Basics of Valuation

Parag Dhol

Inventus Advisory Services India (P) Ltd.

About Inventus

• Early-stage, tech-focussed VC Fund– Internet, Mobile, Software & Services

• Investment Size: Rs. 3 - 15 crores to start with

• Team– Kanwal Rekhi, John Dougery & Manu Rekhi (Silicon Valley)

– Samir Kumar, Parag Dhol & Rutvik Doshi (Bangalore)

• Investments– India: redBus, Vizury, Sokrati, Savaari, Power2SME, PolicyBazaar,

eDreams, Unbxd, Avaz, peel-works, MoveInSync, Aasaan Jobs

– US: ViVu, Sierra, Credit Sesame, Dhingana, PoshMark, FarFaria, Resilinc, Activity Hero, Assured Risk Cover, Syscloud

• Find us at www.inventusvc.com

Theory

What is Value?

• Quotable quotes– “Value lies in the eye of the beholder.”

– “A broker knows the price of everything and

the value of nothing.”

• Valuation is a systematic, disciplined approach, not (always) a science.

• Value = Monetary estimate of the benefit from owning an asset

• Useful for – Raising Capital

– Selling /buying / merging businesses and companies

– Public floatation

Why Care About Valuation

Founder Ownership Before Sharing

Founder Ownership After Sharing

Two possibleoutcomes

• Share of Wealth

• Control

Performance – Return – Valuation

Financial Performance

ReturnExpectation

Valuation Multiple

EquityValuation

• Sales• EBIDTA• EBIT• PAT

• Value / Sales• Value / Profit• Value / EBIDTA• Value / EBIT

Steps in Valuation

• Develop a sound business plan

• Be clear about all the underlying assumptions

• Develop a set of forecast financials – P&L, Balance Sheet, Cash Flow Statement

• Decide on appropriate method of valuation

• Estimate valuation

• Test Valuation under various scenarios

• Decide objective behind purchase – passive interest, JV, strategic investment, controlling interest

• Add premium, if any, for achieving strategic

or other objectives, such as “control”.

Stages….

Stage I

Stage 2

Stage 3

0-12 months

12-24 months

18- 36 months

Stage 4

Product DevelopmentTest Marketing

Proof of ConceptBiz ModelManagementSales & DistributionEconomics

Activity

Risks

Cash

100

500

2,000

Mkt. DevelopmentManagementSourcing / Mfg.Biz ModelSales & DistributionEconomics

Mkt. DevelopmentManagementGrowthCompetition

Market DevelopmentMfg. / Sourcing Stabilization

Biz Expansion Exit for Early Investors?

Elapsed Time

Biz

Grow

th

Practise

Guilty as Charged….

• First Stage Investors (typically)– Sometimes, Start-up Stage

• Valuation by a First Stage Investor; Ad-hoc combination of…– Experience

– Thumb-rules

– Gut-feel

– Fundamental Analysis

– Comparison with relevant matches

Gating Factors….

• Management– Integrity

– Depth of knowledge – in chosen market segment

– Cohesiveness & complementary skills amongst founders

– Passion, persistence, frugal mindset

– Willingness to share!

• Market– Large, growing

• Competitive Advantage– Tech. superiority, new business models

– “Me-too” hardly ever works

– Vitamins vs. Pain-killers

Key things we evaluate

Other Thoughts….

• DCF: Limitations– Forecast for next 5-10 years?

– Hard to predict cash flows

– What discount rate to use?

– Terminal value

• Porter’s Five Forces framework

• Valuation depends on stage

Seed Start-Up First Second Late Exit

Stage Stage Stage

Art Science

Other Observations

Drivers of Valuation

• Environment Related– Macro-economic outlook

– Industry Outlook

• Firm Related– Fundamentals of the firm, esp. strategic aspects.

• Deal Related– Stage of investment and expected investment horizon

– Relative size of exposure in relation to the size of the deal.

– Previous round investors’ expectations

– Exit prospects and path

• Valuation Trends– Comparable deals. Caution : Compare likes.

– Public market valuations and liquidity

Thoughts

• Does Valuation depend on other terms of a deal?

• Does Valuation have to be frozen at the time of raising a round of funding?

• Do deals fall through on Valuation?

• Does modelling help improve Valuation?

• How much effort / time does one spend modelling valuation?

• Where does one find the information required for Valuation?

• How reliable is published information on Valuation?

• Is it worth turning to a professional for Valuation?

Additional Thoughts…

• Multiple rounds are not just important but inevitable for early stage, high growth businesses – Multiple stages mean progressive dilution

• Successful development of investee means wealth of founders’ as well as early round investors grows, in spite of dilution– Equally, unsuccessful development could mean “washing out” of

incumbents’ wealth

• Challenges– Anticipating requirement of funds: Too much vs. Too little

– Calling capital market conditions

– Bases of Valuation

– Forecasting performance and “Incentives”

What else matters?

Liquidation Preference

4.8 4.0

15.2 16.0

0.0

5.0

10.0

15.0

20.0

$M $M

Founders

VC

1x

Participative LP

1x Non-

Participative LP

crorescrores

1 crore raise, 4 crores pre-money; Strategic Sale at 20 crores

Thank You!

parag@inventusvc.com