The Ultimate Guide on Startup Valuation

Arriving at Startup valuation is an art, more than science. Get to know more here

India is witnessing immense activity in the start-up ecosystem. Buzz is no longer confined to Bangalore or amongst the college pass-outs. Many professionals – men and women, fresh graduates, US returned Non-Resident Indians, and domain experts are joining hands with fellow colleagues and launching their own venture – giving them freedom of expression and sense of fulfillment.

It is often a daunting task for startups to determine their fair market value. This is because there are no standard metrics that define appropriate valuations for a startup, or any other type of company. The best approach will vary, company to company, depending on a number of factors.

Each of these ventures needs funding, at angel, seed, growth or late stage. Three important questions come to any entrepreneur's 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 important as it is, has been written exhaustively and widely. Still the right answer eludes everyone. It is akin to a price at which you sold your shares 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.

   Source- The best guide on how to value a startup tms-outsource.com

Valuation of a Startup: what does it mean?

What exactly should you do when working on a valuation of a startup? Should you have an expert prepare a proforma balance sheet, or prepare a cash flow statement for your company?

Valuing a startup company is one of the most difficult tasks in business and finance. You can find many expert opinions online but none can tell you exactly what your business is worth. Here are some ways to generate some ideas in order to arrive at a reasonable value for your business.

Startup valuation methodologies are especially essential since they are generally applied to startups that are still in the pre-revenue stage. A mature publicly-traded company, as opposed to an early-stage startup, will have more actual facts and numbers to work on.

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 models work when sales or comparative data is available from another company.

  Source- learn.marsdd.com

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. Based on this, he has roped in 8-10 investors, giving less than 10% equity to them collectively.

Nathan Beckford, founder of Venture Archetypes and Mahesh Murthy, who funded 50 plus startups, 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 Pl an	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 a 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, harware, 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 startup valuation is an art, not a science. Grey area lies in the valuation of the non-tangibles. Individual perception and hype both contribute, to help inflate the valuation, to exit on a “high”.

Conclusion

A startup valuation is the market value of a startup based on many parameters. Valuing your startup is a process that every entrepreneur must go through while seeking funds or looking for a technical cofounder, a business cofounder, or any partner or shareholder. It aids in establishing the appropriate amount of stock that startups must provide to an investor in return for funding. Not only are money crucial, but so is the timing of funds. If you take too long to get funded, you will most likely be greeted by more market competition.