After graduating, I found a job at a local CPA firm where I met my current boss. He started E Vista in 2018, and I joined him to help build the company. We’ve been growing steadily ever since.

Andy: That’s quite a journey! It must be a big change from Minnesota.

Colin: Yes, it is a significant change. Hong Kong is very different from Minnesota, but I’ve loved living here. I used to visit Hong Kong often through a company I worked with in Shenzhen, so I have many great memories of the city.

Andy: Hong Kong is indeed a vibrant city. I agree, it’s like the New York of Asia. So, what trends do you see for company valuations in 2024?

Colin: 2024 looks quite interesting. To give a brief background, the valuation market peaked in 2021, with very high multiples. However, in 2022 and 2023, it came down a bit, reaching a low point. I believe that next year, we’ll see a rebound. Interest rates might go down, and there’s a lot of dry powder in the VC market waiting to be invested. Although it won’t be an explosive growth, I anticipate an increase in investment and rising valuations.

Andy: How do you accurately add valuation to a company? It’s not just about throwing a dart at a board, right?

Colin: Correct. The method of valuation depends on the type of valuation being conducted. For instance, our primary valuation is for compliance purposes related to employee stock option plans (ESOPs). We use traditional methods like the income approach, market approach, and asset-based approach, usually applying conservative estimates based on the past 12 months of revenue or profit.

For forward-looking valuations, especially for growing startups, we might use forecasts for the next 12 months or more. We also employ discounted cash flow methods, considering forecasts for the next three to five years, along with market multiples from public companies and M&A transactions.

Andy: Where do you see software valuations heading, especially since you likely deal with many software companies?

Colin: Software valuations can vary widely. Generally, software companies have high multiples, but it depends on the type of software—whether it’s biotech, MedTech, security, gaming, or AI. AI companies, for instance, are attracting significant VC interest and can have very high multiples and forecasts. The valuation largely depends on the business model, industry, and how the forecast aligns with the company's potential.

Andy: What tips would you offer to companies preparing for fundraising, especially if 2024 might be a more favorable time to raise money?

Colin: Preparing for fundraising involves understanding the valuation landscape and being aware of market trends. Based on our valuation data, we often see information on funding rounds several months after they occur. Companies should focus on solidifying their business model, having clear forecasts, and understanding their valuation metrics. Preparing these elements thoroughly can enhance their chances of successful fundraising. We still see a lot of data about funding events, but often it's after the fact. For companies that do get funding compared to those that haven't, or those that don't seek funding frequently, having a well-organized data room is crucial. This includes having detailed pitch decks, financials, historical data, management team information, and summaries. Everything should be neatly organized so that when you review it, you can immediately understand what you’re looking at.

(07:52)

For instance, even when evaluating a pitch deck, if the information isn’t clear, it becomes challenging to grasp the business model, especially if the company is pre-revenue. It’s important that anyone reviewing your pitch deck can easily understand your business, the problem you’re solving, and the potential for growth. This clarity is essential.

(08:14)

From a valuation perspective, we often see companies aiming for unrealistically high valuations, particularly if they lack prior funding experience. While companies might aim high to avoid giving up too much equity, an excessively high valuation can backfire. Investors may find such valuations unrealistic and be deterred from investing. For example, some pre-revenue companies might set valuations in the range of $50-$100 million, which can be too high and may not be accepted by investors.

(08:39)

Another trend we’ve observed is the rise of SAFE (Simple Agreement for Future Equity) notes instead of traditional funding rounds. While funding rounds might seem more glamorous with share prices and set valuations, SAFE notes are becoming more common, especially for early-stage companies. SAFE notes offer a way to raise money without setting a current valuation. The investment converts into equity at a later stage, usually during a price round or liquidity event.

(09:29)

For those unfamiliar, a SAFE note stands for Simple Agreement for Future Equity. It’s somewhat similar to a convertible note but doesn’t involve repayment. Instead, the amount invested converts into equity in the future. This method avoids immediate valuation disputes between startups and investors, allowing for simpler negotiations. Early investors often get favorable terms, like discounts on future equity.

(09:57)

When it comes to attracting investors, a significant factor is the strength of the team. For pre-revenue companies, the team’s experience and expertise can be more critical than the product itself. Even if the product is not fully developed, a strong team with a track record of successful exits can be very attractive to investors.

(11:27)

Investors look for confident, experienced teams and potential for scaling. Even without a minimum viable product (MVP), a strong team can sway investors. For startups in various industries, demonstrating the ability to scale and achieve projected goals is vital. This is especially relevant for high-growth areas like AI, where scalability is a key consideration.

(12:23)

Differentiating in a crowded field of AI tools is challenging. It often comes down to how effectively you pitch your product and communicate what makes it unique. Being able to clearly articulate why your AI tool stands out and its value proposition can make a significant difference.

(12:52)

There’s a perception that many AI tools are more features than standalone businesses. While some tools can be integrated into existing businesses, making them scalable and impactful enough to attract investment is crucial. Companies need to focus on creating something that stands out and has substantial value beyond just being a feature.

(13:17)

Many AI startups seem to be more feature-focused rather than building a complete business around their technology. With established tools like OpenAI already available, new entrants must offer something uniquely valuable to avoid being overshadowed by existing solutions.

(13:45)

In terms of what causes startups to fail, a common issue is a mismatch between the product and market needs. Companies might have a great idea but fail to find a suitable product-market fit, leading to high burn rates and insufficient revenue growth. For funded companies, market readiness and proper scaling are critical. For smaller startups, persistence and the ability to sustain operations over time are crucial.

(14:15)

Companies that don’t adjust to market realities or fail to sustain profitability might struggle. The shift from growth to profitability is becoming more pronounced, with a focus on sustainable business practices rather than just rapid expansion.

