Comprehensive Project Report on

VALUATION OF STARTUPS
Submitted in Partial Fulfillment of the Requirement for the Award of the
Degree of

Master of Business Administration

(2020-22)
By

Name: - IBTESHAM

Roll No: - 20MBA032

Enrollment No: - 20-03397

Under the Supervision of

Dr. Pankaj Gupta

Centre for Management Studies

Jamia Millia Islamia, New Delhi – 110025

1
 DECLARATION

I, Ibtesham, hereby declare that the report entitled “Valuation of startups” in fulfilment of
the requirements for the award of the degree of Master of Business Administration which is
submitted by me to the Centre for Management Studies, Jamia Millia Islamia University, New
Delhi is a bonafide description of comprehensive project work carried out me.

This is the original work and is the result of my own efforts.

Dated: 06-05-2022
Ibtesham
Roll No- 20MBA032
Place: New Delhi

2
 CERTIFICATE
On the basis of the declaration submitted by Ibtesham, a student of MBA(Full-Time), I
hereby certify that the project report titled “Valuation of startups” which is submitted to the
Centre for Management Studies, Jamia Millia Islamia University, New Delhi in partial
fulfilment of the requirements for the award of the degree of Master of Business
Administration, is an original contribution with existing knowledge and faithful record of
research carried out by him/her under my guidance and supervision. Certified further, that to
the best of my knowledge the work reported herein does not form part of any other project
report or dissertation on the basis of which a degree or award was conferred on an earlier
occasion on this or any other candidate.

Dated: 06-05-2022
Dr. Pankaj Gupta

Place: New Delhi

3
 ACKNOWLEDGEMENT
It has been a great pleasure for me to work on this project. My sincere thanks to Pankaj sir for
giving me an opportunity to work on this project whereby I was given an exposure to study the
methods available to value startups. which helped me to increase the span of my financial
knowledge and developed my thinking on more practical lines.

I thank to my institution Jamia Millia Islamia for giving me an opportunity to get knowledge
of the corporate world before the completion of my master’s degree course. For providing best
facilities and best mentors. My dream of MBA would be incomplete with JMI.

I would also like to thank, Dr. Pankaj Gupta, my project guide who helped me and guided
me continuously in this project from selecting the topic to writing the conclusion. His guidance
and suggestions helped me in understanding the different aspects of my study.

I want to thank other faculty teachers as well who have been there with me at every step when
I needed guidance in the project.

Ibtesham

20MBA032
MBA- Full time

4
Contents
CERTIFICATE ........................................................................................................................ 3
ACKNOWLEDGEMENT ....................................................................................................... 4
Abstract ..................................................................................................................................... 7
Literature Review .................................................................................................................... 8
Introduction ............................................................................................................................ 10
Rationale: ............................................................................................................................. 10
Aim of the study: ................................................................................................................. 11
Objective: ............................................................................................................................. 11
Background ............................................................................................................................ 12
Valuation Methods ................................................................................................................. 18
The Berkus Method ........................................................................................................... 18
Risk Factor Summation Method: ..................................................................................... 20
Scorecard Valuation Method ............................................................................................ 21
Cost-to-Duplicate Method ................................................................................................. 23
Future Valuation Multiple Approach .............................................................................. 24
Market Multiple Approach ............................................................................................... 25
Comparable Transactions Method ................................................................................... 26
Book Value Method ........................................................................................................... 27
Liquidation Value Method ................................................................................................ 28
Discounted Cash Flow method ......................................................................................... 29
First Chicago Method ........................................................................................................ 31
Conclusion .............................................................................................................................. 34
Bibliography ........................................................................................................................... 35
Appendix ................................................................................................................................. 37

5
 Valuation
of Startups

6
 Abstract
India comes in number 3, after US & China, in startup creation. A whooping number of startups
are added every year. Many of them become unicorn or decacorn within the few rounds of
funding. Some startups had even made biggest IPO headlines in 2021 i.e., Paytm, NYKAA,
Delivery and Dekho and so on.

This startup ecosystem attracts a lot of capital and hence it become important for the investors
and the entrepreneur to value business idea in the best possible manner. Precaution is advisable
when big-big money is involved.

This paper identifies and discussed around 12 methods available for startup valuation. After
reading the paper you’ll have an idea of which valuation method is best suited for a particular
situation – a business idea in a specific point of Lifecyle.

