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 to the following equation:

Valuation = Opportunity divided by Scarcity

I believe this applies broadly to startups - but in the context of acquisition 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.

Be the only denominator.

Advsr's Law: V=O/S

And if you haven't yet - read Magic Box Paradigm: A framework for startup acquisitions - on Amazon here.

Seems like a very straightforward calculation. I might borrow this one. Would you consider Velocity into the equation under Scarcity? In other words, does how fast they're moving figure in?

Posted by: Demian Entrekin | March 14, 2017 at 02:28 PM