 Good evening everyone. Today's topic is business valuation for startups and young growth companies. So let's dive into what is valuation first. This is a disclaimer. Now, I mean to valuation. What is a valuation? Valuation is nothing but an estimation. What is that you're estimating? It could be value, it could be a future estimate, it could be anything. It is a pure estimation of what would happen in the coming days. So valuation basically is to address the thing between what is present today and what could be the future. It's just a projection. Now, like we human beings age, all corporates have something called as corporate life cycle. When you are a startup, you're just a just born baby. As you grow, you become a young growth company, then you become a mature company and then the company will not, will die. That is how the life cycle of the company is. Human beings, the companies do have a life cycle. This is very important in terms of understanding valuation because startups will never remain a startup for their entire lifetime. They would transmit from being a very idea-based company to a young growth company then to a mature company. There is a transformation phase there. So you need to understand which phase of the life cycle are you in. You are in the very ideation stage, you are in the mid-stage, you are in the mature stage or you are in the first declining stage of your business. So let's imagine a case. All of us, I think, who have joined might are startups and are into business of some kind. Imagine that you started a company with a life and you have done your business for about two years now and you have made good profits, let's say 30% now. So what would be the value of your company now? Would it be just your capital invested less your profits or would it be something else? This is the basic question that everybody needs to answer. What is the worth of my company? How do I value my equity? I don't have a chart. If you have to go to an investor, you need to first do your valuation. What is the company's value now? I have been running the business. I have a valuable product. I have customers are giving me proper feedback. Now, before going to fundraising thing, how do I value my company? This is what we will try and address in this session. Your accountant or your CA would say that your value of the company is your profit's pleasure assets. But they do not factor into the operation, the goodwill of the company, the brand that you have built, what you have done for the period. You might have repaid customers, you may have very good brand, you may have brand recall value, anything of that sort. But the brand's valuation is the most important thing. Coca-Cola is valued because of coke, Flipkart is valued because of Flipkart. So the value of the brand as well as the profits are countered for the valuation. Now let's go into what is a corporate life cycle. When you start your business, you are at the starting point, the light bulb movement or the idea movement. You just got an idea, you wanted to form your company, you form your company, just open your company, just have an idea. And you have done your market research and you want to prove a particular thing or you want to establish a particular thing. That is what is called as a startup stage one or a startup company. Once you have an idea and you have a team in place where you can do the business. And second stage comes to young growth companies. Young growth companies are those who have repeat customers, who have businesses, who have running businesses. You have a product which is live in the market. There is an POC, group of concept established, you have paying customers, customers are billing to pay you and then you are doing your business. We will restrict our topic only to these two topics. One is the startup and young growth companies because the other things which we are not going to go into for this presentation at least. Now, this is an important topic given so many startups and young companies are worried as to how to survive this movement financially. So, this is one of the formulas that was given by Steve Blank, who is one of the very famous authors. He has said that survival depends on the speed of understanding of the situation, multiplied by the magnitude of the change or cost cutting. Choices that you make multiplied by the speed and time that you take to make decisions. It's a very simple formula. When I read this formula, I thought it should be shared with everybody. See, survival now in today's thing you have to survive this period. 2020 has to be survived, corona has to be survived. Only if your business survives this would go ahead, do valuations, raise funds and do everything else. Now, this formula is a very, very useful formula in terms of how you interpret yourself. The first part of it is speed of understanding of situation. Now, everybody knows. You know very well that the situation is not good, business is down. There has been a lockdown for about 40-50 days and we do not know what the future has for us. That is the speed of understanding of situation. As a startup, you would have seen that March, April or say April month they would have no sales at all. They might have customer orders may not come to you or may not have an order. So, you have to understand the situation first, present situation, present business situation. And you have to estimate the change that you need to make. What is the change that you need to make? You need to make things to your business plan, you need to make things to your projections, what your position happened, did not happen, what cost cutting you need to do and the speed and time in which you can take a decision. You cannot endlessly wait for the corona to overtake certain decisions. Now, you know that the choices are made, your problem is understood, the negative is also known. Take decisions at the earliest. These three put together will give you an output which will determine where you can go in terms of the company list. Now, what do you need to look in an external environment? You are a startup, you are reading newspapers, you are reading so many things. You need to do these two things first. One is doing external assessment. What is an external assessment? How is the economy doing? What is the GDP growth ahead? How is the health of a target market? For example, if I am the consumer of your product, what is my health? Am I actively buying? Am I returning your calls? Am I out of business? Am I doing my service properly? And then explore what are the new emerging markets? What are the new opportunities corona has thrown? For example, zoom, the new emerging market, nobody knew zoom before corona. The same way you need to invent, you need to invent the market in which what are the new opportunities that you get in there. And then the last and final thing you need to know is that four costs are decorated, whether they are open or not, whether your team members can come and join you, if the customers start buying or not, then you have to decide. These are the external environment factors that you need to assess. Why this is important? Because you need to first survive this. You need to survive COVID. You need to survive COVID financially to have good valuation and then go out, raise your funds, chase your dreams, become the next Google's. So understanding external assessment, please do an external assessment, find out where you are, where your customers are here, are they buying or not, are they business or not. Then do an internal assessment. Now from a CFO's perspective, being a CA for myself, I can say this one that see the perspective is to prepare an internal assessment. External is not within your control, GDP is not within your control, what the government is going to decide is not within your control. But this is within your control, CDE. Internal assessment within your control, you know very well what your numbers are. The numbers can be operating numbers like your cash debt, you have to prepare a scenario-based analysis. Please suggest you prepare three types of scenario. One is the best case, the other is the base case and the worst case. This case means you project everything positively, prepare your internal assessments accordingly to that. Worst case means estimate everything in the possible worst case. As in that little logbook will end till June, will go till June, you will not have business till June, what do you do. And then in that context, you need to know what your operating numbers are. Like liquidity, when is the cash out date, how much is the cash balance that I have, what is the runway that I have, how long can I run my business without acquiring new customers or without my customers paying me. Your accounts are available, your accounts are available, your data, how long are they going to take. Earlier, say the customers were paying you 30 days, 40 days, 50 days. Now they want to pay 90 days, 120 days. Have you factored those things? Your