Valuation of Startups

1. Learning from
Experience
Valuation of Startups
Chander Sawhney
FCA, FCS, Registered Valuer (IBBI)
16th Sep, 2017

2. “
Company Share Valuation

3. “
“
Price is what you
Pay, Value is
what you get
Warren Buffett

4. I. Investment Trends
II. Startup Trends, Deal and
Transaction Activity in last 4 Years
III. Valuation approaches for early
stage Start ups
IV. Case Study
Agenda

5. I. Investment Trends

6. Dissecting the
Investments trends
(h1 2017 - comparative)
Source : YourStory
The highs of 2015 have seen as much as 15 Bn $ Investments

7. Biggest Investments
and Sector trends
(2017)
Biggest Investment Deals of the year leading to higher deal value-
• Flipcart raised 1.4 Bn $ led by Microsoft, Tencent Holding, eBay)
• One97 (Paytm) raised 1.4 Bn $ by Softbank (besides 200 Mn $ raised by Paytm mall
led by Alibaba)
• Ola raised 330 Mn $
• Renewpower Ventures raised 200 Mn $(by JERA)
• Greenko Group 155 Mn$ (led by GIC)
• Delhivery 138 Mn$ (by Fosun International, The Carlyle group)
• HERO Future Energies 125 Mn$ (by IFC)
• Spandana 100 Mn$ (by Kedaara Capital)
• Swiggy 80 Mn$ (led by Naspers)
• OYO Rooms raised 250 Mn $ (led by Softbank)
Best Sectors in Value terms-
• FINTECH was the best funded sector (Demonetization and Digitization helped)
• e-Retail funding was also significant (but the no. of deals saw significant decline)
• Healthcare, Logistics, Consumer Services, Enterprise Services, AI and Big Data,
EdTech, Online Travel, Transport, Real Estate, Adtech and others
Logistics companies are now seeing a good traction due to GST

8. Dissecting the M&A
deals (h1 2017)
Many of the top 100 Mn$ deals saw exit of existing Investors
While Snapdeal Flipcart deal failed, about 101 M&A and Exits took place in H1 2017
(compared to 80 acquisitions in H1 2016)
Major M&A deals include-
• Acquisition of Citrus Payments Solutions (130 Mn. $)
• City Synapse Information Pvt. Ltd. (58 Mn. $)
• One Mobikwik (41 Mn.$)
• Zipdial Mobile Solutions (31 Mn.$)
• Ather Energy Pvt. Ltd. (31 Mn. $)
• Local Cube Commerce (16 Mn. $)
• eBay selling its India business to Flipcart,
• Housing.com getting acquired by Proptiger
• Foodpanda acquired by Delivery Hero
• Shifu getting acquired by Paytm
• Commonfloor acquired by Quickr
• Travel-logs acquired by Yatra
• Zo rooms acquired by OYO
• Delhi based Fintech acquired by Amazon
• Burrp acquired by Bookmyshow (though small sized)

9. Key Learnings –
Investments
(2017)
SURVIVAL OF THE FITTEST
Most of the Funding have been procured by Existing companies
The growing Indian startups (Flipcart, Paytm, Ola etc) have created massive opportunity
for International Investors to come on board
Flipcart even after devaluation went on to acquire rival eBay’s India operations
Despite bearing heavy losses in Snapdeal, Softbank went ahead to bet big on Paytm and
recorded largest funding round
Despite fewer PE deals being funded, the marked rise in the total value of investments
and the steady ticket size of deals, reflects cautious enthusiasm on part of PE investors
Ola took steps to protect itself an restricted some of Investor Softbank’s rights, the 1st in
Indian Start up Industry to take such steps
About 642 unique investors participated in funding including over 191 VC’s and 326
angels (which is lower than earlier years)
As per estimates, H2 is expected to received about 4Bn$

10. II. Startup
Trends &
Deal Activity
in last 4 Years

11. Startup valuation
recent trend
India taking a center stage in global markets because of high growth & reform
expectations, demographic dividend and large market, many Indian startups have
come out, especially in the last couple of years, building scalable businesses
(substantially Tech-enabled) to solve a multitude of problems we face in our daily
life.
Till 2015, Indian digital retail and e-Commerce companies and their valuations
were being closely linked to the soaring valuation of US tech start-ups and
investors are under the fear of missing out. The online retail companies were
relying on a different metric of valuations – "GMV" gross merchandise value which
is defined to indicate total sales value for merchandise sold through a marketplace
over a period. However, it must be noted that GMV is not reflected on their
financial statements and their actual revenues are just a fraction of GMV. The GMV
or sales (as per financial statement) was then multiplied by a multiple (x times) to
get the Valuation of the entity.
Interestingly the trend of Investments has remained difficult and different in 2016.
Many e-tailers have reported decline in number of orders significantly as they cut
discounts leading to drop in their GMV raising eyebrows on their fresh funding
rounds and valuations. This also led to massive layoff of staff and cost cutting
strategies for sustaining business operations.

