Tuesday, March 29, 2011

Two Flaws Lowering Your Valuation

I listened to an amazing web programmer talk about the features of the Software-as-a-Service (SaaS) product he will have ready for launch in a couple of months. He's been working on it for years, and he is very passionate about what it can do. After seeing what the product can do, I believe there are potentially several commercially-viable applications for his product.

Admittedly, he explained that he has neglected the "business-side" of his product, and he's secretly hoping a larger software company will absorb his technology for some outrageous price. So he has two flaws in his thought process:

FLAW #1: He is not a viable acquisition target until he can prove that his software works and it has "raving fan" users.

FLAW #2: He will command the highest valuation possible if he develops the most repeatable and scabable way to sell his product and executes on that bsuiness model as much as possible. This includes all the pivots that come with a start-up SaaS product. The more pivots, the better--meaning he is closer to perfecting the model.

Do you want to improve your valuation? Get more customers and hone your business model into the most repeatable and scalable way to generate cash flow. For once, stop talking about how great your product is and invest some time in figuring out the benefits (not features and advantages) your customers will receive from using your products and find the vertical of customers that are most likely to be early-adopters. From there, only make improvements to the features of your product if you can validate the improvements within the context of your business model.

Entrepreneurs who follow this pattern will set themselves up to receive the best valuation possible for the stage of development and growth they have achieved.