creditors, how do you manage them? How do you manage the payables, account tables? What does your sales pipeline look like? Does it look good? Do you have good orders? Orders can be executed even during the lockdown? Good. Just do these internal assessments. Marketing programs pending. This is very important for startups because many startups have a cash burn. What is a cash burn? To acquire customers, you invest a lot of cash. How do you spend a lot of cash? We call it customer acquisition cost. In this marketing program spending, you need to understand how are you going to market in this new world of post-corona and understand the market dynamics of how your marketing spend is going to be. Are you going to invest in Google? Are you going to invest in Facebook ads, Instagram ads? How are you going to plan? Are your customers going to come through those means? Do a proper internal assessment. And last is your payroll and your other variable costs. They don't cost you know how many employees you have, how many stocks you have, how many people you need to make your salaries. How much runway do you have? Do you need to cut their salaries? Do you need to cut their variable pay? Do you need to cut their promotions? Take a call. Do an honest internal assessment to the situation. And now since you have done the internal assessment, you would know what your shortfall is. Your shortfall of the cash. How do you make good the shortfall of the cash? For example, you may have debt commitments. You can take, draw down more debt. You can say, I don't want any debt, I'll close everything down. But do a honest assessment of the position internally. Where will the additional capital come from? You need capital to survive. Where will the capital come from? Would it be from existing lenders? Would it be from new lenders? What is the source of capital? And if you are a startup, how is your VC or your investor going to look at your company? Is he going to look at your company the way he was looking prior to Corona? Or is it going to change? Are you ready for that? If you want me to invest a crore in your business, as your business plan changed, has everything changed? Do a proper internal assessment. It is your internal assessment, so you have all the data. Do it. Both these internal assessment and external assessment are very, very critical. When even if you go and pitch for any VC or any seed investment or anything, it is very important that you have done this work. Now, once you have done this, once the post-Corona era, what is your new business model? What is your new operating plan? Plans have changed, ideas have changed. Things have changed for the good or the bad. So first make changes, potential changes in your business plan. How do you, where is your customer? Has your customer's mindset changed? Have you changed? Is there anything that you do different to the market? Do you need to give them more access? Do you need to give them more discounts? Do you need to give them more whatever it is, any benefits to get the customer back? Ask yourself, are there new customers? What new customers can you get? How can you get them? What is the source? The new normal is going to be, there is a saying, after every recession, there are new millionaires and billionaires in the company. This recession and this great depression that is going to come is no different. These are going to be startups that are going to survive this, people that are going to survive this and they are going to be the next level growth companies for the next millionaires and billionaires in the company. Many companies unfortunately will vanish, but if you do the previous mentioned steps, if you do your planning and if you pivot to a new state, say you have discovered a new business model, or you have discovered something new, you will definitely survive and once this all gets over, once the desk gets settled, you will definitely overcome this and you will become a much better business, the new next unit also being there. Last, do a sensitivity analysis and scenario based financial modeling analysis. Now, what is a sensitivity analysis? Sensitivity analysis is a change of a particular item to a change of your output. For example, currently you are selling a product at 100 rupees, your margin is 30 rupees. So for selling 100 rupees, you are getting 30 rupees. You do a sensitivity analysis, what if my profit margin comes from 10%? What if I have to cut down my cost from 70 rupees to 60 rupees? What if I have to cut down my labor cost? What if I have to do this? Do a proper sensitivity analysis as to a change in a particular variable, how is it going to impact your business, how is it going to impact your valuations, and how it is going to impact your financial future. Scenario based modeling, as I told you, you have to prepare three scenarios. One is the worst case scenario, one is the base case scenario, other is the optimistic scenario. Do your assumptions, do your maths, you know the cost of a product, you know the cost of your services, you know the cost of marketing, you know your labor cost, everything is known. Preparing for three scenarios, worst case, base case scenario, the best case scenario. You will arrive at a conclusion as to where you stand, both in financial terms as well as when you go out for valuation and business. This is one of the things which many people ask me, should I draw debt or should I borrow more money now to survive or should I take all the debt? It depends on the business nature. If you're a business, you feel that there's going to be a business future, you feel that there's going to be a business, you need capital for that, draw all your debts. The first thing is to survive, to do anything. If you shut everything down, if you completely shut down the funding routes, don't survive it. Make a honest assessment based on the previous two things, your internal and external assessment, you will be in a position to judge whether you need to be drawing down motives or not draw down motives. It depends on the product. If your product is a maximum, and don't do it, because if you're into new businesses and you feel that there's a market for that business, obviously draw down debt. Get debt in your books, try and run your business, try and get your capital going. You need to call on your existing vendors, your other parties and your bankers and call them and ask them for credit. This is a situation, you need credit both for working capital as well as for growth. In valuation, we call, when we invest money, we invest money only for the growth capital, not for the existing capital. Whatever you have generated is over. It's done this way. Valuation is done for your growth capital. What is your growth? Is my money put to growth or is my money put to pay my existing vendors and other liabilities? Nothing is more important than assuring your employees, everybody knows that your salary being paid by the employer is one of the major criteria for your team members to be on board with you. Without a team, nothing works. We'll see that in the coming slides as to what a successful startup looks like and the team is a core pillar of it. Nothing else beats it. So ensure that you assure your employees that their salary should be paid. Whether you cut down your salary, don't cut your salary, it's up to you, but assure them. Now, this is very important in terms of where we are. Till date, we were doing business as it was. We had our thoughts. We were doing business. Now has come a stage where we are in a pre-post-corona era. In the post-corona era, those who have adopted technology, those who have embraced technology, those who have had a technology to their business, are going to suffer. If you're doing your business the whole way, you may not get funded. There may be difficulty in doing what you're doing. This is the robust technology adoption curve. You need to adopt technology in whatever way possible. That is the only way to survive for good. Like we are adopting Zoom for a video conferencing or any other technology that we use for communicating or otherwise. So you have to adopt technology that should be one of the part of internal assessment. And how to fit into this is probably business to decide based on the business plans, based on their planning, future plans, what they want. But the post-corona era, it's going to be only technology driven. We may not have physical meetings. We may only have Zoom meetings or angios. Please be ready with it. Please be ready with it. And please check where you found. I want everybody to be in the early adopter stage. Adopt new technology. Adopt. So many technologies are available. Adopt. This will save you cost. This will save you when you teach to your investor. This will give you value add to you saying that even this technology I adopt black technology. The investors will be overwhelmed when they see that you're adopting technology. Now, we have seen the thing of surviving COVID-19 which I thought