Having worked on tens of ideas and founded two companies in last 6 years, there is one question which has always troubled me. What is the value of a company when it is in the idea phase. There are numerous ways of valuation and all of them make some sense. But most rely on current or past cash flows for valuation. There are some models which value a company based not on its cash flow but instead on the market size and the valuation of companies in the same space but in a different country. If you dig deep, you will find some models which are even stranger than your imagination. But all these models need some reference. Some starting point.
After talking to some VCs and many wiser entrepreneurs, this is what I realized:
The value of an idea can be calculated precisely, to the last cent. The model is really simple and does not involve complex estimations. It is called the p4 projection model.
I am assuming that you already have the basic information about the idea handy. Let me define the variables first.
- M: Estimated size of the total market (In US dollars).
- N: Number of competitors already present. Put ‘1’ in case there are none.
- Q: Capital required to build prototype
- n: Number of co-founders you have. Put ‘1’ if your are the lone warrior.
- P: Capital required per co founder to build the prototype (Is US dollars)
- T: Estimated time required to build the prototype in months.
Now the value in USD ‘V’ of your idea is given by:
V= (M*n/T)*(P/120N)*(T/M)*(N/Q)
I tried to do valuation of my idea using ‘p4’ projections and got the value 0.833 cent!
Then I tried some other ideas and still got the same value of 0.83 cents. These results are not only consistent, but also correct as per another model given to me by a fellow entrepreneur.
Value of an idea is always 0.833 cents. This is because ideas come dime a dozen. An idea means nothing in itself. There is a single mantra for increasing the value of you idea. Execution.
I am in no way trying to suggest that ideas are not important. An idea is extremely important. But alone it is worthless. Coupled with great execution it can be priceless.
So instead of worrying too much about the value if your idea straight away, just focus all your energy on execution. And if someone asks you the value of your idea, feel free to share the ‘p4’ projection model.
Do let us know what you think…
[Edited: Correct values in the body of post]