MBP: Valuation = Opportunity / Scarcity

The denominator has the biggest impact on the equation, a deep dive into scarcity

As discussed in the MBP book, the core equation for startup M&A valuation is opportunity divided by scarcity (in the context of each potential strategic partner’s (“PSP’s”) strategy - the equation changing from pairing-to-pairing). If the PSP and you develop a strategy with a billion dollars in value, and they perceive your startup as the only way to unlock that value, then your scarcity denominator is one and you’ll receive max value. However if you are one of ten ways they could unlock the opportunity then your value drops precipitously.

Most startups have a handle on how to develop the opportunity part of the equation. They have a good feel for the macro trends, customer needs, and market gaps. However, it’s surprising how few startups have an equality developed articulation of their scarcity. We’re going to remedy that right here.

The broad view of scarcity

Scarcity is much more than a few pieces of intellectual property. It’s all that you are - you’re going to want to take a broad view. Additionally, your value to a PSP isn’t just in what you are today, but it’s in your ability to help them unlock a much bigger future. Your scarcity narrative is the story of your startup in motion towards a much bigger future.

Ultimately your scarcity narrative is going to be contoured to your startup, but as a starting point there are elements that I’d say are pretty much universally applicable, these would be:

• Platform

• Team

• Industry knowledge

• Design expertise

• Proprietary techniques

• Extended ecosystem

You’ll find that as you develop your thoughts on each of these elements other elements unique to your situation will be revealed. Remember, your scarcity is in the context of the PSP’s view of the opportunity - so the weight of different elements will change based on their priorities.

Platform

Think of the concept of “platform” in two ways: 1) as encompassing the technology you’re developing; and 2) as anticipating that your current efforts are the base for a next round of  innovation in collaboration with the PSP. Your current efforts are just the most recent manifestation of a much larger vision. You’re always becoming. 

As you lay out your platform, a few elements that will typically be featured:

• Your current capabilities and offerings

• Architecture and technology stack

• Intellectual property and significant innovations (not every important innovation has a patent on it - discuss hard problems you’ve solved)

• Important integrations (don’t underestimate the work you’ve done to harmonize third party services)

Platform is the starting point, but it’s just the starting point.

Team

Getting a startup off the ground is a herculean effort; a seemingly impossible process of forming hard-to-find financial and human capital. I’d say the latter is the hardest part: identifying, recruiting, and synchronizing a world class team to work on a cutting edge problem is no trivial feat. Your team is likely your greatest accomplishment. Your team is what’s going to power the PSP’s strategy, and you’ll want to show that it’s the right one to do it.

Think of your team as a person. How would you describe that person? What would be their credentials? What would establish their credibility? What would their core competencies be? In what areas do they excel?

Beyond core competencies outline whatever else sets your team apart. Prior work experiences, educational backgrounds, technical and innovative accomplishments. Extending further, what can you describe about your culture? How has your team come together into a cohesive unit?

Make the story of your team the centerpiece of your scarcity narrative. Showcase their strength and cohesion.

Platform and team are the two big rocks of scarcity - but they're not the only stones. Let’s dig deeper and uncover the rest of the story.