was very important to be discussed with all the start-ups. Now let's look at what investors are looking for in a start-up before an investor. As a start-up, have you assessed the following? Did you assess something? Did you assess what is your target ideal customer? Now, in the post-COVID era, post-corona era, post-COVID era, your ideal customer might have changed. Your ideal customer's mentality might have changed. Have you assessed your ideal target customer? Have you done a reassessment? Have you clear as to what you're doing? Next important thing is your management team. That is your co-founders, your employees and everything and the knowledge that they bring to the table. This is very important. Funding happens on the face value of the co-founders. Idea secondary management team is the primary one. Next is your total addressable market. Total addressable market is something where you have a particular set. You say, for example, you're selling groceries online. You have a particular set. You only sell inside Delhi, a particular place in Delhi. That is your market. That is your total accessible market. That is your total addressable market. Every business has its own total addressable market. Have you found it? If you have not found it, do research, find your total addressable market and the next step is that you need to find what percentage of your total addressable market can you capture in the next three to five years. Now, in the post-COVID, markets will open up. People will open up. People will start buying. But what is your total addressable market? What have you done? What percentage of it? Say, for example, in Delhi, a particular area, say, the number of customer volume is 100 crores. What percentage of that business can you take? That is your percentage of your total addressable market. Do not do it for 20 years, 30 years. Do it for three to five years as a basic thing. You would get your total addressable market. Once you have got all these things, next is that do a honest assessment of your competition level. Who is your competitor? What is the pricing strategy? What is the marketing strategy? Where are they good? Where are they bad? What have you done in order to get your products better? Be honest with yourself. This is your internal assessment. Just do your personal assessment. If you say there is no competition, somebody is going to comment below. So do a honest assessment. Do a planned honest assessment of what your competition level is in terms of your total addressable market. Next is, do you have a go-to-market strategy? Do you have a good marketing plan? Do you have a business plan? Do you know where to target, whom to target, how to sell? That is your go-to-market strategy. Next comes your minimum viable product. What is a minimum viable product? Minimum viable product is a product where you run your barrier testing. For example, you have an app. You cannot publish the app till it's completed. So in the case you have to publish the app at the beta stage, get the feedback, get customer feedback, get people's feedback, create your business model, change your business model, change your pricing, change your marketing strategy, then you come to the minimum viable product. Once you do all these things, the investors are now looking for proof of concept. What is the proof of concept? The proof of concept is that you have tested this product on the market. I have a product, I have an app, I go to the market, I have sent it up to the market, customers have given me a good feedback. Or customer wants this feature to be added. Or this wants it to be added. Now Facebook is allowing eight people to join, sorry, WhatsApp is allowing eight people to join in a conference call. That is because customers are moving towards Zoom, so WhatsApp had to do something. They said eight people can be joined in a video call. That is a change, that is a proof of concept. I'm just giving an example of that. There could be many things that you can change and you have to give a proof of concept that the market is willing to accept your product. Market is willing to accept your product. Then if you are looking for investor funding, then you have your business has to be having an exponential growth. It cannot be year on year growth of 10%, 20%. It has to be 2x, 3x, 300%, 400% growth year on year. For them to be investing in your company and for them to unlock their value in you. End of the day, investor's responsibility is getting somebody else's funds, investing in your company, getting the returns, getting their margins, paying it back to the original investors. So you have to be giving, and the failure rate in start-ups is about 8 in 8 or 9 in 10 start-ups fail in the first three years to five years. This is the market study that has been done. So their risk of failure is high. So their return is also exponentially higher. You have to give them 200x, 300x growth. 100% to 100% growth. You have to give them growth. Then only they will be investing in your company. Now what investors are looking for in a crypto format is that you need a 3 to 5 years future business financial rate only before. Plan it properly, draft it, put your blind in it, get every cost details, minute cost details possible, get every customer acquisition cost possible. That is for you to run your business. What would be your sales in the first three to five years? What would be your cost in the first five years? What would be my employee cost in the next three years? What would be my other cost in the next three years? What would be the customer acquisition cost in the next three to five years? Then assess the amount of funding needed. Now, when I go through the presentation, I will tell you what is the cash flow gap where you can say the amount of funding needed can be ascertained when you prepare this three to five years business time, you will get to know this is the cash I need. I don't have so much cash, so I need investors to fund me at least it's a amount of cash. Lastly, you have to decide what percentage of equity stake are you going to give your investor. This is very important because high as an investor would invest only in companies which are giving me. Reasonable stake in the company. If you give me 2%-3% I would say no. Why is this important? At early stage startups or early startups which have ideas, the minimum in angel of the sheet from the expert is 20% to 30%. This is the market king. It would be lower if you have an exponentially good idea and you have your idea is never tested. But other than that, gentlemen in the market is 20% to 30%. Now, what is a successful startup? As I told you in the previous slides, a successful startup, this is invest in people more than ideas. That is teams with entrepreneurs who are either funded before or have a good background of the business or have proved something to the world. Or the ideas are so unique and they have passion and drive of doing. Business is nothing but people driving. So the team is the most important factor. Everybody might have an idea. But is the team committed to the idea? Is the team willing to change? Now COVID has come. Is the team willing to adapt early changes? Is the team doing all the changes? This is what we are looking for. Are you in the long run of the game? Or are you the short run of the game? Just form a company, just try and do it. This is very important for all startups to understand the team. And the best composition of team would be two co-founders, different varying levels and a tech member in the team. It's an ideal structure of a team. Ideal structure. An ideal structure that every investor looks at is does a team have a person who has specialized knowledge of what they are doing? Does a team have specialized knowledge on accounting, marketing? Does a team have a CEO? Awesome. And does your team have a technology person? Does your team have a technology person? Of course, now technology is an integral part. Do you have a technology person? This is the best ideal team structure. Now you need to be people, especially those who can implement. People have to implement your ideas. Paper ideas will not work. You cannot be paper-tile. You have to implement your ideas. The moment you start implementing, you will not find that thing easy because you will find a lot of challenges. What you plan will not happen. Your sales will not be there. There could be COVID 2.0, COVID 3.0. Anything could happen. The business will be disrupted. Business will be booming. So be prepared for the cycle. The next thing is you are getting the right ROI. ROI is nothing but return on investment. See, all your investors are looking for return on investment. You are doing business because you need return on investment. If you have invested one lakh, you need at least 25% margin on your product. At least 30% margin on your product. That is your return on investment. The same way when an investor invests in your company, he needs his margin. He needs 30%, 40%, 50%. Based