Start Up Blog

2 schools of business valuation

Posted in entrepreneurship by Steve Sammartino on October 10, 2009

A favourite game of entrepreneurs, especially in the technology industry is discussing whether companies are worth the price they are bought out for. $1.5 billion  for Youtube ………. Sales prices with infinite price earnings multiples (because there are no earnings, or they are loss making). Versus a company being sold for a few times it’s annual earnings with a long period of earnings history.

A more relevant discussion would be which school of business valuation was used during the transaction, and there are two:

1. Sale price representing believed potential

2. Sale price representing return on investment reality

Which is more valid? Well it depends on which side of the equation you are residing. I’d say when selling, we should be aiming for potential. When buying we should go with reality. When buying a business the simplest question to ask ourselves is this:

On current earnings, how many years will it take me to get back my original investment.

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There’s no doubt certain industries are more likely to sell using the potential valuation method. Burgeoning industries like the internet, IPO’s and even railways 200 years ago are good examples. To get away with selling on ‘potential’ the industry needs to be growing, the future unknown and your company well known. If your startup ever gets enough traction to sell to an incumbent, then take what you can get – sell on potential.

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Timing vs Time in

Posted in entrepreneurship by Steve Sammartino on October 6, 2009

The timing versus time in argument is a long standing one in investment circles. And it gos a little bit like this:

People who are for ‘timing’ the market proclaim that smart investors should time their entry and exit for their investments. And that investors should exit when markets are too hot, for example when price earnings ratios are well above the long term average. And enter at the opposite end of the spectrum. Resulting in higher profits.

People are are for ‘time in’ the market proclaim that smart investors should stay in the market at all times. That when you enter or exit the market does not matter so long as the investment has been in market long enough. Which will result in a long term result of profitability due to the period of time in the market, allowing market averages to endure.

Both parties happen to be correct.

What neither side bothers to discuss is most important factor in either strategy. Probability. The probability of success of either the two different investment strategies. It turns out that it’s a pretty simple proposition related to risk and probability.

Timing the market – Can have very high returns (losses) but a much lower probability of success.

Time in the market – Has average returns (rarely losses) and a very high probability of success.

Numerous studies have proven the above to be fact.

How does this pertain top startups? Well it reminds me a lot of the internet and entrepreneurs attitude towards it. Most entrepreneurs believe that the only way to succeed is to win big. To sell out our startup to some digital behemoth. Our business brains have been hijacked by the Techcrunch stories and the large novelty checks presented to the likes of My Space, Facebook, Digg, Flickr and friends …

These are a little bit like investments where the market has been timed. It’s a low probability event. Sure there’s a lot more to it than a passive investment vehicle, but the probability of it happening is so to us, is so low that it’s not worth considering.

What we ought do instead is focus on the high probability events. In an entrepreneurial sense success is a very long term proposition. So our goal should be to remain in the entrepreneurial game as long as possible. As we do this we inevitability move up the learning curve and increase our chance of winning at some time in the future. Winning may not mean a cheque in the millions, but it might mean earning 5 times what we could in wages, as well as having a lot more fun doing it.

So how do we stay in the game?

Keep our costs low. Know how to bootstrap. Enjoy the simple things in life. Know that the having is in the doing, not in the owning of stuff.

Startup Blog says: Use probability to your advantage

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Quote from Warren Buffett

Posted in entrepreneurship by Steve Sammartino on September 1, 2009

Here’s a quote for Warren Buffett - who has been consistently among the few richest people in the world for the past 20 years or so.

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual insights, or inside information. What’s needed is sound intellectual framework for making decisions and to keep emotions from eroding that framework.”

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Firstly let’s define investing as something which we we see as worth putting a consistent effort into to achieve a long term result.

So it is fair to say we invest in many things such as family, health, finances and business ideas. The key interpretation from the above quote is that it’s not about being an intellectual guru, rather our success will be a function of having a robust framework to work towards. That this information is available to everyone, and if we have to the discipline to stick to it our investments will yield results far beyond our expectation.

