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Posted on October 28, 2016 @ 11:06:00 AM by Paul Meagher
The Coding VC website published a couple of useful articles detailing their risk-based framework for valuing and managing startups. Startups are Risk Bundles is their first article and deals with the issue of startup valuation. They summarize their valuation approach this way:
In essence, a company's valuation is based on its ideal outcome, weighed by the likelihood of overcoming all of its risks. The best way to grow the valuation is to mitigate the biggest risks.
They use the diagram below to illustrate how risk factors are used to compute an expected valuation. Each risk factor is represented by a number between 0 and 1 that is multiplied by the ideal outcome if everything worked out as planned. The diagram also illustrates why a technically adept startup needs to specifically focus on it's primary weakness in "selling product" in order to drive a much higher valuation (Option 1). They shouldn't be focusing all their resources on something they are already good at (building a full product) if they want a higher valuation (Option 2).
Their second article is called How to De-Risk a Startup and offers qualitative and quantitative guidance on risk factors startups should look out for, how to rate the magnitude of the risk associated with a risk factor, and tips and heuristics for reducing the magnitude of the risk.
Overall these two articles offer up some useful ideas how one might value and manage startups based on risk factors. I had a somewhat similar idea when I discussed business faults but using a risk framework offers more options for quantitative development. Also, in my research the concept of "de-risking" an investment is often mentioned but seldom discussed in much detail. The latest article helps to remedy that problem for me.
There is some thoughtful commentary on the latest de-risking article on the Y-Combinator newsfeed.
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