on the level of risk that he is taking. Investor is investing only in ideas. He is taking a lot of risk. So he needs more return. Even if you fail, he needs to, other companies, to cope up with the return that has been missed by your company. So have the attitude of right ROI in mind. Return on investment, how will that be? When will my company be profitable? Profitable means cash profits. So be clear from day one that your ROI is a matter. More for you as well as for your investor, as for any business. Business are some ROIs. We do not run charitable institutions. We are not an NGO to give a cost service to anybody. So we run business on it, particular ROIs on margins. So the third point is very, very important for startups who are looking for funding or for good value. That is scalability. If your product is not scalable, venture capitalist or thing will not invest in your business. Look whether it is scalable or not. Scalability means can I have thousand, two thousand, three thousand, ten thousand customers at a time without having any tasks. Can I do that? Is my business scalable? If your business is not scalable, it is not scalable. It is a manual operation. It is definitely not scalable. Then investors are interested in your company. I will give you an example of buying juice. There are so many customers. They can scale it out. Left, right, etc. They can scale the business. It is just that they have to invest in marketing. They will get their customers. Are you in a position to scale up your company? Be it COVID, no COVID. Then other thing is that you should have credible ideas and credible people. You should have credible ideas, ideas from and to their ecosystem and how you are going to get to that solution. If you are giving a particular solution to a problem that you have identified, how are you going to go from point A to point N? How are you going to unlock value? This is very important. And when, this is very, the thing is, last point is you have to prepare your financials and operating plans that are realistic. Prepare it as realistically as possible. As I told you earlier, prepare it in three methods. First case, first case and the most awful case possible, perhaps a COVID case. Prepare it in all the three methods. Three types. See where you stand internally. You don't have to disclose it to the investor. But you yourself assure yourself that there we stand in terms of the financials. When you present the financials or when you present the valuation to the investor, have a good operating business plan. Have a good realistic financial modeling done and have a good roadmap for that exit also. That way they will invest in your company. This is how successful startups are made. This is how this will determine whether you're the next Google, you're the next Zoho, you're the next Flipkart, you're the ones over it. Now, this is a seven step business finance framework. Why do you call seven step business finance framework? Is that what we discussed earlier is what we're still continuing to discuss here. The first part is that, as I told you earlier, forecast your revenues. Now, how do you forecast your revenues? Here on here, prepare a sheet product-wise, item-wise, purchase price, your selling price, your gross margin. Prepare item-wise sales, item-wise services. If you are in a technology company, how are they going to access the customer? How are they going to get the user? What is the value per user? So, prepare your sales revenue forecast. Product-wise, then forecast your cost. Your cost includes everything, your salaries, your expenses, your interest. As a promoter, you will also want to draw some sales from your business. Draw sales from your business. Mark it as a cost. Then, forecast your investments. What is your investment for running a business? You need certain assets. You need computers. You need an office room. Whatever it is for you to run the business. A server. Just estimate those assets that you need. Just estimate. What is the year-on-year increase that you need for those assets? Just estimate it properly. Then, assess your own financing. This is very, very important. Many people think that you can go out of the market, go to the investor, they'll fund you for your ideas. No. Assess your own financing first. This, we call as bootstrapping. Do a bootstrapping. Infosys when it was formed did not go for any investor till they went for an idea. Zoho does not go for any investor. They are self-funded companies. Assess your own financing. What is the capital that I am willing to put in the business? What is that in the business for me? How I can grow it? Do I need investor and my business are not? A test to this, you need to have this test of scalability. Is your business scalable? If it is scalable, then go, if your product is very good, then go, you should try it better. Then, next come the preparation of your income statement and your balance sheets. Income statement is nothing but your profit and loss and your balance sheet. Profit and loss gives you the net profit of the company and your balance sheet gives you the natural position of the company. Prepare your income statement, be ended and balance sheet. If you are not even moving, get your interest with your CA's or valuation professionals, they will help you out to prepare your balance sheet and your profit and loss account. Now comes the critical part. Estimating your funding. What is the funding? For example, in year one, I did a business of one lab, I had a profit of 20,000 and a cash balance sitting in the book was 20,000. Next year I had to do a business of 10 labs. For doing sales of 10 labs, I need to incur marketing costs of 20 labs. Assuming you are a growth company, you want to grow as a startup, you are willing to take on losses. Now my sales is 10 labs, my operating cost is 8 labs, my margin is only 2 labs there and my other cost, my marketing customer acquisition cost another 10 labs. So I need 12 labs, that is my funding gap. Or I put it very simply, my sales in year one is 10 labs, my cost is 8 labs, my profit is 2 labs. Year two, I want to make the sales to 20 labs. My cost remains at around 12 labs. Additionally, to get me from 10 labs to 20 labs, I have to get new customs for which I have to spend an additional 10 labs. So, already your costing is 12, new cost of inventory is around 10, for sales is 20, balance is 2 labs that you need it as. You need to be in a position to estimate your funding gap, get your funding gap right. What is the cash shortage that you have in your business? And how the cash shortage can be met? It can be through bank loan, it can be through any means. Once you have done all these six steps, then comes business valuation. Go the valuation of a company. Once this is arrived, in the coming slides I will tell you what might be more theoretical in some ways. But let's go ahead and decide how the valuation of companies is done. So this is the seven step business framework that you need to have. This is very critical. Given this COVID context, be very critical as to how you are predicting these seven steps. This is going to determine whether you are funded or not, your business survival depends on these seven steps. Do it properly. Do a honest assessment, internal assessment yourself. Now, what are financial drivers? As I told you here, you need to bootstrap your business. You need to bootstrap your business. You need to assess your own funding. That is bootstrapping. What are the financial drivers that are there? You could raise your own funds. You could have your own savings. You could go to your friends, family, relatives. This is the first step in any business. Who is going to support your idea? It's going to be your family. It's going to be yourself. Are you willing to put in that money? As an investor, I would say, are you willing to invest money in your business first? Are you willing to take the risk first? Are you willing to take the lunch in the business first? Are you putting your money at risk first? If you don't put your money at risk, you don't need to be put at risk. You need to be very good in explaining to them the way it is. But generally it works that way that how good are you in your investing your own money? Your own money could be your personal savings, your friends, family, relatives, your short-term loans and long-term loans that you can get. This is very important. This stage of the business is the ideation stage where the company is getting bootstrapped. Do bootstrapping. Get your business idea, start it, put in your capital, get it to the market. As I told you, get the POC, put a concept in the market, then go to the investor. The investor will say, okay, I will invest. If you don't do any of these things, it's going to be your paper on which you're going to invest. Now, coming to the main topic of business valuation approaches. See, there could be two approaches in business valuation. One is the pure negotiation approach, other is the