12. Startup valuation
recent trend (Cont.)
While we fully appreciate the way startup revolution has taken in India but we recall how
the best and most innovative companies in the world like Apple, Microsoft etc. were
formed. Yes, they were bootstrapped !
But in recent times, we have seen mad rush for Investor Funding and focus is much more
on Valuation than Value and Scale then having a biz model with stable growth and
profitability and capital efficiency.
Start-up Funding has dried Up with Investors looking when and if ventures would turn
Profitable? This is also driving more M&A as consolidation is taking place, striving for
consistency -
• Freecharge earlier acquired by Snapdeal at 400 Mn$ sold to Axis Bank at 60 Mn$
• Snapdeal Valued at under 1Bn$ (down from its peak Valuation of 6.5 Bn$)
• Ola raised 400Mn$ at reduced valuation of 3Bn$ (down from peak 4.5 Bn$)
• Flipcart raised 1.4 Bn $ at reduced Valuation of 11.6 Bn $ (down from peak 15 Bn$)
• Morgan Stanley marks down “Flipkart” valuation 3rd time to 5.6Bn $ - Nov 2016. It
was 15Bn$ in June 2015 when it last raised funds
• Jabong sold to Flipcart for just $70M in July 2016; Got Valued at approx. 0.5 times of
its reported 2015 Topline. It was expecting 1.2Bn$ about 18 months back
• Jabong parent raises $339M; valuation plunges by 68% - April 2016
• Hyperlocal delivery start-up – “PepperTap” shuts operations in six large cities – Feb
2016
• “Grofers” decides to close operations in nine cities-Jan 2016
“Topline is vanity, Bottomline is Sanity,
Cashflow is reality”

17. Key Learnings – Early
Stage Start up
Investments
(h1 2017)
1. Startup activity has remained grim in both Q1 and Q2 of 2017 and even till YTD
2017 with deal numbers and value down significantly compared to 2015 and 2016, a
revival of start ups funding space seems some way off.
2. Angel and Seed stage deals are sharply down by almost 40% both in numbers and
Value of Deals. Angels have turned cautious and choosy now, as they have burnt
their fingers
3. Series A rounds are smaller (with preference to later stage firms having Revenues)
and Series B and C have become tougher with increasing timelines
4. The Investors money is struck and not rotating. They have realized that Exits take
longer time in case of Angel rounds and it has lower liquidity than other forms of
investments
5. With limited active startups, the Angel investors are able to spend more quality
time with entrepreneurs and add value

18. III. Valuation
approaches
for Start ups

19. Key Characteristics STARTUP COMPANIES
• No past history, operations not reached commercial production
• Negligible revenues with high operational losses/Negative Cash Flows
• Limited promoters capital infused and high dependence on external sources of funds
• Illiquid Investments
• Speculative / Aggressive Financial Projections
• High Risk Companies
• Complex Capital Structure

20. Start-up valuation is more about understanding promoters
and management background, experience and vision,
future potential of business, people, technology,
competitive landscape, traction and the probability of
success and failure attached. In a way, Start-up valuation
involves also involves validation/review of business model
which makes it complicated vis-à-vis other valuations. It
can be rightly concluded while valuating a start up, the
experience of valuer plays a significant role in value
conclusion as its certainly an art not science.
For valuing mature companies there are three approaches i.e.
Asset, Income and Market approach, however for Early stage
Companies “Market Approach” is recommended as the long
term projections are speculative / aggressive at this stage.
COMBINATION OF FOUNDERS EXPECTATION, BUSINESS
NEED AND INVESTORS RETURN POTENTIAL

