Reader question: “How to assess value for startups?”

Sent by Jonathan Stark on December 11th, 2016

List member Mike N wrote in to ask:

I have a question: How to assess value for startups …. they say “well we want an app to do XYZ.” then either they say  “that gives us something to demo for capital raising”  OR “ No idea how many users or revenue it will generate could be $1 or $1 billion (or some large number) if it is successful”

There are exceptions to everything, but I have found that the typical early stage, “silicon valley” sort of tech startup is a bad fit for value priced software services. 

Here are a few reasons why:

1. They don’t have a predictable revenue stream - Fledgling tech startups are super cost-conscious. Either they have no funding yet, or they just got funding and are hyper focused on their “burn rate”. They are price buyers and price buyers make for bad clients. 

2. They aren’t clear on who they serve - Startups serve two masters: their customers (or imagined customers) and their investors. It’s hard for founders to chart a clear course when they are being pulled in two directions at once. In other words, they are torn between two different groups of stakeholders who each have wildly different motivations. This results in a lot of indecision, reversals, and rework (all of which equate to scope creep). 

3. They are not impressed by your dev skills - Tech startups are not impressed by people who know how to code. The person hiring you could probably do what he (or she) is hiring you to do himself if he had the time. Selling technical services to developers is like selling shoes to cobblers - they’d rather have their kids go without shoes than pay another cobbler to make them. 

Did I explain that well? Does your experience working with startups differ? Have you created products or services for Valley-type startups that can be value priced?

Yours, 

—J


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