methods. There are too many methods in which a business can be valid. Young and early state startups, the only method that is applied is pure negotiation approach. That is, you negotiate, you sell my value of your business 10 lakhs and going to give you so much shares. Are you interested? This is pure negotiation approach. Nothing, it is just based on your ideas. The ideas validated by the founder and ideas validated by the investors. Now, in pure negotiation methods, let's assume that your funding requirement is 1.3 million or 13.5 lakhs. How much equity dilution should you give to an investor? This is most important. In a pure negotiation, this is what happens for all young and early state startups. For them, valuation does not matter that much. Valuation is what this pure negotiation is. If I tell my company's value say 1 crore, and you tell your company's value 80 lakhs, and we both agree to a user value of 90 lakhs. Value of the company is 90 lakhs, as simple as that. That is pure negotiation approach. This is done for early state startups. Young startups do not have financials, do not have numbers. This is the way things happen when the investment goes. Now, the pure negotiation amount you need to first, as I told you in the previous slides, amount of funding needed, what is the amount of funding that you need? You need to do a proper planning and assessment of amount of funding that is needed. Once you know the amount of funding that is needed, what is the percentage of equity are you willing to offer to the investors? What is the percentage of equity that you are willing to offer to the investors? You need to decide both of these things. This is very important. How you could decide this? You can talk to other friends, you can talk to your peer members, you can negotiate, you can discuss, but don't be rigid in this. You have an idea, the other investor is taking risk on your idea. Be focal in this and try and get the best possible outcome. Now, in a pure thing, this is how the valuation works. I need a funding of 14.5 lakhs or 1.35 million and I am willing to offer you 25% equity. But you have decided the value of the company would be 5.4 million, that is 54 lakhs. This is as simple as pure negotiation, nothing. You need 20 lakhs, you are willing to give me 25%. What is the value of the company? That is pure negotiation based upon there is nothing involved in this. Early stage startups, please be, this is how it works. But you need to have a very clear business plan, you need to have a very clear TNL balance sheet and valuation done to arrive at this figure. When you go to the investor, I will check to them. You can say, boss, my business could be valued at so much. Don't give me, I will not give you 20% I will only give you 10%. My growth rate is going to be 100x so I will not give you 25%, I will give you only 2%. You will negotiate. That is pure negotiation based approach. Next is the methods where we value, say a growth company or a startup which has now become a growth company, say a Flipkart, say a Mintra, any other company that you want, say Baidu. How do I do that? There are two methods. One is the cash flow based approach other is the exit multiple based approach. Now, the first method is called as a discounted free cash flow method. From here onwards it could be more theoretical it could be more, you may not be able to to comprehend what we are saying but it is better to understand how the process works. Now, the free cash flow to equity investor is something which every company does a valuation part. It is the cash that is available for the equity shareholders. Equity shareholders are the shareholders who own the company. This is one method of valuation and exit multiple valuation. Exit multiple valuation is simple. To figure out that in 5 years my business is worth 5 crores and today I am willing to do 20% based on that valuation. That is excitement. You need to understand that every investor has a return on investment and as the market study for every investor investing in a startup or a young growth company their return on investment should be at least 60-70%. This is done because they have to take the risk, higher risk with your business failure idea phase. To keep this in mind then we will go ahead to the problem. This is the most important aspect of any valuation. What is a free money valuation? What is a post money valuation? Free money valuation is nothing but value of the company before investment. Let us take this example for that. In this case my free money valuation is that I need 1.35 million or 13.5 lakhs and the post money valuation is 5.4 million. This is the free money. This is the post money. When you go for an investor make sure that you get your free money figure right. That is the determining basis on which your post money valuation works. I have given a very clear example here. Post money valuation is equal to value of the company before the investment plus the amount of investment. Let us take two cases here. The two investors are offering two different things. One is an investor one is offering you 25,000 for 20% of your business other investor is offering 150% of your business. In this case what is your free money and what is your post money? And a negotiated approach post money valuation is known you are getting 25,000 for 20% of your business the post money valuation is 25,000 divided by 20% gives you a lakh and 20% the value of your company is lakh and 25,000 the free money valuation will be a lakh and 25,000 minus which is a lakh. Free money valuation is a lakh here a lakh and 25,000 is your post money valuation that is given by the formula free money valuation value of the company before investment plus the amount of investment. This is how free money and post money works. When you are drafting a time term sheet please be very clear what is your free money valuation. Of course that is going to be the basis on which the funding is known by. In the second case on the similar I will give another example. 150% of the business post money valuation is 2 lakhs because 1 lakh divided by 50% is 2 lakhs and the free money valuation is again a lakh. This is how when an investor says this is free money and this is the company this is how the valuation works this is how the formula works now this is going to be more technical in nature but when Facebook decides to invest in GU on what basis will they decide they decide on the basis of the future cash flows future earning ability future EBITDA EBITDA is nothing but earning before interest and tax this is the formula in which a free cash flow to the firm is arrived more technical but this is the general formula how it is arrived you get your EBITDA earning before interest and tax add back all your depreciation because it is not cash add back the capital expenditure that you need capital expenditure is your future investment needed to grow the company and add the non-cash channel you add it this is very important in terms of understanding estimating the cost of equity we started a company with a minimum IE 30%, IE 50% IE 70% how much that return will be for which we will take this case we started a company with the intention of return on capital K we employed bank capital gives you 5% return and your business give you 30% return how do you calculate your cost of equity for doing your business you are investing a particular amount of money in your business if you had borrowed that money you would have paid 10, 20% interest if you are investing your own money what is the value of return of investment you are getting there are multiple methods of how you can arrive at cost of equity today I don't think for start-ups and young start-ups it is not that much relevant but it is very important to understand if you are investing a lack of your own money to your business you need return on those investments if you had borrowed that money you would have paid interest if you are investing your own money you would have paid return on that how is that calculated it is calculated based on this formula which is risk-free rate of return plus beta into market return when it is risk-free rate of return every business for that matter if I keep the money idle in my bank then I would get 5% equity that would be 5% then I am investing in a business for which I am taking a particular risk risk is being factored into the beta then comes the market return if I do a business if I invest my time and energy money I need 30% return that is your market return now your cost of equity or cost of doing your investment in that is given by this formula it is risk-free rate plus beta into market rate of return when it is risk-free rate we will see how that works out this is again a continuation of the part how do you estimate risk as I told you earlier beta is yours for doing business there could be uncertainty there could be covid 1, wave 1, wave 2, wave 100 whatever it is how do you assess that risk risk is negative and this is given by one of the