In the middle of his entertaining and energetic lecture at the University of Washington’s Foster Business School in an entrepreneuring class, Ralph Derrickson suddenly stopped at the left side of the room. He started chuckling and said “You know as a CEO of Carena, I spend my days either selling stock or selling our products. Selling products is a lot more fun.”
One of the hardest things to educate startup CEOs about is that the product they are uniquely creating is the company that they are building (in the eyes of investors), not the particular product or service that they are selling. At the very start of a company there is usually only one product and it is hard to separate the product development team from the company itself. They are often one and the same.
The education of the CEO in a startup follows the above arc – first there are only costs and expenses, then at some point (hopefully relatively early) revenues start showing up. If things go well the magical cash flow positive line is crossed and there starts to be some profits showing up. Only at this point do the mythical realms of pre-money and post-money valuations used to get investment actually become something real. If things progress, then there is an exit opportunity (acquisition, merger or IPO).
What new CEOs need to understand early on is that they are measured by what kind of multiple of revenue their valuation comes to when they exit. For most of us, it is only when we finally see our first Exit Valuation (usually much lower than we hoped), that we begin to realize that valuation is the metric we should have been focusing on all along. In other words, as a CEO our product is the company and the valuation that we can get upon an exit. Our actual products and the price we can achieve for those products and the revenue we can generate from those products is an important part of that valuation. However, it is only part of the story.
As a good CEO, it is easy to focus on selling products to customers. Yet, the ultimate product in investors eyes is the total value of the company which is made up of the human capital, structural capital and relationship capital. These forms of capital are known as Intellectual Capital and have to be the focus of the CEO.
Company as the CEO’s product. As an entrepreneur the sooner this is understood, the sooner you can be on your way to achieving a good valuation on exit. If you are really good, you will take heed of Basil Peters and do an Early Exit.