An easy guide to decoding every startup’s nightmare: Valuation

 Today we will be discussing about a topic that haunts most startup founders: Valuation! It is never straight forward.

Published: 13th June 2019 05:32 AM  |   Last Updated: 13th June 2019 05:32 AM   |  A+A-

Express News Service

BENGALURU: Today we will be discussing about a topic that haunts most startup founders: Valuation! It is never straight forward. Valuation also remains a complicated issue because undervaluing or overvaluing both can lead to startup troubles. Therefore it becomes necessary to correctly define a company’s value. To complicate it further, most startups have little or no revenues and profits, so it becomes difficult for traditional methodologies to value it correctly.

How can one find out a startup’s valuation then?
Lili Balfour of Atelier Advisors commented, “Valuation is both art and science. The science is the easy part — researching valuations for comparable companies and constructing a revenue or EBITDA multiple.

The art is more subjective. How strong is the team? How probable are the leads in the pipeline? How innovative is the technology?”

Among the most popular method is the Discounted Cash Flow method. It involves estimating the total market for the startup’s product or services and its expected growth. Forecasting market share acquisition across a timeline. Forecasting cash flow by identifying the startup’s fixed and variable costs and future working capital and capital expenditures needs.

Since most startups might also end up failing, valuers typically also take this risk into account and then apply discount rates to cash flow forecasts. Typically three to five years forecast is asked for. Your CA can help you with further details.

However in practical sense, for most Indian startups, their first round is between the first range mentioned in the table – 250K to 500K USD. As the company grows, your valuation will keep increasing. 

Then the most important question comes – how much to dilute in the first round? If you are doing a family/friends round, don’t dilute more than 10 per cent. You will anyway end up diluting between 20-30 per cent for most seed stage VC funds.  Hope this was helpful for you. Rajeev Tamhankar is Founder, TBS Planet Comics, ex-IITR, Flipkart, Xiaomi

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