Valuation is Critical for Startup Exits
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Introduction
Financial valuation is an often underestimated and underappreciated part of evaluating a business, especially when it comes to intellectual property (“IP”). Often times, a valuation is viewed as a mere financial figure in a spreadsheet or document, but the reality is that a valuation can provide more insight than a simple number. A valuation can tell a story about a company’s business, including its team, brand, technology, customer base, and revenue.
Obtaining a valuation should not be overlooked. A strong valuation reflects not only current performance, but also future potential. The information gleaned from a valuation can be vital for fundraising or acquisition, and it further serves as a strategic tool to guide decision-making.
In terms of IP, we often see businesses eager to license or sell their assets without performing proper due diligence. Investors, licensees, and buyers seek justification, i.e., they want to know why a company and its IP are worth their money. Without the appropriate analysis, one may be unable to provide such justification. Negotiating the license of IP or sale of a startup without a proper valuation is akin to navigating a busy highway blindly. It would replace facts with guesswork and would compromise the outcome.
GHB Intellect’s IP and technology valuations always evaluate the technological, legal, and market advantages of the IP to identify unrealized potential and competitive advantages that may not be immediately obvious. Our valuations are comprehensive and grounded in established methodologies, providing leverage in negotiations so that money is not left on the table.
GHB Intellect is well-known in the industry for its rigorous analysis and reliable reports. Hence, having a valuation report from GHB Intellect has the added benefit of being able to utilize it as an unbiased analysis performed by a reputable third party. It can be used as a credible source for negotiation.
Often times, a credible valuation report more than pays for itself. The following case study is a good example of that.
Case Study: Startup Acquisition
A start-up company developing software technology involving signal processing and machine learning recently requested an technology valuation while considering a multimillion-dollar acquisition offer from a large corporation. The technology was broadly applicable to object detection in automotive, aerospace, robotics, and military. Based on our in-depth technical review, we determined that the automotive industry was the most financially viable, immediate, and best use for the technology.We applied an income approach analysis to determine the value of the IP. From our technical review, we identified the overall potential automotive application of the IP to determine the Total Addressable Market (“TAM”). Within this market, we identified companies developing technology with overlapping interest to determine potential licensors. We aggregated the financial information of these companies based on public disclosures and market assumptions to determine a likely market for the IP, along with a deployment and adoption growth curve. A technology-appropriate licensing rate was applied to this market.
Given the projected market returns from licensing or sale of the IP, we applied various adjustments due to potential legal, market, and technological risks. In addition, a discount rate was adopted based on investor expected rates of return for the IP to calculate the net present value of the IP.
Our valuation returned a much higher value than the offer they had received. The company utilized our valuation report to reason with the acquirer as to why the technology was worth much more. Eventually, the company was acquired after the acquirer acquiesced to a value more than double their original offer. As such, the price our client paid for the valuation report was insignificant compared to the gains they received from it.
This case study demonstrates why valuation should be considered as an essential tool to assist in obtaining improved or optimal outcomes in any IP/technology licensing or sale scenario. A valuation report equips the holder with the power of knowledge to proactively and confidently seek better investments and better deals, thereby maximizing the value of their technology and IP. It also signals to the opposing side that low-balling is not going work and, instead, they should make a reasonable offer.