Gave a talk on Startup M&A and the Magic Box Paradigm this week in Canada and in prep refined my framing of startup valuation (in an M&A context) to the following equation:
Valuation = Opportunity divided by Scarcity
The essence being that as an acquirer considers an acquisition they first look at the market opportunity and that sets the frame of the valuation thesis. They then look at the scarcity of the startup (platform, team, etc.) and that is essentially the denominator of the equation. If it's a billion dollar opportunity and there's only one company (or way) in the world to capture it - then the startup can work from a starting point of $1B as the basis for negotiating value (V=$1B/1). However, if there are 10 ways to solve the problem, then the denominator is 10 and the starting point is $100M (V=$1B/10). If there are 100 ways to solve the problem - then... And so on...
If you want to capture the lion's share of the opportunity, then you have to prove your scarcity.
Just posted my Vator Splash LA talk on the Magic Box Paradigm book/ Startup M&A on Vator News. You can see the full post here.
In terms of overall startup M&A process the things I'd highlight would be:
Create the narrative around the direction of your industry. Inside of that overarching industry narrative layout the evolving story of your innovation - and how it is growing into, and positioned to be a leader in, this changing industry landscape.
Potential Strategic Partners (PSPs)
Create a list of the PSPs. Think about current and future players in this evolving industry landscape. In particular those who are adjacent or with operating similarities to your startup.
Develop a thought leadership strategy that brings you into recurring contact with the key players at target PSPs and other industry influencers.
Either through thought leadership, or more directly through commercial partnerships, develop relationships with your target PSPs. Uncover opportunities for collaboration - and help them understand how your startup could accelerate their strategy in this emerging area.
Ultimately you're looking for strong, organic, inbound interest. That's when deals are interesting. Your job is to position yourself as the leader in the space, develop relationships with the key PSPs and create opportunities to be acquired.
If you want the full story - grab a copy of the book, here.