Startup Valuation Methodology SVM

Startup Valuation Methodology “SVM”

Prabir Mishra

Managing Partner

SAATRA Capital Advisory

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

What an Early Stage Investor looks ?

• EXIT, and EXIT Value

• Time , When He can EXIT and what is the “VALUATION”

• Multiple Returns

4.45x 5.31x 6.24x 7.25x 8.35x

20.64x

29.80x

41.76x

57.03x

76.19x

150% 175% 200% 225% 250%

Val

ue

Mu

tip

les

Growth

Value Mutiples

Stage 2 (Beginning of Yr. 3) Stage 3 (Beginning of Yr.5)

1.00x 1.96x4.18x

10.45x

24.31x

42.63x

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

30.00x

35.00x

40.00x

45.00x

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Val

ue

Mu

tip

les

Value Mutiples

General Adopted Practice (Now a days)

• First Chicago Method

• Score Board Method

• Basic VC formula

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

First Chicago Method (An Example)

Scenarios Discounting Factor(Return Expectation)

Valuation Weightage (Probability)

Weighted Valuation

Upside18.5%

$ 7.5 Million 35% $2.625 Million

Base Case $ 5.0 Million 40% $ 2.000 Million

Downside $ 3.0 Million 25% $ 0.750 Million

Value $ 5.375 Million

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.

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%

How to calculate ?

Value Driver Weight Your Venture

Score Factor

Strength of Management 30% 150% 0.4500

Size of opportunity 25% 125% 0.3125

Product/Technology 15% 125% 0.1875

Competitive Environment 10% 75% 0.0750

Marketing/Sales channel/Partnership 10% 100% 0.1000

Need for additional Investment 5% 100% 0.0500

Others 5% 125% 0.0500

Sum 1.2250

• Multiply this Score factor to average pre-money valuation (Say $1.25 Million) $1.25X1.2250 = $1.53 Million

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

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%

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%



Founder Equity Dilution

100%

90.00%

51%

26%

10.00%

5.67%

1.64%

28.7%

15%

1

3.33

16

50

1 2 3 4

-

5

10

15

20

25

30

35

40

45

50

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pre-Seed Post -Seed Post Series A Post Series B

Founder Equity Dilution and Valuation

Founder Seed Investors Series A Investors Series B Investors Option Pool Valuation (Million)

Questions …..

Thank you [email protected]

Startup Valuation Methodology SVM

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