Whether your company is public or private, increasing the company’s valuation is always one of the end-goals of all your activities, whether they be engineering, sales, or marketing. Valuation tends to be driven by a handful of factors, with the most important ones being current revenue, revenue growth potential, profitability (often gross margin %), execution versus competitors, thought leadership, and defensibility of the company’s position in the market. While company valuation itself is usually expressed either by a company’s market capitalization or enterprise valuation (market cap plus debt/liabilities, minus cash/similar assets), the premium that a given company gets is often expressed in terms of the company’s “multiple”, which is typically market capitalization divided by yearly revenue. As an example, a company with a $5B valuation and $500M/year in revenue would have a multiple of 10 ($5B/$500M). If a company in a given industry has a significantly higher multiple than its competitors, it means that the company is perceived as being much better positioned for success than the competitors.
You can see a great illustration of this by looking at the three companies in the I/O networking space (Mellanox, QLogic, and Emulex). Based on data reported by MSN Money on April 24th 2015, the companies had similar annual revenues, with all three falling between $440M and $465M/year. All three companies also reported had slight net income losses (ranging from $18M to $29M). However, their multiples were significantly different, ranging from 1.28 for Emulex to 2.87 for QLogic, and 4.77 for Mellanox. The primary difference between the companies is the market’s perception of each company’s growth potential, indicated both by their historical growth and their potential growth based on the markets they are in. To illustrate this even more, Nimble Storage (a “next-gen” storage company) had a market capitalization on April 24th 2015 of $1.92B and a multiple of 8.43, even though their annual revenue was $228M, and they reported a net income loss of $98.85M. This compares with NetApp, which had a multiple of 1.77, on annual revenues of $6.3B and net income of $638M. The key differentiator is that Nimble Storage’s revenues grew 81% from FY2014 to FY2015 (Nimble Storage was founded in early 2008). Clearly, the market’s expectation of growth potential for Nimble (as a percentage of revenue) is significantly greater than that for the other companies in this example. What drives these perceptions of growth that have a significant impact on company valuations? Obviously, historical data is helpful, but that alone is not the only indicator the market looks at.
One important factor in driving growth potential perceptions is whether a company is seen as being a leader among its competitors. While this is generally related to technological leadership (after all, this is the high-tech industry), it can also apply to go-to-market leadership, supply chain leadership (think Dell in the 1990s), customer service leadership, or other similar factors. Another important factor is whether a company is seen as participating in hot new “high-growth” or “catchy” markets such as big data, cloud computing, or social media, or if the company is in unexciting, low-growth markets such as general-purpose servers and storage for the enterprise. From a marketing perspective, these perceptions are often called “market leadership.” For better or worse, a company cannot just expect that going after the right things and the right markets will automatically lead to the right perceptions about the company’s thought leadership. Rather, thought leadership has to be nurtured and promoted just like products do. Which brings us back to this blog’s title – are your markets and marketing efforts creating a buzz about your company, or are they are a buzzkill. Make no mistake, customers make judgments about your company with every interaction that they have with you, from what you emphasize and how you communicate on your website, to the look and terms you use in your collateral and your sales presentations, to how analysts speak about your company.
The “hot markets” that we spoke about earlier also have their own vernacular and jargon, and if you are not using that language correctly (or at all), customers and investors will not perceive that you are really serious about those markets. The companies that are seen as thought leaders may not have the best products and/or be the furthest along technologically in their target markets; rather, they have engaged their key personnel deeply in these markets, whether through industry associations, by having them speak as experts at industry gatherings for these markets/technologies, by writing articles and blogging on the subject, or by conversing extensively with analysts on the reasons for explosive growth potential in these markets. Thought leaders also have websites and collateral that reflects the dynamics in these markets, creating the perception of the leadership that they strive for.
A good example of this was Fusion-io, who was one of (but certainly not the only) the pioneers in PCI Express flash storage cards. Fusion-io differentiated itself in its target markets by hiring experts in the verticals that they targeted (banking, media/entertainment, etc.), and making sure that those people were “front-and-center” in the company’s marketing and sales efforts. It provided the perspective that Fusion-io not only understood how to make PCI Express flash cards, but also how customers would and should use this new and disruptive technology. Similarly, nVidia is seen as the undisputed leader in general-purpose computing on graphics processing units (GPGPU), which has changed the nature and architecture of supercomputing in a variety of industries. Like Fusion-io, nVidia has many experts on its staff for specific vertical industries that are a target of its GPGPUs (oil and gas, high-performance computing, etc.). Additionally, nVidia sponsors numerous conferences on GPGPU computing, provides universities with grants to utilize GPGPUs in their research, and provides tools for these communities. In both cases, these companies have been able to differentiate themselves far beyond simply the product level with their efforts, and are seen as undisputed thought leaders in their respective markets.
At G2M Incorporated™, we believe that a company’s thought leadership must actively be marketed for the company to achieve the valuations it aspires to. The G2M BuzzLine™ Market Index identifies candidate applications that have the halo of rapid growth that are critical to driving market perceptions that your company aspires to. Based on your company’s current products, roadmaps, and positioning, G2M will help you develop a strategy to exploit those markets, including methods to participate in those markets and PR/AR/IR efforts that will utilize your participation in those markets to drive valuation. The G2M Media Manufacturing Model™ is one example of a method that G2M utilizes to create compelling stories to achieve the media, market analyst, and investor analyst coverage necessary to drive increased valuation. Contact us to see how we can help your company achieve the valuation it deserves.