very famous rules of valuation Mr. Ashton Dharmutan risk is denoted by this symbol the meaning of this symbol is one for danger, second is for opportunities same thing applies in covid also there is danger of covid there is opportunities in covid also how do we assess this risk we as valuation professionals have certain metrics for example if it is in a growth company your risk is much higher because your ideas may fail your process may fail anything would have gone wrong so we estimate the risk based on market potential of your business if you are a startup it is tough we will give the risk on a higher side we will give beta a higher side so now then you come at exit value of the terminal value the terminal value of the company if your company goes on the perpetuity it has an infinite life all valuations are done on one presumption that your company will continue endlessly we call that as going comes there is not going to be any stopping in the company so in that basis how do you value the end value of your company or the terminal value of your company this is given by this formula I don't think that you need an explanation just to understand that when you see a valuation and I will show you a valuation of the company I don't want to disclose the name of the company I can show you these and all the terminals that will be there just for you to understand what these are just going through this as I told you in the previous slide the 7 step business process we have estimated a 5 year sales of a particular company I am not disclosing the name I have told you 1, 2, 3, 4, 5 as a line item of sales this is the year 2021 20 to 20 to 24 sales item this could be the total revenue this is how you project your revenues this is how you project your sales this is the sales item that you have versus the year on year increase that you are going to give you are going to estimate next comes your estimating your future expenses you could have many expenses you could have anything all these expenses put it down get the expenses arrow it down this is the total expenditure that I will do not going to item by item but just for illustrative purpose now estimating the P and L this is how the P and L will look like earning before interest and tax your finance cost finance cost is nothing but your debt interest that you pay if you have borrowed any capital you will pay interest that is the finance cost this is earning before interest and tax this is your tax income this is the net income that the company makes this is the net income that the company makes you have to make it I understand that it might be that then as I told you in the previous slides the estimating the free cash flow to the equity this is how it is done we get the net income, add back the depreciation changes in the capital is added back your capital expenditure is added back do you need a raise in the debt or capital is accounted here and then you arrive at the free cash flow to the equity shallow this is how the free cash flow to the equity shallow does this arrive in the previous slides we saw this something called as a risk now in this case we are assessing the equity this is the risk free rate 10 year government of India bonds now gives you 7.4% that means if you go and this may not be updated for the current day just take it as an illustrator if you keep your money idle and keep it in government of India bonds you are going to earn 7% and if I invest in riskier businesses if I invest in say sensex in stock market it is going to be another 10% it is going to be an additional 10% to the government of India by the way, average return on stock market for any investor could be between 50 to 20% per year so on that assumption the equity risk premium equity risk premium is nothing but the because I am taking this risk I need more returns if I keep my funds idle I will get 7.5% 7.2% because I am taking that risk I need another 7.1% then comes your data these 2 are assessed then comes your beta beta is an annuation if you do for risk my risk is 1.24 times or my chances are this could be 1.24 this could be 1, this could be 0.5 depends on the life cycle of the company if you are a young company the beta could be 2, 3 also as the beta increases your cost of equity also increases in this given case we have taken 1.24% the cost of equity is 16.6% what is the 16.6% 16.6% is the amount of investment return that you need in your business for your 1 lakh that you invest in your company you need at least 16.6% return at least 16.6% return if I kept it idle I would have got 7.5% for taking this risk and doing this I need at least 16.6% as a return from my capital investor this is how an investor will also invest in this now I am just giving you a basic example of how the valuation is done you have estimated the free cash flow you have estimated the terminal cash flow as I told you earlier again terminal cash flow is the value of the continuing business after 2023 or 2024 the business is going to continue the business is going to extend business will run the value of that you don't form a company to set it down in 1 year or 2 years you expect the company to become the next Facebook the next Google whatever it is next Goldman Sachs, Sidney Bank whatever it is it is going to last for centuries to come 100 years, 150 years, 200 years so given that this value is the terminal value or the exit value for startups this could be for 5 years in 5 years I want to exit the company because I think this becomes more complicated for you to understand beyond this but if you have understood till here I think the thing of valuation is covered we need to be very clear of what is the negotiated approach and how we go up into the valuation and this is very important what is the real question and what is the game for you ascertain your return on investment that is the post of equity this is very important because as a business everybody has a business whether you raise funds, you don't raise funds it is important that you ascertain what is the return that you need on the investment for doing the business that you are doing think I have covered all the topics here think some the information was useful and you found it useful back to you Sunali thank you all any questions please thank you so much Viswanathan your session it was really very insightful and very informative so I am sure it added value to a lot of the attendees present we have a few questions lined up would you like me to read out the questions to you yeah please great so one of the question is so you have the example of flip card to most of us these type of brands these type of brands are not making money but there is still a huge valuation that says Walmart bought into it so how does one arrive at the valuation flip card flip card had given a valuation as I showed the cash flow to you I will explain the flip card had given a valuation or the cash flow projection till 2045 they have given a projection cost for 35 years and they have estimated that the market share the barriers that is people cannot start another flip card that easily there is entry barriers huge cost because they are not doing it properly they are acquiring market so they would turn profitable by 2025-2030 and by 2045 they would have had 45% of the India's overall gross merchandise value they would have 45% of it that is how we were rated 21 billion Walmart why Walmart had to acquire there is an interesting story behind this Walmart was a dying company Amazon was eating their things Walmart went through the life cycle like I will just show the life cycle look at examples taken up if you have time this something this one Walmart was in the decline phase Walmart was a retailer who was a chain retailer like Big Bazaar in India gave discounts killed all the small markets captured all the markets now Amazon is doing the same to them through e-street commerce and gross markets Walmart was a declining company they had to do something to come up with this they did not have the capacity to build a new structure so what Walmart paid for flip card was Walmart paid for the technology Walmart even paid for their 3 companies HomePay's own way flip card Mitra's own way flip card the valuation of 21 billion that they got is for all the 3 companies so you value a company at around 7 billion so HomePay you have market, you have data you have customer behavior you have the entire ecosystem with you there is no third party competition there is no 2 players so that is how the valuation was arrived they had given the valuation to 2045 and then the profitability would be much later because competition is setting this would be huge cash burns and that is how the flip card valuation was done I hope that I answered the question yes absolutely so the next question is from Mr. Ajit Kumar Shah he says any company takes a 5 year projection for valuation of the company valuation work on FCF generating positive FCF in that cash can we take a provision of our tax payment in our balance