The Power of First Impressions in Shaping Your Business’s Value
The initial impression customers form about your business has long been recognized as a significant factor in their purchasing decisions. However, have you ever considered how these first impressions can impact how potential investors value your business?
When raising capital, investors’ initial perception of your business plays a crucial role in determining their valuation. This, in turn, affects the equity you may need to relinquish for growth and the overall value of your company during a potential sale.
Jeremy Parker’s experience with Swag.com serves as a prime example. Initially, investors perceived Swag.com as a mere distributor of promotional products, despite Parker’s efforts to position it differently. Consequently, they categorized the company alongside other promotional product businesses, offering Parker a low valuation multiple of EBITDA for a stake in his venture.
Parker decided to pivot his approach. He repositioned Swag.com as an e-commerce platform with a memorable domain name and a superior direct-to-consumer buying experience. This strategic shift transformed the perception of Swag.com from a simple distributor to a technology company in the eyes of investors. Consequently, Parker received an acquisition offer that valued his $30 million company at a significantly higher multiple of revenue.
When it comes to fundraising or selling your business, optics and how investors categorize your company are of utmost importance in shaping its value.
The “Alibaba Discount”: The Impact of Diversification on Valuation
Speaking of the impact of incorrect categorization by investors, Chinese Internet giant Alibaba recently announced its intention to split into six separate businesses. Following this announcement, Alibaba’s market value surged by $19 billion in just two weeks. Why did investors react positively to this move?
Alibaba encompasses a range of businesses similar to those of Amazon.com, including e-commerce, logistics, and cloud storage. Prior to the announcement, Alibaba was valued at only ten times its earnings forecast for the next year. However, each individual business, when considered as a standalone entity, is likely to command a much higher valuation multiple.
Investors often undervalue conglomerates like Alibaba due to their obligation to purchase assets they may not be interested in. Frequently, they apply the lowest valuation multiple within the group to the entire collection of companies. Amazon faces a similar situation. Analysts estimate that Amazon’s cloud storage division, AWS, could be valued at $2-3 trillion if considered as a standalone business. However, as a conglomerate offering diverse services ranging from e-commerce to audiobooks and cloud storage, Amazon’s overall market capitalization is less than half of what experts believe just one of its divisions could be worth.
Balancing Focus and Diversification: Aligning Revenue and Valuation Goals
Investors generally prefer businesses that focus on dominating a single product or service rather than diversifying into unrelated offerings. A diversified portfolio may lead investors to perceive your business as lacking focus, ultimately resulting in a lower valuation. The same principle applies when you decide to sell your company. If your business appears scattered, potential acquirers may fixate on your least valuable division and apply that valuation multiple to the entire organization.
Therefore, it is crucial to prioritize your goals: Do you aim to grow your business by increasing revenue, or do you seek to enhance its overall value? While these objectives are interconnected, they require different strategies. If your primary goal is to boost revenue, diversification may be a suitable path. However, if you aspire to build a more valuable company that has potential for acquisition, maintaining a clear and focused approach becomes paramount.
Contact Investment Business Brokers to learn more about how to maximize your company’s first impression and exit valuation.