4. Reflection: You
A desire for:
• Participating in the start-up ecosystem
• Helping an Entrepreneur
• Making Money/Name/Fame?
• Other ?
4
5. Reflection: You
TO
• Participate in the start-up ecosystem
• Help an Entrepreneur
• Make Money/Name/Fame?
• Something else ?
Has this changed in the recent past.. Post
lockdown ?
5
7. “To Trigger Thinking”
Best Results when
• When Personal Goals are Aligned with Group
Goals for Investment
7
8. 8
Valuation : Startup
At very early stage valuation is often a function of:
• Amount of cash burn (with different scenarios of
bootstrap and adequate funding)
• Stake promoter is willing to give up
9. At the Start-up Stage
Thoughts and Dreams of the Founders drive the
business … Therefore
• The Value (Focus) is MORE on the persons
behind the venture and less on the business
idea and market environment
• The tangibles are limited and a valuation
exercise attempts to capture the intangibles in
numbers (eg. Premium quality may be indicated
by a higher price per unit of sales)
9
10. At the Start-up Stage
Founders may look at how they can tangiblise and
demonstrate potential for success … to show value
For example
• Onboarding respected domain experts/ persons/
brands
• Signing on potential customers, even better is
getting cash into business from customers i.e.
paying customers
• Recommendations/referrals from highly regarded
persons
10
11. At the Start-up Stage
• Valuation for an investor is linked to future outcome and
expected return on exit from investment
• Investment should have potential for high return, which
implies
– the addressable market should be extraordinarily high PLUS
– the founders must have the capability to grow this business
PLUS
– The founders must (appear to) have the drive and determination
to grow this business
– IN A POST COVID-19 WORLD: Investors will look at founders
who reflect, reset and show resilience
11
12. 12
Valuation : Startup
At early stage valuation is often a function of:
• Amount of cash burn (with different scenarios of
bootstrap and adequate funding)
• Stake promoter is willing to give up
AND factors such as
• Value add expected from investor
• Expected funds to be raised in future rounds,
connecting this to future dilution expected to be made
It would help if you can
articulate and list what
YOU & GROUP bring to the table
13. 13
Is valuation a Number?
Conditions
Post deal
Build
more
tangiblesPrepare
Create
more
value
Negotiate/
bargain
Before deal
Math is ONE Element
15. Value is connected to type of investor
• HNIs, informal and formal angel groups
• Seed Funds
• Venture Capital
• Private Equity
• Banks exploring innovative ways to fund SMEs
• Strategic Investors
• Corporate Funds; (Family) Business Groups, Indian & Global
– Directly and/or through a special division or subsidiary
– For employees alone or open to public
– As intellectual and/or financial capital with other facilities
• Government supported funds
• Impact Investors
• Incubators
• Accelerators
• Co-Creators
• Crowd funding
• Online funding platforms
15
16. At the start
… Valuation: Methods
Valuation: Focus Startup
Valuation: Startup Examples
Valuation: Summary
To Trigger Thinking …
16 16
18. 18
Cost based methods
There are different ways of arriving at cost:
• Book value
• Replacement value
• Liquidation value
NOTE
These methods could become relevant when one is considering
the accounting, legal and tax impacts of valuation, for eg.
–in deals related to M&As, JVs and partnerships etc..
–in cross-border transactions, depending on countries involved
19. 19
Income Based methods
• Earnings capitalisation method or profit
earning capacity value method
• Discounted cash flow method (DCF)
20. 20
INCOME: Earnings capitalisation method
• Also called Profit earnings capacity value (PECV)
• Value determined by capitalising earnings at a
rate considered suitable
• Assumed that the underlying value driver of the
company is its future earnings potential
• Suitable for fairly established business having
predictable revenue and cost models
• For example
– Profittee Limited is earning post tax profit of Rs. 5
– It is capitalized at 10%.
– Value of Profittee Limited is equal to Rs. (5/10%)
crores, ie Rs. 50 crores.