sheet till the 5th year like the final year I am not able to follow your question can you repeat the question so it is actually the first question in the Q&A section if you just see yes yes flip card work on FCF I am not able to repeat the question I am not able to repeat the question I am not able to repeat the question in my panel can you explain last slide that's fine so we can take another question until then so one question we have from Mr. Ajit Shetty he says legally who is authorized to make a valuation to a startup our CA is with 10 plus years of experience allowed or we need a merchant banker to do it is it mandatory in 2017 the rules were amended there is something called as registered valuation rules your company's valuation has to be done at least a startup has to be done by a registered valuation a registered valuation could be CA it could be company secretary it could be from any profession but he needs to be a registered valuation and only a registered valuation can do valuation it's not you need to have at least 4 plus years of experience and then that's how the valuation happens and from 2017 onwards it's not necessary that merchant-managers should do the valuation any registered valuation who has to qualify for a particular exam once he has a certificate of practice he can issue the valuation next question is from Mr. Karan Garg he says if fun has to sell a mature company and want to make it what's the best way to go about it if you are a mature company the company is matured and the life cycle is cro... maturity can happen in multiple stages see for example for mature companies I would call it general electricals US company they founded in 1900s now the company has died down they have diversified they cannot further grow the business growth is negative market size the total addressable market is being captured what is mature company except for a mature company depends on where they are whether they are listed or unlisted if it's a mature company better say your investors don't go to a mature company because there is no growth you cannot grow growth is zero or growth is negative and you enter the decline phase except for you would be typically an IPO if you have an option or if you find a very good investor who wants your brand name great so the next question is from Mr.Mohammad he says what are the elements we consider for pre-money evaluation pre-money evaluation as I told you let me just go back to the slide element is nothing but pre-money evaluation depends on the value of your cash flows as I showed you here last slide you can see you have estimated everything what is the value of your business the net present value of your business is shown here is the pre-money evaluation you would not have this done basis that there is no investment in the business the factors to be considered in pre-money evaluation is if you have done your homework well done your candle balancing traditions well if you have done your everything well and you have arrived at net present value of the company this could be the basis of your pre-money evaluation is less what he is being invested could be the pre-money evaluation and what goes into it the 7 step process what is your business in that so the next question is from Mr.Ajit again he says if any company is working for social impact to a village or a person how to calculate good and other benefits to increase the valuation of the company see when you are doing a service as an engine or you are doing for non for profit your valuation typically will not be basis this one we call it the economic benefit of it but NGOs are not valued on the way their profitable companies are valued if you are doing a service then DCS method may not be the appropriate you will have to see yet what is the economic impact that you are creating how many lives are you transforming what are you doing you are doing it not for profit but only as a service so there is no way an investor is going to gain it return on that so I think the question is that valuation cannot be done on these basis it has to be done on the economic impact that you are creating next question is from Mr.Akshar Aayna he says how is valuation of brand image done brand valuation is a complete topic in itself brand valuation is done based on the brand recall value what we call as a recall value how fast are you able to call back the value for example if I am able to call business or if I am able to call franchise India easily that is a brand value then I am able to call back Flipkart without me doing any such thing that is brand recall value valuation happens on a method which we ascertain for that value what is the people are coming for for example say google linked it all are based on brand valuation the revenues may be much lower but the valuation is done on the brand it happens on what we call as a super profit method how Walmart acquired Flipkart also goes on that particular method the valuation happened based on the brand brand has a particular good will and that good will has a potential to generate future profits for me multiple profits for me so there is no competition in that segment that is how brand valuation is done the same problem which is used above will be used the differential methods next question is from Mr.Niraj Kupta he says if in a company that we are planning to buy there is a dependency on the skills of the current owners can we buy see that depends any business takeover or buy out happens is that there is an agreement with the promoters stay with the company for the next 1 to 2 years where you plan a clear exit plan and they hand over everything and go exit does not happen overnight where the existing stakeholders are thrown out or existing promoters are thrown out and new people come that will not happen that way for the next 2 years for the business to stabilize new people to stabilize and if you are looking to buy a company you have an agreement with the promoters be with the company for the next 1 or 2 years till you stabilize so the next question is from Mr.Karan Garg he says from an angel investors point of view what things one needs to watch out while they are investing to get a smooth exit at the end investors point of view to get a smooth exit is that it depends on the investor the appetite that they have see the once you get an investor on board you are getting both things one is you are getting their financial and their knowledge are also along so both being combined they will guide you how to get your market access they will guide you as to how to do it but if your market pays the test or your product is too mature or mature in the sense that it is out of line the product should come in 2030 its coming in 2020 it will be out if you are just futuristic technology imported now because people will not embrace those changes so it is a very path that you will develop where you will gradually get it you will gradually build your business and for the foreign firms they know when to give an exit for you as a founder you will get your investor on board get the next investor on board because for them the exit happens only when the next round happens you have to get the design right you have to get the that is about for investors so the next question is from Tanvi Chaudhary she says what about companies that have started 5 years into business how does negotiation work for them so if you are 5 years into the business then you are not starting you are related to the business and you have you will have your do the free cash flow method do the DCF method get the value of your company get both the values one is the negotiated value you fix a particular price and keep that aside and do the evaluation based on the discounted cash flow method or any other method that suits you if you are into research and development or something just very new then under different method you do the evaluation keep the value both the negotiated price and the discounted cash flow price I have an average this is how you should be in a position to get the value that you should put to the investors so the next question is from Mr. Vijay Thakkar he says Cure Fit which is a physical startup company into wellness health has been burning cash and has a negative cash flow how are they still able to attract investors in such a business scenario similar to the Flipkart one Flipkart one but growth next growth is going to come from wellness businesses or head tech businesses or video marketing businesses and all these are moving businesses because they would have projected a future cash flow at a stage where they become their brand becomes synonymous with us like Apple is a brand, Apple is synonymous with us Google is synonymous with us so people will get accustomed to it it is what they are driving people to do for which they are burning cash and they know to what level they are going to burn cash and how early they are going to make it up for them it is only fitness fitness is going to be a very important