7
 Literature Review
Rositsa Trichkova, CPA & Nigokhos Kanaryan, PhD, (2015), In this paper the author
explains the valuation phenomenon with startup or companies’ financial lifecycle. The paper
tries to explain that the best suited valuation method will depend on the company’s financial
lifecycle. For example, comparable are highly useful at the time of IPO whereas Future
growth is highly useful at the time of seed capital funding.

Trichkova, Rositsa and Kanaryan, Nigokhos (2015), in this paper the author considers the
valuation of startups in the light of the International Valuation Standards - IFRS 13 and the
practice of VCs. The paper presents the main approaches and methods of startups valuation
depending on their stage of development. The contribution of the paper is in examination of
various methods and approaches for startups valuation and the attempt to unify the various
standards by imposing practice.

Duarte, Miguel Munoz (2016), this paper tries to give a trustful model for entrepreneurs, to
make them understand better the value of their idea, as well as the risky essence of their
business. Based on existing literature as well as primary and secondary research, the paper
develops an integrated model of valuation for Startups present in the seed stage.

Augustin de Cobourg, by Raphael Mielle (2016), discussed the 9 methods available for
startups valuation. They have taken a hypothetical example throughout the paper and tried to
example every method with a box analogy. A box is compared with the business idea. The
author did a great work for summarizing the 9 different methods available for startup
valuation.

Andreas Köhn (2018), This paper conducts a systematic review of the existing empirical
literature to illustrate the determinants of startup valuations in the VC context. Beyond that,
the paper seeks to provide an organizing structure to the current literature as well as to detect
academic voids and directions for future research. To achieve these goals, it develops an

8
integrative framework for the factors determining startup valuations in the VC environment,
which should be of use to both practitioners and researchers. That framework illustrates how
startup valuations in the VC context are shaped by a three-sided interplay of factors related to
startups, venture capitalists, and the external environment.

Luis Perez Zotes (2018), in this paper the author studies and analyse the methodologies

used for the valuation process and identify which are the most suitable for startup companies

in the Brazilian market. The methods are evaluated and discussed keeping the Brazilian
market in the centre. The originality of this research is to make a direct relationship of
valuation commonly used with startups definitions proposed by Blank and Dorf (2014) and
Ries (2011).

9
 Introduction
Ideas, creativity, and execution are essential for a startup to flourish. But they are not the only
essentials. Startups also need money to survive. And the money which they secure in
different funding rounds depends on the Valuation of the startup.

And as per Inc42 data, Indian startups raised more than $11.8 Bn across 506 funding deals in
Q1 2022. Big funding number poses a big question, how these startups are valued. How the
investor decides how much to invest. I mean in these startups investors don't have past data to
analyse the trend. Hence techniques like DCF and DCM are not so useful in case of startups.

In this paper we will try to analyse different valuation methods available for the startups and
try to find out which valuation method is the best suited for startups.

Rationale:
Recently India has seen a big growth in the number of startups it is creating. As per the
economics times report 14000 new startups were registered in 2021-22. And it's not just the
count but also the funding secured by them, is making a big noise. Indian startups had raised
42 billion in 2021-22.

All this numbers are mesmerizing. And should compel one to think how entrepreneurs valued
their businesses and managed to get such whopping amount.

Well, the investment depends on valuation.

And in this paper, we will try to analyse how startups are valued.

10
Aim of the study:
Analyse the different valuation methods available for startup valuation and understand the
nuances of the methods, i.e, how & when to use which method.

Objective:
• Identify different startup valuation methods available
• Understanding how valuing a startup is different from valuing a traditional company
• Which valuation method is best suited for startup valuation?

11
 Background
In the recent years India has seen a tremendous growth in creating new startups. The country
has about 50,000 startups in 2018; around 8,900 – 9,300 of these are technology led startups,
1300 new tech startups were born in 2019 alone implying there are 2-3 tech startups born every
day.