21. 21
nt
t
t
t
r
CF
Value
1 )1(
• CF = cash flow
• t = the year and
• r = discount rate
i.e. the cash flow for each year from year 1 to year n (which is the time
period under consideration) is discounted to arrive at the present value
of future cash flows from year 1 to n
INCOME: Discounted cash flow
22. 22
Market based method
• Assumption is that other firms in industry are
comparable to firm being valued
• Standard parameters used like multiples of revenue,
EBIDTA, PAT, book value
• Other indicative parameters such as revenue per user,
net margin per user etc. may also be calculated
• At different times, different multiples are popular, for
example GMV (gross merchandise value) for e-
commerce businesses
• Adjustments made for variances from standard firms or
deals in the recent past, these can be negative or
positive; i.e. premiums and discounts are assigned
23. 23
Exercise in Valuation - I
ILLUSTRATIVE VALUATION EXERCISE
REVENUE FORECAST USD
Business Units Y1 Y2 Y3 Y4 Y5
Unit 1 12,00,000 24,00,000 48,00,000 72,00,000 1,08,00,000
Unit 2 12,00,000 24,00,000 48,00,000 57,60,000 69,12,000
Unit 3 8,00,000 16,00,000 32,00,000 38,40,000 46,08,000
Unit 4 8,00,000 16,00,000 32,00,000 38,40,000 46,08,000
Total 40,00,000 80,00,000 1,60,00,000 2,06,40,000 2,69,28,000
Profit margin, year 3 & year 5 respectively 20% 32,00,000 25% 67,32,000
VC Investment USD 20,00,000
Average Revenue Multiple 8 One Year Forward – Average of selected sample cos.
Discounts for
Liquidity 35% 2.8
Size 35% 2.8
Company 10% 0.8
Total Discount 80% 6.4
Revenue Multiple 1.6
Valuation - Multiple ONE YEAR FORWARD USD 64,00,000
VC Expected Stake 31%
While making assumptions for future multiples and expected PAT etc,
have a basis for assumptions, as this may be required for negotiations.
While you may not necessarily discuss this, you must have this
information and justification. for eg. why is the multiple 8 and not 15 etc.
24. 24
Exercise in Valuation - I
ILLUSTRATIVE VALUATION EXERCISE
REVENUE FORECAST USD
Business Units Y1 Y2 Y3 Y4 Y5
Unit 1 12,00,000 24,00,000 48,00,000 72,00,000 1,08,00,000
Unit 2 12,00,000 24,00,000 48,00,000 57,60,000 69,12,000
Unit 3 8,00,000 16,00,000 32,00,000 38,40,000 46,08,000
Unit 4 8,00,000 16,00,000 32,00,000 38,40,000 46,08,000
Total 40,00,000 80,00,000 1,60,00,000 2,06,40,000 2,69,28,000
Profit margin, year 3 & year 5 respectively 20% 32,00,000 25% 67,32,000
VC Investment USD 20,00,000
Exit Table Method 3 year time 5 year time
Expected Valuation 2,00,00,000 4,00,00,000
Discount Rate applied 50% 50%
Present value of expected valuation 59,25,926 52,67,490
% ownership expected by VC Investor 34% 38%
25. 25
Exercise in Valuation - II
Some parameters used to value Plantation Co. Garden Co. Park Co.
Enterprise value/sales 1.4 1.1 1.1
Enterprise value/EBITDA 17.0 15.0 19.0
Enterprise value/free cash flows 20 26 26
Meadows Co.
Sales Rs. 200 crores
EBIDTA Rs. 14 crores
Free cash flow Rs. 10 crores
How would you value Meadows Co. based on
the market/industry information provided?
26. 26
Some parameters used to value Plantation Co. Garden Co. Park Co. Average
Enterprise value/sales 1.4 1.1 1.1 1.2
Enterprise value/EBITDA 17.0 15.0 19.0 17.0
Enterprise value/free cash flows 20.0 26.0 26.0 24.0
Application to Meadows Co. Average Value
Sales Rs. 200 crores 1.2 Rs. 240 crores
EBIDTA Rs. 14 crores 17.0 Rs. 238 crores
Free cash flow Rs. 10 crores 24.0 Rs. 240 crores
Exercise in Valuation – II: Possible
Solution
27. 27
Some parameters usedto value Papers Co Docs Co. Prints Co.
