Humaginarium is pre-money in a cardinal sense of the term: no financing, no outside investment, no revenue. We’re clean as a whistle! Nonetheless we’re an economic entity with latent equities: stakeholder contributions of facilities, services, material, time, and cash. These significant contributions are measurable and have practical value. Surprisingly then, though we’re unfunded we’re not poor. We have operating and capital budgets, expenses, cash flow, an elegant brand, and a business model though we’ve yet to write a profit and loss statement. This may sound like a classic tech startup holed up in a garage, except we occupy several garages.
Our financial situation is going to change soon, so I’m working on our first pre-money valuation. Not all startups do this, but I feel it’s worthwhile. A pre-money valuation assigns a total net value to our present and near-future company so that I can rationally price shares in Humaginarium. Shares of ownership will be exchanged for services in some cases, for hard cash in others. However not all contributors will receive Humaginarium stock; only those who want it and can materially enhance the company’s total value.
Even after three years in my virtual garage, that word “rational” still sounds a little jarring. It gets my hackles up because I don’t associate rational with guesswork, intuition, smoke and mirrors, or the Midas touch. However many valuations of early stage companies are concoctions of just these sorts of things. Pre-money valuations are often guesswork loosely based on creative analytics. As much art as science, maybe more. How’s that for full disclosure?
My first approach to pre-money valuation was led by a sensible financial advisor and for that reason it went nowhere. Months were spent trying to build a kind of sand castle with blueprints, but every time we stood back to look, ocean waves from the real world would wash over and turn it into mush. I still have some artifacts of that effort, but I doubt they will ever be used. They don’t enhance the value of the company.
More recently I met with Steve Lindo, a fellow member of the MATTER Healthcare Incubator, whose early-stage company Simergent recently closed a nifty second round of funding. I told him afterwards that he managed to call me out of the dense woods and on to a marked path, one that he had recently walked and was still navigating though Simergent is farther along than Humaginarium. By the way I talk a lot about the value of peer-to-peer learning, positioning it as a capstone of my innovative health education. Steve and Bob dialoging in a small, windowless conference room is a stellar example of how peer-to-peer works. Two explorers on a mountain trail, talking about conditions and directions, shortcuts and pitfalls, techniques and models that may hopefully lead to a summit.
Steve explained several tested methods for pre-money valuation. Everything made basic sense and I was encouraged because he spoke from experience and deep reflection. Afterwards I spent a few hours researching his methods and a couple others that surfaced online. I also sent questions to experts about non sequiturs of pre-money valuation that I just couldn’t make sense of (because, it turned out, they are nonsensical).
My net result is a hybrid methodology that nicely organizes the economics of Humaginarium (rather than some sand castle), plus a list of very doable analytical tasks to come up with my number. I wound up feeling pretty sure that my first pre-money valuation will be drafted soon, this month, so that I can head over to current and emerging stakeholders with a cap table that is as much science as art, maybe even more. That will be awesome disclosure!