21. ‘Market Approach Valuation Methods for Early stage Companies’
First Chicago
Method
Exit Multiple
Method
Reverse Calculation or Back
Solve Method
• The First Chicago method
entails three different
projections – Success, Failure
and Survival cases – and
profitability estimates are
assigned to each.
• This method results in a
separate valuation and
pricing for each outcome.
• These are then averaged and
the weighted average
valuation is determined
(weights being the
profitability assigned to each
case).
• As start-ups are high risk
companies, investors expect
higher returns.
• The Exit method takes into
account the current
investment, the expected
return, and the valuation at the
time of exit to determine the
current value of the Company.
• This method derives the implied equity value
for the Company from a transaction involving
the Company’s own securities, typically, the
preferred stock.
• It indicates an equity value that is consistent
with the rate of return that investors in the
most recent round expected given the degree
of marketability of their investment as well
as any special rights (e.g. liquidation
preferences) accorded to them.
Scorecard
Method
The Scorecard Valuation Method is a more
elaborate approach to the subject company
valuation. It starts the same way as the First
Chicago Method i.e. you determine a base
valuation for subject company, then you
adjust the value for a certain set of criteria.
Nothing new, except that those criteria are
themselves weighed up based on their
impact on the overall success of the subject
company. Besides the normal valuation of a
company the scorecard method considers
the qualitative scores of Management,
Traction, Competitors etc. Thee Weighted
Average Value is recommended as the value
through Score Card Methodology.
Where independent investment has not yet been made in the Company Where independent
investment has been made in
the Company

22. IV. ‘LET’S SHARE EXPERIENCE’
VALUATION CASE STUDY FOR EARLY STAGE START UPS

23. ‘About Company’
• Company X is engaged in providing free information (news, updates, etc.) and entertainment services (movies, music,
etc.) on passenger’s personal devices.
• As of the Valuation date (March 31, 2017), Company X had not started generating revenue and is currently operating
at a loss.
• The Company has skilled co-founders. Further the Company has already made capex of INR 10 Millions and moved
inched a little from idea stage by converting the idea into a commercial service and projecting a market with some
revenues and profits within short span of 5 months.
• As of the valuation date, Company X had acquired several customers and expects to generate revenue in FY ended
2018.
• Seeking funding of USD 0.5 Million.

24. Where independent investment
has not yet been made in the
Company

25. Key Inputs and Procedures:
• Financial plan for next 2 years under three different scenarios : Success, Failure and Survival Cases
• Comparable Companies: Public companies listed on recognized stock exchange based on size, addressable market
and offering is a crucial step, As these companies will not only representative to the valuation of the valued
Company but also its financial projections management of the valued Company is expecting to achieve.
• Assign probability estimates to each scenario based on the stage of development and qualitative factors.
‘First Chicago Method’

26. All Amount INR Million
‘First Chicago Method’
Particulars Success Survival Failure
Projected Sales of the Company for FY ended 2018 199.21 132.80 74.04
Projected EBITDA of the Company for FY ended 2018 127.95 85.30 47.82
Present Value Factor 0.91 0.90 0.90
Adjusted EBITDA of the Company 115.80 76.88 42.92
Industry adjusted average (EV/EBITDA Multiple) 4.00 4.00 4.00
Enterprise Value of the Company as per CCM 463.19 307.54 171.69
Probability of Each Scernario 25.00% 50.00% 25.00%
Concluded Enterprise Value 312.49
Add: Cash as on 31.03.2017 1.80
Less: Debt as on 31.03.2017 20.92
Concluded Equity Value (Post Money) 293.37
Less: Estimated Capex Required 65.00
Concluded Equity Value (Pre Money) (INR Million) 228.37
Concluded Equity Value (Pre Money) (USD Million) 3.51

27. Key Inputs and Procedures:
• Calculate Pre-Money Valuation of the Company by applying Market Approach to Valuation (Like in First Chicago Method)
• Value the subject Company on various Qualitative factors which are extremely subjective in nature:
‘Scorecard Method’
• If the Subject Company is Weaker on any parameter mark less than 50%
• If the Subject Company is Better on any parameter mark between 50% - 75%
• If the Subject Company is Significantly Better on any parameter mark between 75% - 100%
• Add scores through Positive factors and Deduct scores through Negative factors to calculate Multiplier Factor for the Subject Company
Qualittative Factors % Weightage Impact
Size of the Opportunity 10%
Positive Factors
Product/Technology Uniqueness 10%
Operational Status of the startup (Ideation / Concepting / Validation stage),
Scaling Stage, Establishing stage
20%
For how long is Core Team working together with each other and how do they
complement
10%
Current Traction of your startup 15%
Competitive Environment 10%
Negative Factors
Need for Additional Investment 20%
What alternatives do your customers using right now? 5%