Enterprise value/sales 2.6 1.9 0.9
Enterprise value/EBITDA 10.0 21.0 4.0
Enterprise value/free cash flows 21.0 30.0 24.0
Application to PenPencil Co.
Sales Rs. 300 crores
EBIDTA Rs. 15 crores
Free cash flow Rs. 7.5 crores
Exercise in Valuation - III
How would you value PenPencil Co. based on
the market/industry information provided?
28. 28
Some parameters usedto value Papers Co Docs Co. Prints Co. Average
Enterprise value/sales 2.6 1.9 0.9 1.8
Enterprise value/EBITDA 10.0 21.0 4.0 11.7
Enterprise value/free cash flows 21.0 30.0 24.0 25.0
Application to PenPencilCo. Average Value
Sales Rs. 300 crores 1.8 Rs. 540 crores
EBIDTA Rs. 15 crores 11.7 Rs. 175.5 crores
Free cash flow Rs. 7.5 crores 25.0 Rs. 187.5 crores
As there is a wide value range, the application of the
relative multiples does not look appropriate in this
case. What are your thoughts on this?
Exercise in Valuation – III: Possible
Solution
29. At the start
Valuation: Methods
… Valuation: Focus Startup
Valuation: Startup Examples
Valuation: Summary
To Trigger Thinking …
29 29
30. Valuation
• At idea and early stage there is limited data,
more subjectivity; higher weightage given to
– Team
– Potential market
– Competitive scenario
• At next phase, more weightage is given to
– Customer traction
– Pipeline
– Past record of conversion from pipeline etc.
– Immediate past performance
– Business and financial model
30
31. Valuation
• Many methods are there, including but not limited to
– Multiples of revenue, EBIDTA, user base, etc
– Multiples of industry specific value drivers, e.g. GMV (Gross
Merchandise Value), revenue per user, net margin per user
– Cash flow based, discounted
– Exit valuation expected
• Financial forecasts are the starting point and required
from a regulatory perspective. They are also a key point
in the due diligence review, prior to investment
• Uncertainties are factored in by way of scenario and
sensitivity analysis, probabilities and expectations
• Other statutory, accounting and tax implications are to
be factored in while arriving at valuation and deal cash
flows
31
32. Valuation
Key Drivers:
• Markets: Flavor of season, competitive scenario,
industry trends
• Team: At helm plus advisors/mentors/board
• Cash burn: Or cash needed, look at scenarios of
minimum bootstrap and best case
• % sharing: Equity promoter is willing to let go
32
33. Valuation
Other Drivers:
• Unbundling of deal issues, such as
– Board Membership
– Decision making powers
– Payment/salary to founders
– Assistance in administrative matters (eg. Incubation)
– Contribution to execution and participation in key
activities such as sales, partner tie-ups
– Liquidation preference
– Exit clauses
• Negotiation and taking control of the situation
33
34. Valuation
• Deals can sometimes be structured to
accommodate valuation perceptions
– For eg. linking to future performance
– This could become an area of concern when there is
a possibility of a “down round” when new investors
come into the picture
• Understand what could be the
– Deal maker issues and
– Deal breaker issues
34
35. Valuation: Impacted by Quality ..
• FOCUS on Quality not just on Quantity …
• Illustrative parameter: Revenue Quality
– Sales Quantity
– Quality of revenue - in terms of
product/service/vertical/location etc.
– Customer segments addressed
– Average revenue per employee
– Number of customers, number of high value customers
– New customers added
– Customers lost
– Pipeline customers
• Customer acquisition strategy
35
36. At the start
Valuation: Methods
Valuation: Focus Startup
… Valuation: Startup Examples
Valuation: Summary
To Trigger Thinking …
36 36
37. 37
Valuation : Startup Examples
Some angel investors/ Incubators/ Accelerators, set a
pre-decided equity percentage, illustrative example:
• Range between 7.5%-10% of company equity,
for Rs.1 crore investment
• 25%-30% of the company, for the first amount
of investment, which could vary between 50
lakhs to 2 crores
• 75% discount to valuation at next round by
investor
NOTE: Regulatory factors & Tax to be factored in by
both investors and entrepreneurs before finalizing terms.
38. 38
Valuation : Startup Examples
Names/data changed to maintain confidentiality..
