Price = Value

I remember when being on LinkedIn meant you were tech savvy for a non-tech person.  I also saw the shift to “you are completely out of touch if you’re not on LinkedIn”.   Now I’m trying to get some lessons learned about business valuation from watching the IPO.  (I didn’t get any financial benefit directly, so this is an effort to make the glass half full.)  It helps that I’m fascinated by the question --  what is a business worth?  As we saw from the IPO, there were plenty of opinions, but those who voted with their pocketbooks put a much higher price in place than my calculator would have ever predicted.  (This is a digression, but I also do agree with the school of thought that says the MVP award goes to the bankers, who made money on this deal and set themselves up for future profits at LinkedIn’s expense.)

Opinion aside, let me be clear that the value of anything is the price someone will pay for it. A valuation is an idea of what something should cost.  A purchase or a round of funding involves a real price, and real value.  The goal is to position the business to capture maximum value so the price is as good as or better than the valuation.  Ironically, the key to good positioning is making sure you know the fundamentals behind the numbers and that they add up to the truth.  LinkedIn wasn’t overly modest about their prospects, but they also acknowledged challenges for growth.  Did their bankers leverage a perception of market scarcity by limiting the amount of stock and getting the offer out quickly?  The answer would be yes.  Putting your business in a flattering light is OK, just make sure it’s only the lighting and not the basic assumptions that are the subject of adjustment.

Another key point for building value comes from the June issue of the Journal of Accountancy.  I’m highlighting where this idea comes from to give it more credibility, as it may seem counter intuitive at first. 

CPAs can frequently spend too much time on numbers, and not enough time telling their company’s story. The company’s background, niche, management, strategy and other less quantitative matters, are colloquially known as the company’s “story.” The story is what investors will typically remember and is generally what will drive them to invest. The story generates excitement where numbers alone usually do not.

LinkedIn got a higher value because of the story.  You don’t need high priced investment bankers to have a compelling story.  I see small businesses almost every day that have a great story.  Good numbers are part of the price, but being clear on why the businesses succeeds and will keep succeeding ultimately is where you can unlock value that translates into a better price.

I’m going to stop now and go update my LinkedIn profile…..