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The World of Startup Valuations Magic, Mystery Or Craft? The World of Startup Valuations Magic, Mystery or Craft? AUGUST Valuation Investment Banking Restructuring Advisory Services 2019 Content 1 Foreword 2 Introduction to Start-ups 3 Growth Stages for a Start-up 4 Funding Stages for a Start-up 5 Valuation Methods for valuing Start-ups 5.1. Venture Capital Method 5.2. Berkus Method 5.3. Scorecard Method 5.4. Risk Factor Summation Method 5.5. First Chicago Method 5.6. Backsolve Method 6 Concluding Remarks The World of StartupValuation Valuations Methods – Magic, for ValuingMystery Start-ups or Craft? 02 FOREWORD The dotcom bubble of the 2000 was one of the most phenomenal disruption that took place in the history of equity markets. Also known as the internet bubble it was a surge in the prices of stocks in the U.S. primarily pertaining to Internet / Tech companies. This was supplemented by the bull market run around the same time which fueled the upsurge in prices. From 1994 to 2000 the equity stock of these so called “Internet-Based” Companies grew aggressively 5x-6x. Such exponential growth was driven by the sentimental estimates of analysts/investors that, internet would be the next big thing. Nevertheless, the internet did end up being a phenomenon. However the value expectation may have been slightly over-estimated. The entire episode led to the crashing of NASDAQ with an estimated loss of $ 5 trillion in Market Capitalization. The aftermath being NASDAQ taking 15 years to recover its all time high it once honed at the peak of the dotcom bubble which can be seen in the figure shown below: NASDAQ INDEX (1975-2015) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 500 1975 1980 1985 1990 1995 2000 2005 2010 2015 *NASDAQ primarily consists of technology and internet based stocks and hence it was called the “Internet Bubble” Source: macrotrends.net The World of Startup Valuations – Magic, Mystery or Craft? 03 FOREWORD internet-companies then, notable similarities exist: extra-ordinary rates of cash burn, colossal losses, ambitious assurances of a steep growth trajectory and feeble due diligence by investors under the fear of missing out. Post the dotcom bubble, the big question which lurks in the valuations arrived at? There is more than what meets the eye, when it comes to examples whereby the valuations arrived at by the bankers company went IPO. Some of them are listed below: Source: in.tradingview.com car rides, scooters and bicycle-sharing system. The company went public recently. Contrary to popular market expectation, the share price instead of soaring, has been trading below the price at which it opened it’s IPOs. Similarly in the case of UBER, the company was approached by eminent investment bankers of the Wall Street nine months before its IPO, and a valuation of $ 100-120 billion was proposed. The company hired the bankers to make the valuation a reality. However when the company went public the share prices plummeted and the market capitalization of the company stood at ~ $ 69 billion. It also marked one of the worst falls post IPO debut in the US market history. Recently the company declared a loss of $ 5.2 billion in the second So what is the reason behind these companies displaying a Source: in.tradingview.com decline in value post the IPO? of increasing their Return of Income. The protocol followed by them is to exit at the right time when their investments are at its IPO stage, the same gets assessed by the market and correction takes place. As the valuations are arrived at by a market holds for the company. 04 The Indian Startup Valuations From humble beginnings to its most recent valuation of $ 21 billion, Flipkart has become a beacon for every thriving startupreneur. It has been on the headlines for quite sometime after Walmart, the biggest retailer in the world purchased a significant stake in it. However, mind-boggling question that has pinched many analysts remains unaddressed. How exactly was the valuation number arrived upon? 1,352 In INR Bn 970 752 217 730 >661 156 132 421 95 156 28 (4) (8) (5) (2) (21) Mar -14 Mar -15 Mar -16 Mar -17 Mar -18 Mar -19 Total Revenue Profit Valuation As per the article on firstpost.com, since its inception a Economist reckoned e-commerce is just a $15 bn market, decade ago, Flipkart has lost around $ 6.1 billion in cash by much smaller than the Forrester estimate. So Flipkart's 2017, almost equivalent to half the funding raised by them Gross Merchandise Value (GMV) ranges from a little over at that point of time. The