Power Talk │ February 2021│Ready to Startup

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SONAL AGARWAL BALI2019-PRESENTFOUNDERDILIGENT CONSULTINGThere are various methods of valuation, like venture capital method, Berkus method, Scorecard valuationmethod, discounted cash flow method etc. But at an early stage, it becomes difficult to arrive at a perfectvaluation. A well-articulated & realistic Business Plan or financial projections helps the startup arrive at avaluation. It is important for the founder to understand the concept of PRE-MONEY and POST MONEYVALUATION Concept to avoid any unnecessary dilution. PRE-MONEY refers to the valuation of the companybefore it receives the investment such as external funding or financing. The post money valuation of thestartup refers to its value immediately after receiving the capital from the round of funding. This determinesthe equity share that investors are entitled to. Sometimes in a startup since there is no historical dataavailable of the startup, it is advisable to do a peer-to –peer comparison of a company of similarbackground, offering equivalent products or services and take a peep into their valuation at different stages.Accordingly, their own valuation can be arrived at.There’s a Scorecard Method of valuing an early stagePower Talk l Ready to StartUp
startup. It is the most preferred method used byangel investors. It uses the comparison of thestartup with the perception of the other startupssuing factors such as Robust Business Idea,Management Team, Market Size,Product/Technology, Funding needs & Scalability etc.It is highly subjective but the main emphasis(20%-30% of weightage) goes to the startup team ofFounders. The next can be how unique anddisruptive is the business idea. “In building abusiness, the quality of the team is paramount tosuccess. A great team will fix early product flaws,but the reverse is not true.”The early stage valuations are difficult to make andare hence generally “Guesstimates”. A startupdoesn’t have any historical data to show andtalks only on the basis of EXCEL SHEET NUMBERS. Sincethere is no validation of numbers, the best method is tobuild a business plan which is broken into plausiblesteps or milestones and it is easier to be able to gaugethe kind of funds the startup would require for fulfillingeach milestone. The Fund requirement should bebroken into Working Capital, Manpower, MarketingBranding & Customer Acquisition, Technology orProduct, Capex etc. The investors would be happy tofund the entire cost of pick the cost that they want toinvest into as per their mandates / investment thesis.A Good Pitch which showcases the product or thestartup with right numbers and valuation makes a lot ofimpression. It should define the need of the founder tonegotiate as to how much fund is required and what isthe equity that the startup is agreeing to share with theinvestor.Even with the best approach, 90% of the startups inIndia fail to raise the funds. This is because of morethan one reason .The metrics show that PRE-REVENUEstage startup don’t get funding easily as compared tothe POST–REVENUE stage startups . To combat this it isbest to bootstrap the venture till it reaches the revenuestage and the model is proven with a paying customerby its side. So it’s better to bootstrap and also exploreall other funding possibilities, generate revenue,stabilize business model and then approach theinvestors for funding needs. With history of constantrevenue generation, the business model is explainedbetter. Surviving the pre-revenue model is enough proofthat the startup is on its way to attract customer whoare willing to pay for their business idea.Another reason why the startups fail to get theattention of the investor is because of overdeclaration of the value of their startup. The foundermust make a very well calculated and fair estimate ofthe value of company.The size of the opportunity alsois a big deciding factor for the investors. Thescalability of the business is an important factor. Abusiness that is very niche means restricted revenuewhich may sometimes not interest the investor, thatis the reason that B2C startups gets better attentionfrom investors. It is important for the founder to showa very clear path of Return on Investment (ROI). It isimportant to share how the investment willaccelerate the revenue, increase margins, reduce theresources used to generate revenue and keep scaling.Remember it important to secure funds frominvestors to scale business, build robust technologyand not to fund the expenses of the startup.www.powertalkwitharchanna.com 31
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