BAV Term Paper Submission

PGP 2015-17
Indian Institute of Management Raipur

Submitted By
Kewal Krishna Bhoi (15PGP025)
Vikram Singh (15PGP056)

Start-up Valuation

The key determinant of start-up valuations are-:

1.
2.
3.
4.

Balance between Demand & Supply of Money

Age and size of recent exits
Willingness of investor to pay premium
Level of desperation of the entrepreneur looking for
money

The willingness of investor to pay plays a critical role in the

valuation of start-ups. Their willingness to pay is influenced by
factors like-:
1. If sector of start-up is hot
2. If management team is very experienced and have
capabilities to execute.
3. If a start-up is having minimum viable product and
functional in a limited area.
4. If a start-up is getting traction from its customers.
The standard practice of start-up valuation involves
1. Finding a similar company
2. Calculate EV/EBIDTA, EV/Earnings or EV/No. of customer
multiples
3. Multiply revenue this month, year and next year
4. Calculate Optimistic, Pessimistic and normal case
enterprise value depending upon future revenues
5. Triangulate 3 values
6. Exit plan value
7. Discount earnings by time value of money to get the
valuation
This is a particularly difficult challenge for earlystage
companies, looking for their first Angel funding round, since
they are likely to have very few assets, very few customers,
and only a trickle of revenue. The founders need money, but
arent ready to give up majority ownership, yet the investor
needs to have ownership quantified to rationalize a traditionally
high risk investment.
There are few more techniques which are being used in start-up
space for the valuation of start-up firms.
1. Place a fair market value on all physical assets (asset
approach)

2.
3.
4.
5.

Assign real value to intellectual property

All principals and employees add value
Early customers and contracts in progress add value
Use discounted cash flow (DCF) on revenue projections
(income approach)
6. Multiple of discretionary earnings (earnings multiple
approach)
7. Calculate replacement cost for key assets (cost approach)
8. Find comparables who have received financing (market
approach)
9. Look at the size of the market, and the growth projections
for your sector
10.
Assess the number of direct competitors and barriers
to entry
In summary, we can see that start-up valuations always start
with real financial data which you should be ready to provide.
The analysis then extends into many subjective areas, so be
prepared with own your assessment already summarized in
your Financial Model. Be aware that most investors follow a set
of pragmatic solutions, more art than science, and only the
experienced investor will even understand or appreciate some
of the approaches discussed above.