How can valuation help you grow your startup?

Hi there 👋,

In my early twenties, I did a Master’s in Finance and Investment. This wasn’t as long as it sounds, I swear.

A big part of what we did in that study was calculate company valuation. That translates to: how much is a company worth?

It usually involved a big Excel sheet, a lot of benchmarks, estimates, assumptions and calculations. Oh, and a lot of coffee was consumed. 

The end result? A random number seemingly spat out on the page.

I hated it.

Not because of the Excel sheets; I adore those - don’t even get me started on the wonders of Pivot Tables.

I hated it because I knew that changing a single number in that sheet could cause the company valuation to drop from 40 million to 33 million.

So how accurate could it really be? Is valuation actually useful in finance and investment, and what about in startup growth?

Using valuation for growth

Fast forward (not that many years, I swear), and I get it now. 

Sure, it isn’t 100% accurate, but if you don’t do any calculations, how can you know whether to invest in Company A or B?

And if A is worth 23-34 million and B is worth 33-40 million, there’s still a chance that A is better, but B is the safer bet.

The real irony is that I use the same technique today for growing companies.

Founders often turn to me and ask questions like:

• Is it worth improving our email welcome flow?

• Should we work on our conversion rate or focus on the ad creative?

• Will improving first to second-order retention actually have a big impact?

I love receiving these questions because I don’t answer them.

Instead, I teach them the same technique I learned for valuations. I show them how to calculate the best estimate of impact.

Step 1

Start with the key metrics:

1. What is it now?

2. What is a good benchmark for what it could be?

3. What could you realistically improve it to?

So take the email welcome flow for a DTC brand, you start by getting the key numbers in place.

Current conversion rate from the flow (placed orders): 5% overall, with 4% being from the first email

What would be a good rate for your industry? 8%

What do you think you could improve it to? 6.5%, as definitely emails 2 - 4 could be working harder

So that is a 30% improvement (5% to 6.5%)

Step 2

Then look at the volumes that are impacted by this:

Sign-ups going through the flow over the last 30 days: 8000

Current conversions (orders): 400 (5% of 8000)

So 30% more would mean 120 more orders. 

But what does that mean? 

Ideally, you calculate it relative to your North Star Metric - the measurement most predictive of your long-term success - and how it would impact that. 

But you can also look at Lifetime Value (long-term impact) and first-order revenue (short-term impact) over the next three months:

Lifetime Value: 160 pounds

Lifetime Value Lift: 57,600 pounds (160 LTV x 120 orders x 3 months)

Average First Order Value: 30 pounds

First Order Revenue Lift: 10,800 pounds (30 revenue x 120 orders x 3 months)

The decision

You’ve got your valuation, so what comes next?

1. See if this is even worth the costs of improving it in terms of time and resources

2. Calculate alternative opportunities

3. Compare them, keeping in mind:

   1. Differences in costs and ability to improve

   2. How long will the impact last? e.g. improving email flows has a longer impact than campaigns because campaign emails continually need to be worked, but might have a higher volume of email recipients

   3. User research/data to back up the impact

   4. The wider company growth strategy and overall vision

Is it perfect? No.

Is it better than just doing everything or blindly choosing? I believe so. 

It takes practice to think like this, but I make sure Founders calculate this before coming to me to discuss those questions.

In this example, it was worth improving it as a stand-alone opportunity.

This is because there is a large volume going through the flow, and it has room for improvement.

In other cases, like if it had been a tenth of that, it might not have.

But a five-minute calculation can save you hours of wasted time. It also allows you to make data-driven decisions for your growth.

Recommendation

In every edition of Growth Waves, I also share a related book, individual or newsletter to check out related to the week's topic.

Check out Bainbridge and their DTC Benchmark newsletter. I use this newsletter all the time to nerd out about graphs and find relevant benchmarks or key metrics .

But this comes with a word of warning. 

Please, please, consider your industry and price range. For example, the beauty industry has notoriously lower repeat order rates than DTC overall.

I could never have guessed that the task I liked least during my Masters's would end up being something I do all the time. 

I also never could have guessed that I’d end up working in growth, or having thousands of people read my weekly newsletter.

Things can be funny like that, and a lot can change within a few years.

Until next week,

Daphne