India is witnessing
immense activity in the start-up eco-system. Buzz is no longer confined to
Bangalore or amongst the college pass-outs. Many professionals – men and women,
fresh graduates, US returned NRIs, and domain experts are joining hands with
fellow colleagues and launching their own venture – giving them freedom of
expression and sense of fulfillment.
Each of these
ventures needs funding, at angel, seed, growth or late stage. Three important
questions come to any entrepreneur mind. One, which is the optimum stage any
venture should seek funding at? Two,
what is the ideal valuation and third, what percentage of equity can be
offloaded to investors?
This subject as
much important as it is, has been written as exhaustively and widely. Still
right answer eludes everyone. It is akin to a price at which you sold your
shares invested in a listed company and still feels you sold it cheaply. There
is no right price. However, I will share some established and informal models
doing the round.
Key factors for
consideration in valuation of unlisted companies are
1. Idea
– demand, scalability, IP protection, entry barriers to competition
2. Team
– education, experience, complimentary skills, values, maturity, vision and
passion
3. Product
stage – idea, development, pilot, traction, launch, growth
4. Finance
stage – own money, family & friends, individual angel, established angel,
seed fund, growth fund, late stage
5. Sales
figures, if available (for sales multiple)
6. Debt
in the venture
Some of the
established methods include discounted cash-flow (DCF) model, cost-to-recreate
model, and market-multiple-model. However, market-multiple model works when
sales or comparative data is available from another company.
One friend of
mine, who quit his plum job and jumped into setting up a new venture in
healthcare, has an interesting and simple valuation method to tell. He pegged
the valuation at Rs 6 crore, considering 2 Cr for his IIM-A educational
background, 1 Cr for having set up his company, 1 Cr for putting in his 15%
investment into the venture, 1 Cr for having developed the product (yet to
launch) and 1 Cr for initiating contractual agreement with some 20 partner-vendors
in South Delhi. Basis this, he has roped in 8-10 investors, giving less than
10% equity to them collectively.
Nathan Beckford,
founder of Venture Archtypes and Mahesh Murthy, who funded 50 plus startup, offered
stage-of-development as a proxy to the kind of investment a venture can
command, and thereby arriving at the valuation and then applying any
adjustments. Here is what they have to say, simplistically speaking.
Stage
|
Investors
|
Funding Amount
|
Equity Offered
|
“Post” Valuation
|
Concept / Business Plan
|
Self or Friends and Family
|
Rs 5 to
25 Lakhs
|
1% to 10%
|
Rs 50 to 200 Lakhs
|
Technology Developed
|
Angels, Seed VC like Blume, Venture Nursery,
Mumbai Angels, IAN, Kae etc
|
Rs 20 to 300 Lakhs
|
10% to 20%
|
Rs 2 to 15 Cr
|
Launch / Early Consumer Traction
|
Seed VC, Series A VC like Seedfund etc
|
Rs 2 to 25 Cr
|
25% to 33%
|
Rs 8 to 75 Cr
|
Scaling and Adoptation
(Cash flow negative) |
Series A, B, C VC like Nexus, Sequoia etc
|
Rs 5 to 50 Cr
|
25% to 40%
|
Rs 20 to 200 Cr
|
Rapid Mass Expansion
(Cash flow positive) |
Late Stage funds like Matrix etc
|
Rs 50 to 200 Cr
|
25% to 40%
|
Rs 200 to 800 Cr
|
Another
interesting model of valuation variation has been exhibited by https://angel.co/valuations
in which difference in valuation has nothing to do with many of the venture
stages discussed above. It has data basis college (Stanford, Berkeley, Harvard,
Mumbai university etc), incubator reputation, past employers of founding
members, location (Silicon valley, Bangalore, Mumbai, New York City, Western
Europe etc) and markets these startup cater to (Big data, hardware, mobile
commerce etc).
These methods do
not matter in the later stages of funding. Simple calculation goes, how much
money is needed by the venture, for equity that it is willing to offer. For
example, if $ 600 million is needed in stage X and equity that venture is
willing to offer is 2%, valuation becomes $30 billion. All the earlier
investors should be notionally making money at this price.
Clearly start-up
valuation is an art, not a science. Grey area lies in the valuation of the
non-tangibles. Individual perception and hype both contributes, to help inflate
the valuation, to exit on a “high”.
Some of the
Indian e-commerce companies are valued very high. Housing.com currently valued
at Rs 1500 Cr, Quickr at $1 billion (Rs 6000 Cr), Paytm at $1.5 billion (Rs
9000 Cr), Snapdeal at $ 2 billion (Rs 12000 Cr), Ola at $ 2.5 billion (Rs 15000
Cr), Flipkart at $15.5 billion (Rs 93000 Cr) are such examples. Would they
sustain the kind of valuation even after listing? In a perspective, Indian Oil
Corporation (IOC) is valued at Rs 94000 Cr currently and except for top 20
Sensex companies, all other companies would have valuation lesser than
Flipkart. Makemytrip.com, once the
bell-whether of Indian e-commerce bandwagon is no longer cynosure of investor
eyes. It reached to a valuation of $ 800 million just after listing and is
currently valued at $ 450 million.
Will this insane
valuation of Indian startups sustain, is a big question mark. Big foreign money
is entering India and chasing only the chosen few, considering them “safe”, and
increasing their valuation unrealistically. There are many ventures that have
huge potential but are still lurking in limbo, in the absence of visibility. It
is better to make a correction, diversifying and going beyond celebrated few,
to value appropriately, instead of bringing the whole eco-system down with bad
examples.
Ashish Jain
Published in
Financial Express on 28th August 2015
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