From Rs. 100 (Cocofit) to Rs. 1,200 Cr (Gopal’s 56), we have seen some absurd valuations at the recently concluded Shark Tank India. Now, this has got the whole of India thinking – “what is the correct valuation and how to get to that magical figure”?
Short answer – there is no “right valuation.”
let’s delve deep. People often think of valuation as an objective number with lots of math and some scary stuff. However, more than numbers, valuation is about story and economics, making it a subjective number.
So, what do I interpret from this info?
1) Valuations being forward-looking – if you can sell the story (obviously backed by some facts) well, the chances of you getting a good number goes up
2) By economics, we mean demand and supply – in simple language, if there is more money chasing fewer assets (startups in our case), the chances of you getting a good number goes up. And investors also have FOMO – which sometimes influence the valuation they give to a startup
Got it, now tell me, how is valuation done (in real life)?
There are various valuation techniques in the market, and we won’t discuss each of them here. Basis our experience, we’ll look at a few prominent ones:
Yeah, sure, go ahead!
Most startup valuations are done using “multiples” – it can either be revenue/EBITDA/PAT multiple. Say we are using revenue multiple. Here you look at the current revenue, multiply it by the multiple and get a valuation.
So how do you get these multiples?
1) Simple, we look at the competitors and find the industry average. If a company in a similar segment has raised money at 5x revenue multiples – this serves as a base for you.
2) Now we build the story, put down our USP, and quote a valuation (mostly at par or higher than the industry avg)
3) Note - Importance of story 😊
Is that all?
No, the judgment is pretty subjective. Hence, even a single investor can influence a company’s entire valuation. The same could also be seen on Shark Tank – Founder asks 50L for 5% (he knows that there would be high negotiation, so always start low 😊) – Shark 1 gives the counter offer of 50L for 15% - Shark 2 gives 50L at 12% - founder renegotiates at 50L for 8%, and the deal gets done at 10%.
Investors’ judgment, vision about the startup, synergies – often influence the valuation a founder gets. E.g., for a company in the wearables segment – Aman Gupta would probably be willing to pay a higher valuation than Namita Thapar (synergies, you see).
Got this, any more method?
Yes. Discounted Cash Flow (DCF). But with a catch!
Majority of the valuations are “back-calculated.” You fixate the valuation you want and the %stake you wish to dilute today, forecast numbers, and booom!
Same on the VC side. You fixate the minimum return and %stake you want from the investment today, forecast future financial and multiples, and value the startups accordingly.
Note again - Importance of story, if the story is good – numbers and valuation both can be justified😊
Sounds interesting. Any more insights?
Yeah, one last. Remember, more than a valuation game, startup valuation is a pricing game. As an investor, I have to make sure that I can find a buyer, who would be willing to pay a higher price than me at a future date. And this cycle ends at IPO, where all the VCs have made their money, and now it’s up to the general public (and a few investors) – whom we call market forces to decide the right valuation.
E.g.? Paytm. It was valued at a whopping $20Bn during IPO. And at the end of day 2 of listing – the valuation dropped to $12.7bn. While now, the share price of Paytm is 833, compared to the issue price of 2150 – a discount of ~61%. Does that mean Paytm was overvalued? We don’t know. But our simple point is that till the time investors can find a buyer – they make money.
Parting thoughts? Aaahh no! Enough of gyaan on valuations – some more gyaan would follow soon in Part 2 of this article. Till then, do show some love by liking, commenting and sharing (to encourage us to release part 2 sooner :P)