not. Very few successful entrepreneurs have ever been criticised for low-balling the valuations of their business. But the history of business is littered with examples of those who could not meet the lofty expectations set either by them or by the hype surrounding them.
I guess that neither Time Warner nor AOL will ever fully recover from their ridiculously over-valued merger announced in the heady days towards the end of the internet bubble in January 2000. In Australia, I recall businesses such as Free Online, Liberty One, Peakhour and many others that attracted hyper-inflated valuations long before they even had revenue to prove their business model. Although money was made by some investors on some of those ventures (by exiting early), it didn’t mean that they were necessarily successful, sustainable businesses that met the expectations set by the founders.
So just like Obama is likely to be somewhat ambivalent about getting a prize before he has delivered on his vision, so should the smart entrepreneur be cautious about over-selling his or her vision. There is always room to increase the price later when there are runs on the board.
And never, ever forget the only real determination of business value — the point at which a buyer meets a seller in an actual transaction. That may prove to be a bit more difficult for Obama.
Kim Wingerei sells mobile phones and telco services online. He works to live, is easily distracted and likes sailing.