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Startup Blog Live – episode 3

Posted in entrepreneurship by Steve Sammartino on August 10, 2009

I’ll be doing another Startup Blog Live session at 8pm this Thursday night. It will be via http://www.twitcam.com under my twitter sign up which is http://www.twitter.com/sammartino or @sammartino for current members.

Thursday 13th August at 8pm – Live.

TV Studio

The topics of discussion will be Tactics vs Strategy – which was the topic of a blog post below and a very important issue for startups and entrepreneurs. If you can make it – ask a question in teh comments and I’ll answer it live for everyones benefit. Last time we had over 70 people tune in. So join us.

Steve.

I am on TwitterClick here to chat with me

When seeking investors

Posted in entrepreneurship by Steve Sammartino on April 10, 2009

Here’s some simple advice when seeking investors for your startup.

Never use the words ‘The Next’…

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Regardless of the uber successful business which follows these two words it just isn’t going to happen. For two reasons. The first is our probability of being this successful is almost non existent. Secondly if we are this successful, we wont be the next, but something new.

The main point is when people use the words the next, they lose credibility. And when someone says it to me regarding their new business venture, I find it hard to believe anything they say after that.

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World of Venn

Posted in entrepreneurship by Steve Sammartino on January 18, 2009

While we are bootstrapping our startups, it’s worth bootstrapping our lives simultaneously. We should be building projects with overlaps, to the extent that we end up living in a ‘World of Venn’. For the ‘un-nerds’ who can’t quite remember the Venn diagram, here’s a simple explanation:

Venn Diagram:
n.   A diagram using circles to represent sets, with the position and overlap of the circles indicating the relationships between the sets.

[After John Venn (1834-1923), British logician.]

The reason for doing this is simple. By living in a ‘World of Venn’, we are building intellectual assets which have synergy. Assets which are connected metaphysically. Constructs with similar ideals which can be shared, borrowed or stolen. The people in these worlds often overlap too. They’re often interested in learning about and helping in other areas of our Venn worlds. And importantly when one set dies or withers, it has an overlapping intersection on which we can refocus our efforts without having to start from the beginning.

Here’s a sample of parts of my world and the Venn relationships.

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As you can see my worlds overlap and all build revenue streams.
–    Ideas and experiences from rentoid.com, give me great writing fodder and intellectual stimulation for this blog you are reading right now.
–    Startup blog has lead to more professional business writing I do for magazines and journals
–    My academic career at Melbourne University has lead to more Business writing and an upcoming book on marketing & investing.

The point is – they all feed each other, build on one another and leverage my personal areas of expertise.

Each success in one section adds credibility and strength to an overlapping area. The more overlaps we have, the larger our sweet spot becomes. When we have a great number of overlaps, life gets sweeter and the rewards are greater. This is why ‘work life balance’ is simply a hoax. Work is a large part of our life and should be joyous. To try and find time for things outside of work we actually ‘enjoy’, means we’ve got our life wrong. Once we live in a world of Venn our personal and financial growth is inevitable.

Venn is Zen. How Venn is your life?

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Make your sentences short

Posted in entrepreneurship by Steve Sammartino on January 7, 2009

We need to make our sentences as short as possible when trying to engage anyone that matters in a business. Investors, customers, retailers.

So our short sentences should appear in our pitch, our copy writing and our video communication

So how could I possibly make this sentence any shorter than it is?

How could I make this sentence any shorter?

Could I make this sentence shorter?

Could I make this shorter?

This is shorter still.

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Tell your story – ‘Quickly’

People are very time poor, or maybe just a little impatient. Regardless of which it is we have to be able to tell our story quickly.

Vanguard Investments do it in 2 seconds. Click here to see how they do it. (Watch the animation)

Even this chart below tells the story on long term ‘index’ investing. Of which Vanguard are the founding forefathers.

vanguard-story

The recent downturn is a best a ‘blip’.

How long does your startup story take to tell? Here’s a tip – we’ve got a few seconds at most.

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