Startup Company Business Valuation Methods - YouTube

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Namaskar, my name is Mukul & you are welcome to Asset Yogi

In this series, we are talking about Startup funding

I have already made two videos of this series

In which we have discussed the process of startup funding, How investors invest

What do they see in a startup & what are the exit options for them?

I will suggest you to see those videos, the link is given in the description box

In this video, we will talk about startup valuation

When an investor invests in a company, the company's is valued

This decides the % shares the investor will get in that company

When we talk about startup valuation

When you compare it with a mature company, such as, Reliance, Infosys

Then it is easier to find their value because they are listed companies, market capitalization is easily available

In fact, you can compare price-earnings ratios, price to book ratios, etc.

And compare them with other companies whether it is an under-valued/over-valued company

You can also find the value of a company with discounted cash flow method

Either publicly listed or private company

But the base in this is your Profits

These companies are profitable, which is why it is easier to find their value

But mostly, there are no profits in a startup

And if it gives profit, then we will see how to find their value

How to find it with revenue, & if neither revenue nor profit is there, then how to find its value?

We will understand all these in this video

So, to understand this video, you should know the basics, what is IRR, Return on investment, present/future value?

If your concepts are not clear on the basics, then you can watch my videos on these topics

Let's move to the blackboard

Firstly, we will talk about Early-stage companies, which means we will start from the beginning

Let's assume, a team of 2-3 friends, who trust each other have an idea & want to start

They don't have funds, in such case they make a prototype of their idea

They have skillsets, which means, someone can be good at technology, marketing skills, finance skills, etc.

The third thing is that; how big market size they are targeting

If all these things are good, then an angel investor may show interest in such business

If an investor invests in this startup, then, how its valuation is to be done?

Here, it is difficult to do valuation of such startup's as there is no revenue or profits

Here, 5x ask method is used

Any investor wants to take a 20-40% stake in an early-stage company

This 20-40% is not fixed but we can understand the market norms

It can be 10% or 50% but if I take it typically they take a 20-40% stake

If an investor likes the idea & he is ready to take the stake on the lower side, he is ready to take 20% stake

If your requirement is 1crore then I will give you 1 crore of 20% stake

Now, if 20% stake is 1 crore then 100% stake will be 5 crores

So, whatever money you needed, you have done 5x of that (1crore x 5x = 5 crores)

So, you have given 20% to the investor & the value of the company will be 5 crores

In this 5x ask method, it can also be 4x or 3x

This multiple will depend on how strong is the idea, how strong is the team, size of the market?

In which market the startup wants to operate?

If it was 3x ask, then in that case for 1 crore, the investor will demand 33.33% & the founder will have the rest

So, in such case, the valuation of the startup will become 3crores

If it was 3x ask method

So, investors look for a 20-40% stake & you have to decide how much money you have to raise

So. this is one of the method

Another one is, Exit valuation method

Let's assume, an investor wants to invest in a startup

He will see how much profit he can make or at least 50% ROI, in the next 4-5 years,

He will calculate if the company's value after 5 years will be 100 crores or not

If he thinks that its value can be 100 crores

So, whatever his return expectation will be, from that he will calculate the present value

Let's say, he will calculate the present value on 0 date

And his expectations or IRR (Internal Rate of Return)

I have already made a detailed video on IRR, watch it to know how to calculate IRR

Make sure to watch how to calculate IRR & present value

If they say IRR is 50%, now if you calculate the present value

I have also made a video on present value, you can watch it from the link given in the description

So, its present value will be 13 crores, if they are expecting a return of 50%

So, in such cases, he will calculate back, whatever he thinks how big the company will be after 5 years

He will calculate the present value from his return expectation

So, he will give the money to the startup based on 13 crores

So, for this 13 crore valuation, he demands a 20% stake

So, how much money he will give to the startup for a 20% stake

He will give 2.6 crores

So he will invest 2,6 crores & take a 20% stake because he has calculated its valuation of 13 crores

So the angel investors or venture capitalists uses one of these 2 methods for valuation of early-stage companies

Then second is, Growth stage companies

They are where product-market fit is established

Sales are increasing & customer acquisition cost is decreasing

So, in such cases where the company is generating revenue or you have profit number

Then you can use revenue or profit multiple for valuation of the company

What is profit multiple?

The valuation can of 10-20% of your profit

This depends on the industry, it is which type of company, if it is tech. company then valuation can go higher

If the profit of any company is 1 crore, then the value of the company can be of 10-20 crores

So this is the profit multiple

Similarly, it can be calculated by Revenue multiple

It is applied where the company profits are not coming

Here, valuation can be 2-5x of revenue

Let's say, if a company's revenue is 5 crores

Then the value of the company can be 10-25 crores

Let's assume, when an investor invests in a company on 0th date its valuation was 5 crores

And after 5 years, the company grows 10x and its valuation becomes 50 crores

Then in this case its IRR will be 58%

This 10x growth

In this case, IRR is 58% & this is the return on investment

So you can check in my video, how to calculate IRR, present value?

Let's say; if it became 50 crores in 4 years instead of 5 years, then IRR will have been more

In this case, IRR will be 78%

The Return on investment will be 78%

The faster it multiply revenue & valuation, the more returns it will give

We have seen the valuation methods of startups, now we will talk about pre-money & post-money valuation

It is important because many times investors or startups don't read terms, which may lead to confusion

Let's assume, if an investor calculated any company's value (idea+team) of 4 crores

Investor says, he will give 1 crore for a 20% stake

So he will give 1 crore cash to the company

Initially, the value of 4 crores was 100% divided between founders, let's say there were only 2 founders

If there are 1 lakh shares in this company

Then founder1 will have 50,000 shares & founder2 will also have 50,000 shares

If 20% has to be given to the investor then the company will issue 25,000 new share

So, 25,000 shares will go to investors & founders will have 1 lakh shares

So, 100,000 shares + 25,000 shares = 1,25,000 shares

When an investor invests in a company, additional shares are issued & the existing shares remain with the founders

When the money was not invested, company's valuation was calculated 4 crores, so this is Pre-Money

This is called Pre-Money Valuation

What will be the Post-Money Value?

When the money is invested (1 crore) then it will be called as Post-Money value

In this case, post-money value will be 4crore + 1crore = 5 crores

Basically, Pre-money + Amount raised = Post-money

I will show, what confusion can be there?

In this case, pre-money(1crore)+amount raised(1crore) = post-money(5crores)

Here, 20% stake will be of investor & 80% stake will be of founders

Investors may say that; he will not consider 4crore pre-money valuation

They will consider 4 crores post-money valuation, on which they will give 1 crore

If we do bank calculation, then the initial value of the company becomes 3 crore

So, in this case, if we take 1 crore from 4 crores(post-money) then it will give a 25% stake to the investor

And founders will be left with a 75% stake

That is why; it is important to know about pre-money & post-money valuation

It is important to read the terms & conditions, that what founders/investors are proposing

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