“Can you believe they just got bought for $300M!” Jeroen, my co-founder, and VP of Engineering said to me. Jeroen, who was usually pretty mild-mannered, was a little pissed off.
Before I could answer, Jeroen continued with his rant. “They haven’t even announced a product yet, and they have no revenue! It makes no sense.”
The company Jeroen was referring to was started by ex-coworkers of ours. They weren’t in the same market we were in. They were using similar technology to what we were developing, but they were focused on a different industry.
Jeroen wasn’t done. “We’ve announced over 50 products and our valuation isn’t close to $300M. This makes no sense.”
“Let’s look at who bought them,” I said as calmly as I could. “It’s a big multinational firm. Let’s look up what their market cap is.”
We went over to my computer. “No wonder!” I said. “Their market cap is $300B. They can afford to overpay!”
The value of your company is determined by the market.
Jeroen didn’t get it, yet.
“Think about it,” I said. “What percentage is $300M of $300B?”
“0.1%,” Jeroen answered.
“It’s a drop in the bucket. Don’t you see? They can afford to overpay!”
“But $300M? That’s a lot. If they were doing what we were doing, then they wouldn’t be worth even $10M.”
“I know,” I said.
Our ex-coworkers must have felt like they had won the lottery. They had developed a semi-working prototype, and now they were being acquired for $300M.
They would get $180M when the acquisition closed and there was another $120M earn-out if they met certain milestones. But this still doesn’t answer why the acquiring company paid so much.
If you have a company that can revolutionize an industry or creates a new exploding market, then your company can be worth a lot of money.
The bet the acquiring company was making was that our ex-coworkers technology would revolutionize and enable a whole new industry. If the bet paid off, the company would be worth billions. If the bet didn’t pay off, the company would be worthless.
But the downside for the acquirer was minimal. $300M is 0.1% of $300B, so financially it wasn’t going to hurt them if the acquisition was a bust.
The value of your company is determined by the market.
You’re probably not going to be as lucky as our ex-coworkers were. We sure weren’t. So you’ll have to earn your valuation the old fashioned way by growing your revenue and building a real company.
But the valuation of your company will vary tremendously depending upon the market. A company with $10M ARR expecting to grow to $30M ARR in the next 12 months in one market can be worth a significantly different amount than another company with the same metrics focused on another end market.
In the end, our ex-coworkers technology didn’t pan out. The investment was a complete failure for the acquiring company, but our ex-coworkers were $180M richer. They won the lottery.
For more, read: What Are The Five Signs It’s Time To Sell Your Company?
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