An article by ValueNomics'^® president Gary Jones, Zen and the art of valuation, was featured in the April 27th issue of Silicon Valley Business Ink Magazine

Cupertino, CA -- A article by ValueNomics'^® president Gary Jones was featured in the April 27th, 2001, issue of Silicon Valley Business Ink magazine.  The article, Zen and the art of valuation, which appeared in condensed form, states that while formula and science are tools essential to the process of measuring the value of a business, the "art" of valuation plays an equally important role.

The full text of the article is below.

 Zen and the Art of Valuation

By Gary E. Jones

With this article we hope to provide insight as to what is generally meant by the "art" of valuation.

Value is . . . is what?
ValueNomics^® has dedicated itself to the discipline of Value, or, more accurately, the measurement of value for literally hundreds of valuations, tens of thousands of hours and countless discussions on business enterprise value for Silicon Valley business interests.  Based on this experience, it is clear that formula and science are tools essential to the process, but that the "art" of valuation plays an equally important role.

At the risk of being branded a "heretic" by my competitors, I am going to take a shot at defining the "art" of valuation in this article.  In this regard I make no claim to being a mystic or spiritual seeker of some cosmic truth. The fact is that value is something like attempting to hold water in your cupped hands- some is bound to escape. That which remains is priceless.

Being Mindful of Investor and Entrepreneur
The Investor and The Entrepreneur are two opposing forces with a common goal.  The investor is driven by the desire for a high internal rate of return on investment (IRR) and thus willing to take venture investment levels of risk.  The entrepreneur is also willing to take risk in return for giving sweat equity and receiving a living compensation during development of a technology and business enterprise. Both parties have the common goal of harvesting their investment as a measure of their skills, judgement and return on investment. Considering these positions, it is a given that the investor would prefer a pre-money value (the value of the enterprise before their dollars are invested) low enough to allow room for the enterprise value to increase to a point that will achieve the investor's targeted IRR.

The entrepreneur, on the other hand, has an opposing position. She wishes to achieve as high a value as possible. A higher value will potentially reduce the amount of control she has to give up, while still retaining as much equity as possible.

Both goals are understood and reasonable.  The side that compromises their goals is in part influenced by market conditions at a moment in time, or the Zen condition of "now": the moment in which negotiations are conducted and current market forces are at play.

To wit, this Zen state of "now" constitutes something of a dilemma for the valuation analyst.  While we, as analysts, conduct research, analyze financial statements and market evidence, and run all the formulas and models we have in our tool chest, there is the factor of current market conditions that requires judgement based on experience.  That factor is, I suggest, the Zen in the "art" of valuation.

ValueNomics^® and the "Art" of Valuation
ValueNomics^® is not alone in its methodology of incorporating the Zen, or the moment of "now", in the "art" of valuation. The opportunity to conduct interviews of all types of investors from corporate and venture capitalists to angel investors, entrepreneurs and board members has helped us gauge current market conditions. These interviews support our methodology.  We use the concept of a consensus of value.

As part of the valuation process, ValueNomics^® conducts the normal research, interviews, analysis and formula-based approaches. Our senior people then review the work and meet to discuss and debate the result. At this juncture in our process, we put on the table challenges and support for positions we are taking in the result and report.  The staff analyst also gives his or her input as to the information and estimate of value from their viewpoint as the person who conducted the day to day work. The team considers market evidence, calculation, judgement and more, and interjects opinions based on experience into the mix throughout the process, but most particularly at this point.

The result is quite amazing. A consensus is reached, and at that point in time we have attained our estimate or opinion of value.  Others have said that this process is analogous to the negotiation between the investor and the entrepreneur, and is also similar to the process much used by investment committees to reach the end value for their term sheets.  In achieving consensus through a mix of science and fact, and experience and the moment of "now", our science becomes an art - the "art" of valuation.

Gary E. Jones is the President of ValueNomics Research, Inc. located in Cupertino, California.