Using AI for Valuations

Artificial Intelligence is finding its way into an ever-growing number of contexts. AI's ability to process and synthesize massive amounts of complex information and quickly produce results helps people save time and money. As such, you might think that using AI would be a good way to do a valuation of your tech company. In fact, it's not. There are a variety of reasons why you should not rely on AI to do a tech company valuation. Here are some of them.

Garbage in, garbage out

As a seller, it’s critical to do research and valuation comparisons ("comps") in preparation for an M&A. Analyzing the financial metrics of similar companies to yours and the valuations of those companies helps ensure that you accurately gauge offers from buyers so that your company does not get undervalued.

However, using an AI tool to automate these efforts is not wise. AI tools typically rely on public data that is often months, if not years, old, and will miss recent changes in the market. 

You need current data for these tools to provide more accurate results. But the most current data is often not public. It is typically only available from expensive private data services or tech investment banks like Corum.

Numerical hallucination 

AI tools for tech company valuations are subject to "numerical hallucination," where these tools can generate completely invented revenues, growth rates, or valuation multiples that look highly authoritative, but are completely wrong. This can lead you to completely unrealistic expectations. For instance, if an AI tool says your company is worth $15 million, but is really worth $10 million, you might reject what would otherwise be an attractive offer of $12 million.  Or if the tool says your company is worth $11 million and a buyer offers $12 million, you may accept that offer, feeling like it's a win, when, in fact, you could have gotten much better offers if you had waited.

Lack of competitive bidding

Creating an auction environment where multiple buyers competitively bid for a tech company will inevitably generate a higher valuation than will an AI tool that has no built-in competitive bidding. As someone wisely put it, "One buyer (as represented by an AI tool) sets a ceiling. Six buyers set a floor." Telling your story to multiple buyers and emphasizing how you can affect the future of their business, where they are competitively bidding for your company, is the best way to maximize your company's valuation and get an optimal deal. You cannot do that with an AI tool.

Lack of personal context

AI tools do not understanding your personal context. They do not understand your motivation in pursuing an M&A. They don't know your health, your family situation, or your legacy wishes. They don't understand the culture of your company, the personal strengths of your team, or your customer loyalty.

Understanding personal context is an important factor in determining the true valuation of your company because personal motivations, goals, and company culture can directly alter the offers from buyers due to what they perceive as risk or unique benefit.

Factoring personal context into a company's valuation requires human dealmakers who will work with you to understand your motivation, goals, and company culture. They will help you present the qualitative factors that make your company attractive to buyers and optimize its value. Human dealmakers can help you present your company in terms of how it can help a buyer successfully leverage the disruptive trends in the marketplace ‒ something that is beyond what AI tools can do.

Security issues

Using an AI tool to do a tech company valuation creates significant security and confidentiality risks. Everything you put into an AI tool, such as confidential financial records, proprietary metrics, cap tables, and strategic roadmaps, becomes part of the tool provider's database. At that point your private information is no longer under your control. Many AI tool providers retain user input to train future models. This means your confidential company information could resurface or become accessible to outside parties. Are you willing to risk that exposure?

Work with an experienced advisor

Working with an experienced investment banking and M&A advisory firm like Corum ensures that you get an accurate company valuation because they test real-time market demand. Also, understand that a valuation is a starting point, not a finish line. Your company is worth what a qualified buyer is willing to pay for it. The only way to discover that number is to run an exhaustive, professional, global process ‒ something that Corum provides. Corum's disciplined, eight-step M&A process is designed to create an auction environment that brings multiple pre-qualified strategic and financial buyers to the table simultaneously. Telling your story to these buyers and emphasizing how you can affect the future of their business, where they are competitively bidding for your company, is the best way to maximize your company's valuation and get an optimal deal.