Want A Better Valuation? Decrease Your Assumptions.

Lately, as part of the DreamIt Ventures team, I've been listening to and screening tons of applicants and applications looking for funding.  I'm always surprised when I ask an entrepreneur about their "key assumptions" and as they answer, it seems like it's the first time they have really thought this question through.  My definition of a key assumption is a critical aspect of the business that is a linchpin, and if the assumption is incorrect, everything starts falling apart like a tumbling house of cards.

I generally find that most businesses / ideas are based on 3 - 7 key assumptions that represent the highest risk factors that will determine the likelihood of success.  This applies to both new and ongoing businesses.

As you are thinking through your business, business model, new product, or new service, make sure to ask yourself and your team:

• What key assumptions are we making?
• How can we figure out if our key assumptions are correct and do it quickly and in a capital efficient manner?

The more key assumptions you have, the more risks there are.  More importantly, if you are looking for outside funding, as assumptions decrease, value increases.  For a new venture or product, one of the best ways to decrease assumptions and increase your value is to get a handful of early customers / users / clients to use your product or service.  Finally, keep in mind that you can usually get rid of many key assumptions by being clever, and thinking outside the box.  Try to burn up your intellectual capital before looking for significant outside capital.

Areas where I see the highest concentration of key assumptions in new ventures:

• Positioning
• Competition
• Market demand
• Pricing
• Market adoption rates
• Revenue forecasts

Focus on eliminating your key assumptions that make up your key risks.  Don't build a house of cards.

Comments

[Luke G]

Great post. One of the things that it took us a while to realize is that, in many senses, we're in the business of making & testing hypotheses. Explicitly listing our assumptions and how we can (and will) explore them has proven tremendously useful.

[Steve Barsh]

Thanks for your comment Luke. Great to hear that you find "exploring assumptions" is beneficial. -- Steve.