very important role and they will have projected the cash flow for say next 20 years with certainties and uncertainties in place so that is how they work they would have assessed the market total accessible market of so many young population, aging population so many people with age by this time and by the time they age they need better cash or better fitness levels so they would have projected the revenue based on the age of the population that is how it depends on metrics for every company difference how it would fit it would be from the fitness it would be based on the aging population or it would be based on any other factor look card was not based on number of users number of active users on the platform and how many orders were they placing every business one thing is very critical lifetime value of the customer I have not put it in my slide but I am just leaving it as an answer what is the lifetime value of a customer lifetime value of a customer is total purchase of the customer is going to make throughout the lifetime of the company for example I make 100 purchases from say business for the next 10 years that is my lifetime value all companies would have estimated the lifetime value of the customers and how recurring the business the business is recurring and if you want to go to gym every alternate day or every day it is recurring business the flow is going to happen people are going to invest in health the valuations could have been driven up by that the cash burden they are doing is a plan to cash flow to acquire customers there is something called as customer acquisition cost they would have done the tax for this they would have done the cash flows for this they would have predicted that this could be my customer acquisition cost acquiring a customer and paying business like say what Google paid their games, scratch cards they gave so many things to do so many subscribers of their own that is the customer acquisition cost the benefit of that is they get the data with them, you can have continue with them even with the charges they want to pay multiple factors that go into how the drivers work for them for industry wise you see for example a company in tech is different from a company in healthcare because your life cycle of a tech company is only 20 years the entire life cycle of tech company is 20 years but whereas a life cycle of a fitness company could be 50 years because it is dependent on the aging population, nobody is going to change fitness is going to remain fitness as long as humans are there so these are the factors the drive valuation, these are the factors how they did it, it is pure negotiation they would have negotiated at a particular price this is the price, this is the cash flow this is my customer acquisition cost this is what I expect in 2025 the Indian market to be in urbanizing the healthcare sector, they think to be that is how they would have done it losses does not matter and given this COVID context all investors are now pushing every setup for profitability there is a famous Rake Junjanwala quote saying that I don't understand how food cart works, seriously nobody knows how food cart works, they are burning cash but only thing is that the valuation for the aging happens based on the future value and the technology are they going to be the only player are they going to be monopoly or polygopoly 2-3 players are only going to be there in a segment everybody else will die like it happened with snap deal like it happened with so many companies so it depends on at 2030 I am the only player I am the only 2 players that are there even better premium very well explained so I guess we will take 2-3 move questions and then we will just wrap it up one question is from Mr. Varan Jindal he says does it reduce your chances of getting funded if a company is 10 years old but recently profitable but wishes to get more funding for growing exponentially if you are 10 year old business and you are making you are bootstrapping your business you are growing your business and if the scalability is good say for example be a flipkart be a culprit one factor that fits them is scalability you see they can have exponential number of customers paying customers they can have exponential number of orders if you are able to demonstrate that you have an exponential growth and there is a viable business option available viable business exit available to the investor they would definitely invest in them so the next question is from Mr. Akshay Raina he says what happens when after the completion of the exit period of the investor the company is not able to return the agreed returns to the investor in that case the company is not the next investor the founders role could be to go to the next investor that is for example I am an investor in your company as a founder you should look for the next investor say for example a PE firm a major level you move on to the seed level to move on to the venture level you have to go out explore the market get new investors coming in for instance Paytm got Warren Buffett on the board you have to go and explore the market you have to get the next exit feasibility should be made for the investor that have already invested in the company if you are not able to get that exit if you are not able to get that exit for any reasons investors have factored everything as I told you in my slide there is something for a risk that we take the beta risk that we try and capture that but it is not 100% possible all investors go with it for calculation that only one or two in 10 companies will survive so there are terms that is expected from one company it is going to be exponential because they are going to fund 9 failed startups that is how an investor will look at it that is how you should look at it last question now it is from Ms Seema Purwar she says what is equity with rights and whether it makes sense to give 5% equity to landlords for a cafe for physical presence 1% is this called as a revenue share that you give to them you need not have to give them equity share you can give them a revenue share every multiplex or every complex for example you have any more there is an agreement where they would collect the percentage of your sales apart from the rental lease income they collect this as a percentage of the sales or percentage of the profits whichever way it works it is better if you are running a cafe for a particular reason and a percentage of your sales or of your profit it is a general industry norm there is no such thing as to give 5% to negotiate and there are going to be cases where you are able to negotiate 0% if you are running a business do not give out stake in the company try and make a sale of 100 rupees 5% include their cost in it and then prepare an agreement that is the opposite so I guess we will just wrap up the session now thank you so much it was absolutely great having you here and thanks for all the information and your insights I am confident that it added value to all the attendees and I hope they can apply it to their businesses as well thank you to all the attendees for being part of this webinar if you still have any questions any concerns please email me and I will try my best to help you if you still have any questions Mr. Ajit again we were not able to understand your question but again if you just email that to me I will make sure it reaches Mr. Viswanathan and we will see what we can do about that anything you would like to say thank you thank you all I think the things were more informative to you some topics might have been more you might not have understood what was being said there because it was more of a this one there expert level thing there but if you have understood the basic financial things and what these need from a valuation perspective but I just want to conclude that have this thing in mind how to cope with covid how to survive covid is very important for all startups how we are going to adapt technology and how we are going to survive this covid how we are going to do your re-planning how we are going to share and some very good things just focus on what is being said there take your decisions come out of this covid once this we get into this recessionary or depression more economic depression there are going to be new billionaires and millionaires being just have that hope survive this apply this formula and be able to go with that thank you all thank you so much yeah of course it was absolutely great thank you so much once again we will see you next time we are planning to make this valuation a series so in the next webinar we will try to cover more topics in more details so if you are interested for that please let me know and please also check out all our other webinars as well we have one this Saturday which is also about crisis innovation strategy so if you need any other information about that please get in touch with me thank you once again everyone have a great day ahead stay home and stay safe thank you