What is fairness? What is breweries valuation useful for?
First, if this isn’t clear, I’d better clarify what equity and valuation are. Personally, I believe that founders should know what their business is worth at any given time, regardless of whether an investment raise or sale is imminent. However, if you do plan to get some money to help you build your business, it is very important that you have a valuation in mind.
Breweries cost a lot of money to build. Funding usually comes from one of four places.
The founders put the money on themselves.
It would be cool if you could get some kind of government grant.
It would also be helpful if you could get a debt loan through a bank or secondary financial institution, but in reality, it’s extremely difficult for newer businesses.
You can raise money in exchange for equity (ownership) in the business. This is usually done privately or through an equity crowdfunding campaign. Large public companies do this through shares that are publicly traded on the stock exchange.
With that in mind, here are some general things to consider.
1. Some people get what they pay for.
Something is worth what someone else paid for. This is often thought of as the way residential real estate is valued. If a house sells for $1 million, and nine people check the house and think it’s overpriced, and then one person checks the house and thinks they’re willing to pay $1 million, then the house is worth $1 million, even though 90 percent of the people disagree with the valuation.
Valuation is not about agreeing on a number; it’s about the founder setting a number and then finding people who are willing to invest in that number.
Don’t be too busy trying to make sure everyone agrees with your valuation. When you present your business, focus on finding people who have confidence in the future.
2. Protect your interests
It’s easy to complain about overvaluation, but at the end of the day, when you sell your business to some big company, they’ll probably complain too. You can’t have it both ways, expecting the founders not to sell their shares but also expecting them to donate as much equity as possible for the least amount of money. The higher the valuation, the less of the business you have to give up, and founders should make every effort to keep as much of their business as possible for a number of reasons.
First, if you give up too much equity in a business, you will lose control of that business and find yourself in a position where you have no choice but to sell. You won’t want to.
Second, if you give up too much of the business, you’ll have a hard time raising capital later because you don’t want to set aside the small percentage of equity you have left. If you have a growing brewery, you can count on making multiple investment fundraisings, so don’t think of the first fundraising as the only one.
At the end of the day, the founders worked hard to reach their brewery’s goals, and that opportunity may never come again, so you want to capture as much of that business as possible. Ideally, you will never give up any equity, but for the reasons mentioned above, it is essentially impossible to raise capital in any other way.
So, as a general rule, be very careful how much equity you give up and, if in doubt, try to get a higher valuation that will allow you to give up less equity.
The risk is not as much as many people invest, but it may be a risk worth taking. The alternative is to price it too low and give up a lot of the business for a small amount of capital when you could have waited until the business was more mature and worth more, thus giving up less equity.
Doing a round of investing is selling your business, but not all of it. Make sure you get paid.