In the startup world, two key topics emerge time and again (sometimes becoming ubiquitous) are business plan and valuation. Although these concepts are often associated with the fundraising stage and the subsequent due diligence, their importance goes far beyond that.

The objective of this in-depth focus is therefore to explore more closely the importance of the business plan not only as a tool for attracting investors, but also as an internal operational guide and to give criteria on the valuation process of a startup highlighting how it represents a “flexible” starting point subject to multiple factors and market dynamics, rather than an immutable value.

THINKING A BUSINESS PLAN: WHAT IS ITS USE?

As mentioned, the business plan is not just a formal document, necessary to attract financing, but is the cornerstone on which the company’s entire operational strategy is based. Its job is to serve as a detailed guide to outline the company’s goals, the strategies to achieve them, and the operational and financial plans to keep the company on a sustainable growth path.

The final document also provided with a financial plan must clearly define: mission, vision, the company’s short- and long-term goals (roadmap), the activities put in place to achieve them (activity plan, business model and marketing plan), and the economic and financial fallout of this action. In this sense, it is evident how a well-crafted business plan is not only a key document for investor due diligence, but also directly helps the founders and the team to keep the focus on what matters most at a given historical moment in the life of the company and to work toward common goals, reducing the risk of dispersion and disorganized efforts. In addition, a well-articulated business plan that presents clear activities, tasks and sub-tasks (gantt) facilitates internal communication, aligning the expectations and responsibilities of all team members.

A special note is in regard to the financial planning part (the output of which is mostly rendered in excel).

In fact, a good business plan must include a financial plan consistent with the goals of the company. This document is as crucial for the investor’s evaluation during due diligence as it is for the founder(s). In fact, the goal is to reason and understand what the expected cash flows are (in terms of revenue, costs to be incurred and cash flow), funding needs (defining the ask for fundraising – how much money the company needs before reaching breakeven) and operating budgets for various activities (e.g., marketing plan) allowing the startup to effectively manage its resources, be they physical, tangible and intangible and to prepare for possible financial difficulties (sensitivity analysis). Indeed, on this last point, a well-designed plan must allow for the identification of potential risks and the possibility of having drivers for the development of mitigation strategies ensuring that the company is ready to respond to challenges and opportunities with agility and speed.

THE ROLE OF VALUATION

Analogous discussion is what is carried out for the valuation of a startup, which, in fact, represents the estimated economic value of the company. This process, which combines qualitative and quantitative data, is crucial not only to determine the price of the shares to be sold to investors (and fuel the exit fantasies of the founders), but also to properly understand and communicate to the outside world the growth potential of the company. 

However, a valuation, no matter how well executed, does not return a value that is certain and unchanging; on the contrary, it is inherently dynamic and subject to interpretation. The variables involved, from growth projections to market risks, are often complex and susceptible to revision, making the entire effort prone to major revisions.The final number obtained, therefore, is not a static number, but a real starting point necessary for subsequent negotiations between founders and investors. 

Indeed, investors may require further evidence of the growth potential or business model, leading to a revision of the company’s value. Likewise, founders may need to consider new economic conditions or changes in the competitive landscape, which affect the perceived value of their company.

Valuation, in short, is not a trivial task, but to navigate this complexity there are various approaches that can help shed light on how to determine the value of the startup. The following are 3 that often turn out to be the ones given the most attention:

• Method of Market Multiples

The market multiples method is one of the most common approaches to valuing a startup because it is extremely simple and intuitive. 

This method compares the startup with similar companies that operate in the same industry and are of comparable size.When we talk about multiples, we most often refer to revenue multiples (ratio of market value of comparable companies to their annual revenues) or EBITDA multiples (ratio of market value of comparable companies to their EBITDA).

• Discounted Cash Flow (DCF) Method

The DCF method estimates the present value of expected future cash flows by discounting it to the present through the use of a discount rate that reflects the risk of the investment.

