By Opinov8, March 10, 2020
These days it can seem as though every tech company wants to convince the world that they are the next major industry disruptors. It’s important to be able to tell which of these companies are what they say they are. To help you evaluate the worth and potential of a software development company, make sure you have the answers to the following five questions.
Are the experts in charge (and do they work well together)?
The leadership team sets the tone for the entire company. Running a software development company requires a technical expert, a visionary, and an organized head of operations. One person can wear more than one of these hats, but that is a rare occurrence. Whatever the case, you should be able to identify those three leadership characters within the company. Don’t undermine the attitude team members take with one another. The chemistry within a leadership team keeps talented minds working toward a common goal.
How does the company turn a profit?
Ads, service fees, and subscriptions are all valid revenue models in software companies, but they all exist along a spectrum. A company harnessing data to send their users targeted ads will probably see higher profits from those ads than a company who presents the same ads regardless of what the user’s likely interests are. A company subsidizing their service fees in order to gain a broader user base might forgo profits in the short-term to gain more long-term growth with an abundance of loyal customers.
What is the company worth right now?
Calculate the current value of the company in the same you would calculate the value of any other company. There are three main valuation techniques: the cost approach, the market approach, and the intrinsic value approach. Identify which approach makes the most sense and perform your valuation. Software development companies are companies too.
What are the metrics impacting growth?
In real estate, the cost to own and the cost to rent are critical metrics that indicate whether it’s reasonable to expect growth. Unlike real estate, there’s no single metric across all software development companies. Identify the metric that reflects the behavior of the field in question. A rideshare company might follow a metric describing the percentage of the driving-age population which owns a car and overall satisfaction with public transportation.
How are those metrics behaving?
After identifying the relevant metrics, analyze their behavior over the past few years. This history provides a baseline of the market’s behavior and can indicate whether the current economic landscape supports the company’s growth.