28. ‘Scorecard Method’
Lets Work out in our case and value the subject company performance on qualitative factors:
Pre Money Equity Value of the Company (INR Million) (Calculated through First Chicago Method) 228.37
Scorecard Factor 0.43
Adjusted Equity Value through Scorecard Method (INR Million) 98.19
Adjusted Equity Value through Scorecard Method (USD Million) 1.51
Qualittative Factors % Weightage
Company XYZ
Score
Factor
Size of the Opportunity 10% 80% 0.08
Product/Technology Uniqueness 10% 80% 0.08
Operational Status of the startup (Ideation / Concepting / Validation stage), Scaling Stage, Establishing stage 20% 80% 0.16
For how long is Core Team working together with each other and how do they complement 10% 80% 0.08
Current Traction of your startup 15% 80% 0.12
Competitive Environment 10% 20% 0.02
Need for Additional Investment 20% 20% 0.04
What alternatives do your customers using right now? 5% 60% 0.03
0.43

29. Key Inputs and Procedures:
• Revenue and EBITDA (Exit Year): Project expected revenue and EBITDA for the exit year based on qualitative and
quantitative factors.
• Multiple Value: Compare the financial metrics of the subject Company (exit year) with those of the comparable companies.
• Discount rate: As start-ups are high-risk companies, investors expect higher returns. The rate of return expected by VC’s for
companies in different stages of financing are significantly different.
• Impending Financing: Determine the financing required to reach the expected revenue and EBITDA level, and calculate its
future value using the discount rate as expected rate of investor (40% in our case)
‘Venture Capitalist’ /‘Exit Multiple Method’

30. ‘Exit Multiple Method’
Particulars
Valuation Date 31st March 2017
Exit Year 2020
All Amount INR Million
Revenue 258.12
EBITDA 153.65
Industry Average EV / EBITDA Multiple 4.70
Adjusted Industry Average EV / EBITDA Multiple (15% Discount) 4.00
Enterprise Value - 2020 613.82
Add: Cash (Exit Year) 185.85
Less: Debt (Exit Year) 20.92
Equity Value - 2020 778.75
Less: Capex Required (Future Value) 249.70
Adjusted Equity Value - 2020 529.05
Discount Rate (%) 40
Present Value Factor 0.43
Equity Value as on Valuation Date (INR Million) 228.13
Equity Value as on Valuation Date (USD Million) 3.51

31. Where independent investment
has been made in the Company

32. Company X receives 2 Mn $ against issue of 100,000 Series A Convertible Preferred Shares of 10 $ each in the latest funding round. The
Preferred shares have 1:1 conversion ratio and 100% Liquidation Preference (i.e. 10 $ each share). There are 400,000 common equity
shares of 10 $ each in the company.
• Going by the latest round of funding, it may seem that the value of company has reached 10 Mn $ (i.e. 2 Mn $ / 20%). However, in this
case it cannot be said that the Equity Value of Company is 10Mn$ for all shareholders. Actual Company Value could be actually be
much lower for equity shareholders, Option holders without any special rights/ liquidation preferences and could also be different for
different series of preferred shareholders having different level of preferences. Based on the lattest round of funding, the value can be
attributed to different class of shareholders using complex Option Pricing (BackSolve method). As a ballpark number, the difference
can be 30-40% (or even more) signifying the value of preferences / control depending on a no. of factors.
‘Back Solve Method’

33. The Backsolve OPM is a form of market approach which derives the implied equity value for one type of equity security
(Common Stock) from derived value of another form of equity security (Preferred stock).
Payoff preferences
In this method, each share class only has value if the funds available for distribution to shareholders exceed the value of the
liquidation preferences at the time of a liquidity event for each of the prior share classes in a company's cap table.
Preferred shareholders will convert to common equity shares once the company value is above 2 Mn. $. There will be sharing
between Preferred and Common Shareholders based on the no of shares)
Break points are created in this model (based on the claim each security has in company) and then each class of security is valued
as a call option using Black Scholes OPM. The incremental call option value is then allocated amongst each breakpoint. based on
the relative liquidation value and thereafter based on the outstanding no of shares.
‘Back Solve Method’

34. ‘Back Solve Method’
Valuation Result between Normal and Backsolve Valuation Method:
Particulars Not Adjusting Equity Value for Preferences Adjusting and allocating Equity Value for
Preferences
Basis Simple Capitalization of Recent Investment As per Backsolve model
Equity Value of Company 10 7.33
Equity Value of Preferred Shares 2 2
Equity Value of Common Shares 8 5.33

35. “In the business world, the rearview mirror is always clearer
than the windshield”
Warren Buffett

36. Chander Sawhney
Chartered Accountant & Registered Valuer (IBBI)
FCA, FCS, B.Com (H)
M: +91 9810557353
E: chandersawhney@gmail.com