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How do you choose from this range of investors and more: HNIs, informal and formal Angel groups,Seed Funds,Venture Capital, Private Equity, Banks, Strategic Investors, Corporate Funds; (Family) Business Groups, Indian & Global, Government supported funds, Impact Investors, Incubators, Accelerators, Crowd funding, Online funding platforms
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This document discusses various topics related to entrepreneurial financial strategies. It addresses how to develop financial forecasts and business models, consider different factors that influence valuation of entrepreneurial ventures, prepare for negotiations around valuation and deals, plan transitions to new stages of growth and roles of stakeholders. Key aspects covered include developing short, medium and long term financial plans, reviewing funding options, creating and updating financial forecasts and business plans, conducting due diligence and managing cash flows and working capital needs in entrepreneurial contexts.
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This document discusses various methods of valuing startups for investment purposes. It outlines the typical valuation ranges and timelines for different sources of investment like angels, venture capital, and private equity. Some common valuation models are also described, such as discounted cash flow analysis and cost to recreate valuation. Examples are provided of how venture funds estimate required returns and determine valuation demands based on projected growth and exit values of the startup.
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The document provides information on valuation methods for startups. It discusses questions founders may have about valuation, outlines common valuation methods including cost, income and market-based approaches, and provides examples of how valuations are determined for startups at different stages. Valuation is presented as a multifaceted process that considers both tangible and intangible factors, and depends on the specific investor, deal terms, and negotiation between the founder and investor.
The Science and Art of Startup Valuations - Anjana VivekTiE Bangalore
TiE Masterclass: Valuation for Startups
This 3 part workshop conducted by Anjana Vivek, Founder Director of Venture Bean Consulting, Parag Dhol, MD, Inventus Capital Partners & Pavan Sondur, CEO & Cofounder, UNBXD
This document outlines a presentation on business models, growth, and value creation. It discusses defining business models, examples of innovative Indian companies, the business model canvas with its 9 building blocks, assessing the starting point of a business, setting goals and targets, analyzing sales and growth parameters, governance, valuation, and other considerations for growth. Key aspects covered include stocktaking, setting short, medium, and long-term goals, segmenting and analyzing sales, managing the sales pipeline, demonstrating value, and readiness for scaling.
Business Planning and Preparing a Business PlanTiE Bangalore
The document provides guidance on business planning and preparing a business plan (BPlan). It discusses assessing strengths and constraints, setting goals in the short, medium and long term, and planning for different funding scenarios. The business model canvas tool is introduced as a framework to map out the key elements of the business model. When seeking investment, appealing to investors requires demonstrating high growth potential through a large total addressable market and an execution-capable team. The document outlines sections that should typically be included in a BPlan such as management team, products/services, marketing strategy, financial projections, and implementation timeline. It emphasizes that an effective plan clearly communicates the business idea and convinces the reader of its viability.
This document discusses business valuation methods for exit planning. It begins with learning objectives which are to understand valuation approaches, complete a case study, and consider planning strategies. It then covers valuation basics like standards of value and types of value. The main valuation approaches discussed are the asset, income, and market approaches. Specific methods within each approach and their pros and cons are outlined. The document also discusses normalizing adjustments, control and marketability considerations, and planning strategies to maximize business value when exiting.
This course will take you through the process of a typical business valuation engagement, from scoping the work to ultimately arriving at a conclusion of value. Through a case study, we will address fundamental issues including valuation approaches (asset, income and market), normalizing analysis and valuation discounts.
The document provides an overview of business valuation, including key principles and methodologies. It discusses:
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- Common standards of valuation including fair market value and intrinsic value.
- Approaches to valuation including income, asset, and market based methods.
- Key valuation methods like relative valuation using multiples and discounted cash flow valuation.
- Factors that influence valuation like purpose, industry, stage of business, and financial performance.
This document discusses various financial ratios and benchmarks that can be used to analyze a company's financial performance. It provides an example calculation of profit margin and debt ratio using the DuPont analysis method. It also discusses benchmarking against peer companies or industry averages to establish performance standards for comparison. Finally, it notes some limitations and problems with relying solely on ratio analysis to evaluate a company's financial health.
Bauer Industries is evaluating a proposal to build a new truck manufacturing plant and has prepared cash flow projections over 10 years showing revenues of $100 million annually, manufacturing and marketing expenses totaling $45 million, and depreciation of $15 million, resulting in estimated annual EBIT of $40 million and unlevered net income of $26 million. Bauer plans to use a 12% cost of capital to evaluate the project's net present value and determine if the project should be accepted.
The KPI - Cash Flow Modeling and Projections (Series: MBA Boot Camp 2020) Financial Poise
You can chase a lot of financial measures of your business, but nothing stacks up to cash flow. Like a boat captain on a rough sea, being able to see what is coming at you financially is absolutely invaluable. Cash flow models are the absolute go-to tool for reviewing companies in distress, yet they are also invaluable to venture capitalist who must manage long range investments as well as fast growth. This webinar discusses the basic components of a cash flow model, why it is weekly and not monthly and why 13 weeks is the usual length. This webinar also discusses what type of data is best for making an efficient and practical cash flow model, as well as best practices for reporting and pitfalls associated with modeling and balance roll forwards.
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Evaluate a business - A beginner's guideUplyrn Team
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Before going to market to sell your business, you or your executive team may want to obtain an independent appraisal. Likewise, prospective buyers may wish to obtain expert services to value an acquisition target or discrete portions of a target. This webinar provides a look into how valuation experts place a value on a going concern.
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Questions.. . questions..