Mentoring:
• 1. Edtech Co. 1 year old – Terms: month one meeting (half
day), Focus on growth strategy and advisory services for
leadership team: 2% equity
• 2. Food tech idea stage – Terms: month 2 meetings (2 hour),
mentoring on growth strategy, funding strategy and help in
fund raising: 5% equity plus 1 % success fee of funds raised
• Statutory and tax issues to be addressed while equity is given
Incubation by Tech company:
• 3. Idea stage: (i) Rs.50 lakhs was committed for 1st year, to be
drawn on need basis (ii) Admin/accounting etc. support to be
provided (iii) basic sustenance monthly fee of Rs.25,000 per
month agreed to for each of 2 founders: 48% equity with Tech
Company and balance equally by two founders
39. 39
Valuation: Startup Examples
4. Investment in media/entertainment company in 2014!
(numbers changed to maintain confidentiality)
• HewS closed $10 million valuation from InvestorA
• Reading press reports, Investor 2 wanted to participate and
asked the promoters to suggest a valuation
• HewS Team and InvestorA decided at random: 20% increase
in 1 week, leading to valuation of $12 million;
• On flight as InvestorA travelled to meet Investor2, he decided
he would not just be a messenger, he would value add, so he
decided to up valuation to $18 m
• During negotiations, Investor2 gave final offer of $15 m
• Thus in about 10 days the company valuation went up by 50%,
from $10 m to $15 m
• Founders ended up with more money than they had planned
for and had to think of ways to spend this!
40. 40
Valuation: Startup Examples
Names/data changed to maintain confidentiality..
Service business: Value add measures:
• 5. Two year co. – Rebranded, reclassified domain, pre-funding;
on advise that revenue multiple would go up from 3 to 5.
• 6. Three year co. – Changed business model to increasing
outsourcing of some service delivery aspects. Cost of inputs
increased, gross margins reduced, however operational
efficiency increased, net profit margins increased and valuation
multiples; i.e. revenue and PBT multiples increased.
Investor negotiation:
• 7. Early stage idea: Jim had high technical knowledge, limited
financial knowledge. Investor Z convinced Jim that he could
partner and grow the company to high value in 3 years and
negotiated for half the business. Jim got into this without
understanding how shares could get further diluted in later
rounds of funding. At the end, Jim was left with less than 10% of
the company he started, however valuation was high.
41. 41
Valuation: Dynamic/Volatile
Reference: Article published in Livemint November 30th, 2017:
SoftBank offers to buy Flipkart shares at up to $10 billion valuation
http://www.livemint.com/Companies/QBVZHpX5f43yBKML4HdlFN/S
oftBank-offers-to-buy-Flipkart-shares-at-up-to-10-billion.html
DO you know what happened later, deal value at exit?
42. 42
Valuation: Dynamic/Volatile
… “Walmart has wrapped up Flipkart acquisition for $16
billion, a valuation of over $20 billion, which makes it
the world's biggest ecommerce deal. Walmart will own
around 77 per cent of the Bengaluru-based company in
what is also being seen as the largest buyout for the US
firm.”
https://economictimes.indiatimes.com/industry/services/re
tail/softbank-ceo-confirms-walmart-flipkart-
deal/articleshow/64093437.cms?from=mdr
43. At the start
Valuation: Methods
Valuation: Focus Startup
Valuation: Startup Examples
… Valuation: Summary
To Trigger Thinking …
43 43
44. 44
In Summary: Valuation Process
• Use more than one model
• Identify current market models relevant to venture
• Have a rationale for the models used
• Plan long term not short haul
• Look at alternate scenarios
• Discount for risks, assign probabilities
• Arrive at range
• Identify deal issues (breaker/maker) for negotiation
• Practice before negotiating
A valuation range is preferable
to a single number
45. In Summary
• Caution: Look out for concern issues, hidden agendas;
evaluate on value-based parameters including but not
limited to fund source, governance, ethics and reputation
• Keep an eye on the law and statutory regulations; these
also impact valuation and deal negotiation
• Plan for advisors/CAs/lawyers, due diligence costs and
other deal related costs which will add to the price paid or
reduce the price received for any transaction
• Plan for long term impact of decisions on valuation
45
Thank you