(15:16)

For 2024, it seems that a focus on profitability over growth might continue. While some might hope for a return to the growth-at-all-costs mentality seen in previous years, the current trend emphasizes building a sustainable, profitable business.

(15:47)

Whether we return to a growth-focused approach will depend on various factors, including market conditions and investor sentiment. For now, it seems that a balanced approach with an emphasis on profitability might be more prevalent. For AI companies, investors are often willing to pour money into businesses that they believe can scale rapidly. They are generally more patient, waiting for the market to catch up. However, for many other companies, investors expect to see progress, particularly in terms of profitability, after a few years. They may not be willing to wait indefinitely.

(16:43)

We've observed some companies that, despite having tens of millions of dollars in funding, experience repeated down rounds. This is particularly common among companies that raised capital in 2021. Investors who have already committed might continue investing to avoid losing their initial investment, often due to sunk cost fallacy. Additionally, as share prices decline, existing investors might receive more equity for their continued investment.

(17:09)

Turning to cap table management, improper handling can lead to several issues. One problem is having a cap table that isn’t regularly updated. This can result in a messy and disorganized system. For example, companies might provide outdated or multiple versions of their cap table in different formats like PDFs or Excel sheets, making it difficult to determine the most accurate version.

(17:38)

Another issue arises with filings. A robust equity management system can alert you to necessary filings or potential advantages, such as tax benefits. One example is the 83(b) election, which allows founders to prepay taxes on their equity at the current value, potentially saving on taxes if the company’s value increases significantly. Without a proper system, founders might miss out on such opportunities.

(18:05)

With a cap table system, you can streamline the process of staying updated on filings and avoid the time-consuming task of manual tracking. This also helps with communication, ensuring shareholders are informed about equity updates and that everything is managed efficiently.

(19:07)

Regarding our platform, we are focused on improving our cap table system with real-time updates. This feature will allow data input, checks, and updates to occur seamlessly without needing manual intervention from an analyst. While many clients appreciate the personal touch of working with an analyst, this new feature aims to balance convenience and personalized service.

(19:33)

We also plan to expand our platform to include more features, enhance tax compliance, and improve valuation tools. The goal is to provide a comprehensive solution that keeps pace with evolving needs.

(20:24)

For prospective clients, our platform stands out in a niche market. It offers a user-friendly interface that is easy to navigate without extensive training. Unlike some competitors, we emphasize personal service and responsiveness. We aim to provide high-quality valuation services and ensure that clients feel well-supported.

(21:15)

Our system performs well in the cap table management space and includes key features essential for effective management. We prioritize ease of use and efficient client support, addressing issues that other providers might overlook.

(21:45)

In terms of client support, we strive to offer a personal touch and respond to inquiries within one to two days. Many clients switch to us from competitors due to dissatisfaction with the level of support they received elsewhere.

(22:11)

Managing a cap table and company valuations is crucial and involves more responsibility than managing simpler tools like email marketing platforms. Even as automation advances, a personal touch remains valuable, especially in professional consulting services. We aim to balance automation with the personal support clients need to feel assured and cared for. Having someone available just a step away for updates or changes is invaluable. It’s great to have the ability to contact someone and receive a prompt response.

(24:00)

I had an interesting experience after studying accounting. I interviewed at several large accounting firms and got quite far in the process. However, I didn’t make it to the final round. My strategy was to emphasize my expertise in accounting, which set me apart from other candidates.

(24:28)

Now, on the other side of the hiring process, as a partner at a company with 20 to 30 staff, I conduct interviews and see things differently. I realized that my focus on specializing in one skill was a mistake. I now prefer candidates who are well-rounded, even if they’re not experts in a single area. A candidate’s willingness to learn, admit mistakes, and have a positive attitude is more valuable. In a startup, where roles and tasks constantly change, being a jack of all trades is crucial.

(24:55)

If I had to do it all over again, I would focus on being more well-rounded. For anyone considering joining a startup, it’s important to be personable, hardworking, and knowledgeable about various aspects of business. The Pareto Principle suggests spending 20% of your time to understand 80% of a task. Broad experience and soft skills are essential, as startups often require flexibility and a willingness to adapt.

(26:06)

In startups, it’s not a typical 9-to-5 job. You might find yourself working late nights and handling various tasks to grow the company. The excitement of being involved in a startup often means putting in extra hours, which can be rewarding.

(26:24)

I value staff who don’t view their work as just a job but as a mission to complete tasks, regardless of the time. They focus on achieving results rather than just clocking out at 5 p.m. This dedication helps them advance within the company, where they feel more connected and valued, unlike in larger firms where they might feel like just another number.

(27:10)

Startups come with their own trade-offs compared to large firms. While large companies can offer specialized roles, startups provide opportunities for growth and personal investment in the company. Having worked in startups for many years, I find that the extra hours are worthwhile when you enjoy what you’re doing. Building something from the ground up is incredibly fulfilling.

(27:34)

The sense of achievement when seeing the results of your efforts over time is profound. It’s gratifying to look back and see the progress made within a year or two. It’s about having a purpose and being able to say, “I built that.”

(27:56)

Comparing yourself to companies with more funding or at different stages can be challenging. However, persistence is key. If you keep working hard and stay consistent, good things will eventually come. The startup world tends to reward long-term dedication and hard work.

(28:20)

Over time, things tend to get easier as you learn and adapt.

(28:47)

Colin, I really appreciate you joining us today, especially considering the time difference in Hong Kong. Your insights on valuations are particularly relevant given the current fundraising environment. For anyone serious about cap table management or 409A valuations and seeking top-notch service, check out eVista on Nacho Nacho, the B2B SaaS marketplace. You can currently get a 20% lifetime discount, so don’t delay. Thanks again, Colin.

(29:12)

Thank you so much for having me!