What do you think of when you hear the word
valuation for a business? Do you think it is
related to
• Sales
• Cost
• Profit
• Cash flow
• Combination of above
• Other factor?
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• Does value depend on whether one wants to sell
a company, to buy a minority stake or to buy the
entire company?
• Will a strategic investor value a company
differently from a financial investor?
• How can a company which is continually losing
money have any value?
Questions.. . questions..
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• Why did ecommerce company valuations in
India Zip and Zoom? Are these heading for a
slowdown now?
• Will all companies lose in value in these volatile
times or will some still Zoom in Valuation? If so,
which ones will grow and be sustainable?
Questions.. . questions..
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Some different ways to value
• Cost vs. Market Value
• Historical vs. Replacement
• Differs depending on need of person doing
valuation – buyer, seller, employee, banker,
insurance company
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Value to buyer
• Valued because of expected return on
investment over some period of time; i.e.
valued because of the future expectation
• Return may be in cash or in kind, tangible or
intangible, or a combination of these
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Valuation methods
These can be broadly classified into:
• Cost based
• Income based
• Market based
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Valuation methods
• Different experts have different classifications
of the various methods of valuation
• Within these methods, there are sub-methods
• Sometimes the methods overlap
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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
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Income Based methods
• Earnings capitalisation method or profit
earning capacity value method
• Discounted cash flow method (DCF)
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INCOME: Earnings capitalisation method
• Also known as 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
– assume that Company Profittee Limited is earning post
tax profit of Rs. 5 crores and we would like to capitalize
this at 10%.
– The value of the Profittee Limited under this method is
equal to Rs. (5/10%) crores, ie Rs. 50 crores.
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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
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• Discounted cash flow is based on expected
cash flow and discount rates
• Sometimes it is difficult to get a reliable
estimate for the future and the valuation model
may need modification, for example in the
illustration below:
INCOME: Discounted cash flow
Value: Phase 1
Discounted
Value: Phase 2
Terminal Value
Figure: Net present value
NPV of
Enterprise
Discounted
Discounted
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Market based method
• Also known as relative 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,
revenue per user, net margin per user etc.
• 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
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Exercise in Valuation - I
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?
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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 - II
How would you value PenPencil Co. based on
the market/industry information provided?
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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 – II: Possible
Solution
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• Simple and easy to use
• Useful when data of comparable firms and assets are
available
• Useful when information about recent deals are
available
Limitations
• Difficulty in getting data, particularly for unlisted
companies
• Easy to misuse
• Selection of comparable can be subjective
• Errors in comparable firms get factored into valuation
model
Market based method
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Valuation
Based on
• Tangibles and Intangibles
• Data and Assumptions
• Subjectivity and Objectivity
24
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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
25
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Valuation
• Many methods of computation 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 also
required from a regulatory perspective. They are also a
key point in the due diligence review, prior to investment
• Other statutory, accounting and tax implications are to be
factored in while arriving at valuation and deal cash flows
26
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Valuation
Driven by:
• 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
• Percentage sharing: Equity promoter is willing
to let go
27
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Valuation
Driven by:
• 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
28
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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
• For more on valuation: detailed class notes at
http://www.slideshare.net/anjanavivek/valuation-
basics (from set of the Top 4% & 5% viewed on
SlideShare in 2013, 2014 respt.)
29
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Valuation: Points to be factored
Valuation is calculated based on a financial model.
The following are also to be considered and factored
while preparing the business model and funding plan:
• Nature of transaction i.e investment, divestment,
M&A , JV or partnership etc.
• Whether 1st round or later round of investment
• Whether angel investor or VC or strategic investor
• Whether family and friends or other
• Amount of money required
• Stage of company - early stage, mezzanine stage
(pre-IPO), later stage (IPO)
• Value add by investor
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Valuation: Points to be factored
• Key management: Performance, expertise, team
diversity and capability etc.
• Project, product, USP
• Industry scenario, global and local
• Country scenario
• Market, Total addressable market, opportunity, growth
expected
• Competitive landscape, barriers to competition
• Risks and risk mitigation measures
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Valuation: Points to be factored
• Historical performance
• Future projections, pipeline
• Quality of revenue; historical, and pipeline
• Assets, tangible and intangible
• Liabilities in financial statements, potential liabilities
and off Balance Sheet items
• Cash flows expected and tracked alongside revenues
expected
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Process of valuation
• 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
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Valuation : Startup
At very early stage it is often a function of:
• Amount of cash burn (with different scenarios of
bootstrap and adequate funding)
• Stake promoter is willing to give up
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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.20,000 per
month agreed to for each of 2 founders: 48% equity with Tech
Company and balance equally by two founders
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Valuation: Startup Examples
4. Investment in media/entertainment company
(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!
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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.
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Valuation: Dynamic Ecosystem
Ref: Economic Times: Feb 29, 2016:
Flipkart’s valuation markdown: Billions gone in a flash
ReadMore@:http://economictimes.indiatimes.com/articleshow/51182907.cms?from=mdr
&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
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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
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In Summary
• Build a Financial Model that is consistent, capture
elements of business model; address deal rationale
• Look at different valuation models; arrive at a value range
• Prepare for negotiation, identify deal issues, possible
negotiation strategies
• 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
43
44. VentureBean Consulting Private Limited
Thank you
44
Reference: VentureBean K.Hub (Knowledge Hub)
For teaching notes, articles and more on finance, valuation, business models,
leadership and more..
• www.slideshare.net/anjanavivek
• https://twitter.com/VentureBean
• http://www.linkedin.com/company/venturebean-
consulting-private-limited
• https://www.facebook.com/pages/VentureBean-
Consulting-Private-Limited/387846908091034