We want to raise capital for our businesses to help us with resources to fix frictions in markets. In this video, I explain how founders can boost the valuations of their startups. The key element is that you must have a way to communicate why you are different from the incumbents because your ability to set a new basis of competition will unlock more value for your investors. It connects into the heart of your scalable advantage, providing new elements that set you apart. High scalable advantage means that you can grow with minimal costs, and most times, that happens because your marginal cost is very low. If that happens, investors will see your business from new angles, rewarding you with higher valuations. Cases abound with the following:
- Airbnb and hotels: Airbnb has practically no marginal cost compared to hotels
- Uber and traditional cabs: Uber is an aggregator with strong scalable advantage
- Facebook and media: Facebook does not create the raw materials of its business. Users do and that means it can grow without any limitation, theoretically
- WeWork and office leasing firms: WeWork is an aggregator with service, removing a pain point of dealing with landlords who remain stuck in the past.
But even with the promise of high valuation, you need to generate income because in realty that is what investors are investing in for. In other words, after all the nice sounding words, you must make profits; otherwise, the business will die one day. Sure, if you sell before going public, the acquirer will still have to deal with generating profit to make it a business.