In order to reach at the final value, it is then necessary to estimate future cash flows (free cash flow) and the appropriate discount rate, often based on the weighted average cost of capital (WACC), and finally the residual value of the company from the end of the forecast period to the future (terminal value).

• Venture Capital Method

This method consists of two moments: “pre-money valuation” (i.e., the pre-investment valuation) to which once the total funds put in by the investor are added, the “post-money” valuation follows. In order to carry out the pre-money valuation it is necessary to:

• Estimate the investment needed (define the “ask”).
• Predict the startup’s revenue and cost data.
• Determine the timing of the exit (e.g., IPO or M&A).
• Calculate the exit multiple (based on comparable transactions).
• Discount the future value (PV) with a discount rate that coincides with the ROI.
• Determine the % ownership stake you want to leave to the investor.

For a startup, a robust business plan is more than just a fundraising tool and can determine whether or not an investment is successful. Valuation, on the other hand, is a complex and dynamic process that establishes an initial value but is subject to negotiation and revision.

However, what is clear is that both of these tools are critical to successfully navigating one’s entrepreneurial journey and building a solid foundation for the startup’s future.

For both established corporations and nascent startups, strategy functions as an influential countermeasure against the sway of the “self-serving bias” within the decision-making milieu. It acts as a guiding beacon, enabling the scrutiny of information sources, fostering introspective analysis of historical decisions, and challenging personal predispositions. Through a meticulously crafted strategy, individuals can embrace a more impartial, enlightened, and equitable approach to decision-making.

The self-serving bias entails interpreting data to validate existing beliefs and personal agendas. Amid ambiguous circumstances, individuals often make assumptions that bolster self-worth and ego. People selectively analyze information to bolster their stance while disregarding contradictory viewpoints. In the corporate realm, succumbing to this bias can lead to suboptimal decisions or even precipitate conflicts and crises. Companies entrench themselves in entrenched positions, becoming averse to alternative perspectives, thereby instigating instability. To counter this trend and foster sound, enduring decisions, corporations, and startups should assess the reliability of their information sources, engage in counterfactual analysis of past decisions, and rigorously challenge their assumptions.

Rigorous evaluation of information sources bolsters corporations’ confidence in employing pertinent data to deliberate on subsequent steps, incorporating different perspectives alongside their own thoughts and actions.

Simultaneously, indulging in counterfactual contemplation empowers businesses to broaden their assessment scope, considering different frames of reference beyond immediate outcomes. This reflective process encourages acknowledgment of various perspectives, culminating in a more balanced appraisal of decisions made. By employing counterfactual thinking, corporations ensure a more impartial examination of existing data. Moreover, corporations and startups can combat self-serving biases by actively pursuing information that challenges their entrenched beliefs. This proactive stance, although discomforting as it threatens established identities and worldviews, represents a pivotal stride toward cultivating a more nuanced and informed outlook.

Yet, transcending self-serving bias marks merely one facet; for corporations and startups aiming to elevate their decision-making wisdom, fostering distinct behavioral attributes pivotal for transitioning from a “tactical vision” to strategic thinking is imperative. These attributes encompass the ability to discern situational intricacies, adept resource allocation, and precise strategy execution. Such competencies form the bedrock for individuals aspiring to assume more strategic roles within organizational frameworks. Foremost among these traits is the development of “acumen”. This encompasses an individual’s cognitive process: the adeptness to comprehend situations, conceptualize pathways from current states to envisioned futures, and surmount challenges to engender novel value. Subsequently, corporations and startups require an ingrained sense of “allocation”. Strategic thinkers delineate objectives, allocate resources, gauge risks, and navigate trade-offs, leveraging advantage via premium value propositions.

Ultimately, formulating a business strategy merely represents the initial stride; the manner of strategy implementation constitutes the fulcrum of success. Collaboration epitomizes the proficiency to collaboratively exchange knowledge, data, and insights toward delineated objectives, while execution encapsulates disciplined resource deployment to attain said objectives.

Evidently, strategy not only augments individual decision-making prowess but also delineates organizational trajectories, steering decisions, and their realization toward coveted objectives.