accumulated losses of the $7 billion (if you believe The Economist) to $8.6 bn company stood at about $ 3.6 billion as of March 2017, (Forrester). Flipkart does not report GMV and we don't according to its filings in Singapore. have Flipkart's 2017-2018 numbers. But Flipkart's An extract from an article by rediff.com pertaining to standalone filings (excluding Myntra-Jabong) said valuation numbers arrived at by different leading economic revenues (which would be a percentage of GMV) rose 18 spaces has been presented. per cent to Rs 155.7 bn ($ 2.4 bn) in FY2016-2017 from Rs 131.8 bn ($ 1.98 bn) in 2015-2016…. “Forrester Research estimated the online retail revenues (less tickets) were at $19.6 bn in 2016-2017 and $27 bn in Assuming Forrester's estimate of 35 per cent growth is 2017-2018. That's about 35 per cent growth. Forrester reasonably accurate, Flipkart's 2017-2018 revenues should projected 26 per cent CAGR for the next five years which have hit about $3.2 bn. Does that gel with $7 bn to $8.6 bn will depend on fast smartphone and Internet penetration, a as GMV? Hard to tell. (Myntra-Jabong may have logged good per capita income growth and robust fintech $1.2 bn GMV in 2017-2018). The Walmart deal ($16 bn for 77 solutions. Forrester estimated Flipkart's standalone per cent) values Flipkart at $21 bn-plus. Keeping generous market-share (without Myntra-Jabong) was 31.9 per cent error margins given the discrepancies, that is three times in 2017-2018, while Amazon India held 31.1 per cent. But The Economist estimate for GMV and maybe, seven times, Flipkart claimed it held 60 per cent market share… the 2017-2018 revenues. We have no clear idea what the future burn-rate will be.” The Economist estimated Flipkart logged just under 50 per cent of online revenues (less ticketing). That's way more It is quite obvious that it is challenging to decipher the market share than in Forrester's estimates. But The mystery behind startup valuation. “Of recent, the valuation game has turned into a ‘black magic art’ more than a science”, -Ravi Gururaj, Chairman of Nasscom. **The total revenue and profit have been extracted from returns filed with the ROC. ^ The valuation numbers have been extracted from various articles from notable news The World of Startup Valuations – Magic, Mystery or Craft? 05 blogs The Indian Startup Valuations Few other startup valuation based on latest round of funding are as under: In INR Bn 1,107 650 33 455 311 8 6 2 3 (0) (4) (9) (15) (16) Mar -14 Mar -15 Mar -16 Mar -17 Mar -18 Mar -19 394 454 244 195 313 22 14 8 4 (8) (28) (31) (49) Mar -14 Mar -15 Mar -16 Mar -17 Mar -18 Jan -19 Total Revenue Profit Valuation **The total revenue and profit have been extracted from returns filed with the ROC. ^ The valuation numbers have been extracted from various articles from notable news blogs : Economic Times, Live Mint, CNBC, Times of India, Tech Crunch among others. #Valuation numbers has been converted from USD to INR based on exchange rate prevalent as on the last day of respective financial year. The World of Startup Valuations – Magic, Mystery or Craft? 06 The Indian Startup Valuations Few other startup valuation based on latest round of funding are as under: In INR Bn 228 46 4.68 8.5 1.46 - 0.00 0.24 (0.00) (0.02) (1.37) (2.05) (3.97) Mar -14 Mar -15 Mar -16 Mar -17 Mar -18 325 56 5 31 25 1 0 0 0 (0) (0) (4) (4) (5) Mar -14 Mar -15 Mar -16 Mar -17 Mar -18 Total Revenue Profit Valuation **The total revenue and profit have been extracted from returns filed with the ROC. ^ The valuation numbers have been extracted from various articles from notable news blogs : Economic Times, Live Mint, CNBC, Times of India, Tech Crunch among others. #Valuation numbers has been converted from USD to INR based on exchange rate prevalent as on the last day of respective financial year. As it can be seen from the above figures, the valuations are soaring in spite of declining profits. The World of Startup Valuations – Magic, Mystery or Craft? 07 FOREWORD Traditionally , the general proposition has been that if a company has been losing money on every transaction it makes, then the business model is not a sustainable one. However this may not hold true anymore given the fact that today the investors look at the long term potential rather than short term gratifications. Similarly, the traditional valuation approaches may not be able to reflect the fair value of these tech-startups. What is the utility that one sees while investing in a startup is enigmatic and subject to infinite number of if and buts.
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