Startup Valuation Methodology SVM. Prabir Mishra Managing Partner SAATRA Capital Advisory

Transcription

1 Startup Valuation Methodology SVM Prabir Mishra Managing Partner SAATRA Capital Advisory

2 How do we value a Startup? The most difficult question How do we value? Any clue? Depends on Investor? NO, Yes, No clue Dependent on market force? Comparable Values Eye Balls, Tractions, Unique Visits, Service calls? GMV GROSS Merchandise Value What about discounts, Returns

3 Value Mutiples Value Mutiples What an Early Stage Investor looks? 45.00x 40.00x 35.00x EXIT, and EXIT Value Time, When He can EXIT and what is the VALUATION Multiple Returns Value Mutiples 42.63x 30.00x 24.31x 25.00x 20.00x 15.00x 10.45x 10.00x 4.18x 5.00x 1.00x 1.96x 0.00x Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Value Mutiples 76.19x 57.03x 41.76x 29.80x 20.64x 4.45x 5.31x 6.24x 7.25x 8.35x 150% 175% 200% Growth 225% 250% Stage 2 (Beginning of Yr. 3) Stage 3 (Beginning of Yr.5)

4 General Adopted Practice (Now a days) First Chicago Method Score Board Method Basic VC formula

5 First Chicago Method A situation specific valuation methodology Mainly used for valuation for dynamic growth companies Step 1 Analyses the terminal values in different scenarios Upside Base Case Downside Step2 Estimate the divestment price for each scenario Step 3 Determine the required return and calculate the valuation in each scenario Step 4 Estimate the probabilities of scenarios and calculate the weighted sum

6 First Chicago Method (An Example) Scenarios Discounting Factor (Return Expectation) Valuation Weightage (Probability) Weighted Valuation Upside $ 7.5 Million 35% $2.625 Million Base Case 18.5% $ 5.0 Million 40% $ Million Downside $ 3.0 Million 25% $ Million Value $ Million

7 Scorecard Method Compare the target company to an typical angel-funded startup Adjust the average valuation of recently funded venture Step 1 Determine the average pre-money valuation of pre-revenue venture Same region, similar business sector/segment Step 2 Use Scorecard method to compare target companies to your perception and derive the score factor Step 3 Multiply the score factor to the average pre-money to arrive your valuation.

8 Scorecard Method Value Driver Weight Strength of Management 0-30% Size of opportunity 0-25% Product/Technology 0-15% Competitive Environment 0-10% Marketing/Sales channel/partnership 0-10% Need for additional Investment 0-5% Others 0-5% In one parameter If your venture is stronger than the average (say) then write 125% In other parameter if it is weaker than the average (say) then write 75%

9 How to calculate? Value Driver Weight Your Venture Score Factor Strength of Management 30% 150% Size of opportunity 25% 125% Product/Technology 15% 125% Competitive Environment 10% 75% Marketing/Sales channel/partnership 10% 100% Need for additional Investment 5% 100% Others 5% 125% Sum Multiply this Score factor to average pre-money valuation (Say $1.25 Million) $1.25X = $1.53 Million

10 Basic VC formula What VC Considers Required IRR (Internal Rate of Return) of Fund Investment Amount Term ( Year ) of Investment ( 3 years, 5 years) Assumed income for Term Comparable company PER (Price Earning Ratio) Required future value(investment)= (1+IRR) Year X(investment) = A Future value of venture =PER x income = B Final ownership required (%) = A/B

11 Basic VC formula Required IRR (Internal Rate of Return) of Fund = 50% Investment Amount = $3.5 Million Term ( Year ) of Investment ( 3 years, 5 years) =5 Years Assumed income for Term = $2.5 Million Comparable company PER (Price Earning Ratio)= 15 Required future value(investment)= (1+0.50) 5 X ($3.5 million)= $26.6 Million Future value of venture = 15X$2.5 Million= $37.5million Final ownership required (%) = $26.6/$37.5 = 70.9%

12 Basic VC formula Previous calculation holds good for no future Dilution What in case of multiple rounds of investments Assumed 50% IRR in Year 0 (Round 1) Assumed $2.5Million Investment 40% IRR for Year 2 (Round 2) Assumed $1.0 Million Investment 25% IRR for year 4 (Round 3) Assumed $ 1.0 Million Investment Round 1 dilution = {(1+0.50) 5 X ($2.5 million)}/ {15X$2.5 Million} =30.4% Round 2 dilution = {(1+0.40) 3 X ($1.0 million)}/ {15X$2.5 Million} =7.3% Round 3 dilution = {(1+0.25) 1 X ($1.0 million)}/ {15X$2.5 Million} =3.3%

13 Founder Equity Dilution Founder Equity Dilution and Valuation 100% 90% % 15% % 40 70% 28.7% 35 60% 30 50% 40% 100% 90.00% 5.67% % 20% 51% % % 0% 26% Pre-Seed Post -Seed Post Series A Post Series B Founder Seed Investors Series A Investors Series B Investors Option Pool Valuation (Million) 5 -

14 Questions.. Thank you