In a NY Times article, “Failure Isn’t Always a Bad Thing”, an interesting formula on determining a start-up’s potential for success is presented which was extracted from venture capitalist David Sliver’s book “Smart Start-ups”:

V = P x S x E

Valuation = Problem solved x Solution’s elegance x Experience of management

The maximum score for P, S, & E is 3; where the highest score is 27.  The higher the score, the greater odds for start-up success.  If “V” (valuation) is less than 5, it can be assumed the business idea is destined for failure.

If you are a business owner, take a moment to apply this very simplistic yet eye-opening formula to your own business valuation.  On the surface, this is a good exercise for budding entrepreneurs, investors, and/or potential partners.   Give it a try and let us know your thoughts.

Putting this model to the test, we examined our own business, Fair Market Valuations:

P = 3
S = 2.2
E = 2.2

3 (P) x 2.3 (S) x 2.3 (E) = 15.9 (V)

You’ll obviously have a bias towards your own company or business idea, but ask a handful of mentors or trusted advisors to rate your business using this simplistic model; take the average valuation and reflect on your potential.   Good luck and as always — Know your value.  Know your business.