According to NASSCOM Centre of Excellence for internet of things (IoT) and artificial
intelligence (AI), India has the third-largest ecosystem for startups in the world and the number
of such firms is growing by 10% per year. As on June 3, 2021, 50,000 startups across have
been recognized as startups by DPIIT. The sectors that had the maximum registered startups
were:
• Food Processing
• Product Development
• Application Development
• IT Consulting
• Business Support Services

Fig. 1: Number of startups

Source: Statista.com

12
This Spurt in the startup Industry has become a significant factor in growth in the number of
companies and funding organisations which are attributing to this cause

Fig.2: Quarter 1, 2022 Funding Data

Source: Venture Intelligence

The Indian startups have gone on to raise sizeable ticket sizes from various global and domestic
funds. The top 15 deals constituted about 40% of total deal value, demonstrating that most
funds are valuing deal quality more than quantity.

Private equity deal volume in India rose for the second straight year, and while the average
deal size declined slightly from the prior year, the total value of $26.3 billion in 2018 was the

13
second-highest of the last decade. The number of deals greater than $50 million increased from
the previous year.

According to economic survey, A record 44 Indian startups achieved unicorn status in 2021,
taking the overall tally of startup unicorns in India to 83. In April-November 2021, Rs 89,066
crore was raised through 75 IPO issues, much higher than in any year in the last decade,” it
said.

Fig.3: Funding data 2020-22

Source: Xpheno

All this numbers, posed a question for the investors, what is the best method (or just the
method) to value a startup. When such big money is flowing then it became important to find

14
the right value of the company otherwise whole wealth can be eroded before the investors can
identify what is really happening.

And finding the value of the startup can be different from the valuing the traditional well-
established companies. Because, most startups do not have the past numbers to show the trend
or the high number of assets to support the minimum value.

Startups are complicated in structure and resources. The absence of comparable companies, the
inexistence of historical data, the complexity to estimate volatility, and a large number of
intangible assets, which unfortunately are key drivers for value in tech-related companies,
make this discipline so difficult.

Hence it is fair to say that valuing a startup is both an art and a science. Whether the business
in the pre-seed stage or just issuing stock options to its employees. Startup valuations provide
insight into a company’s ability to use new capital to grow, meet customer and investor
expectations, and hit the next milestone. Today, unicorn valuations — businesses valued at $1
billion or more — number in the hundreds. There are now “decacorns,” startups valued at $10
billion, and even “hectocorns,” valued at over $100 billion.m

While impressive, these calculations aren’t as objective as you might think. A startup valuation
may account for factors like your team’s expertise, product, assets, business model, total
addressable market, competitor performance, market opportunity, goodwill, and more.

If the company have actual revenues, then use concrete economic numbers as a starting point.
But in the context of startups, the company is ultimately worth what entrepreneur and investors
agree it's worth. And most angel investors and venture capital firms use multiple formulas to
find the pre-money value of a business, or how much it’s worth before they invest.

Calculating value will always involve a little guesswork, but there are some helpful materials
businesses can have ready. Financial statements like a balance sheet are essential. Be prepared
to assess the skills and experience of startup’s team and identify any strengths and weaknesses.

The value of the startup can also be depended on how much a business wants to raise, or how
much different investors are ready to invest in it in the different rounds of the funding. Often
after the funding rounds we read the news that now XYZ startup value 1X million. But one can
ask, how to decide How much should entrepreneur raise? Well, the answer depends on the
multiple scenarios

15
 Fig. 4: Marginal utility of money raised
Source: Investopedia

By nature, valuations will differ across locations, industries, and years. For example, a Silicon
Valley property technology startup founded in 2008 should not be the measuring stick for a
Boston protect startup in 202. And a B2B company may have dramatically different inputs than
a B2C company.

Startups Requires a more creative valuation methodology that considers numerous factors: –
Stage of development – Quality of the management – Industry prospects – Value of the
company IPs – Value of comparable companies – Working capital requirements

16
 Fig. 5: Startup financial life cycle
Source: Xpheno

Here we try to summarise some of the methods of startup valuation used in the industry. For
the sake of better understanding we divided the methods among:
• Best suitable for Pre-revenue startup, and
• Best Suitable methods for post-revenue startup.

Because depending upon the stage, the reason for funding, and fundamentals of the company
can change dramatically. Hence both these stages required separate methods, crafted as per the
needs of different stage of startups.

17
Valuation Methods

Valuation Methods

Pre-Revenue Startups Post-Revenue Startups

Pre-Revenue Post-Revenue
Comparable
Berkus Method
transaction method

Risk Factor
Book value method
Summation Method

Score Card
Liquidation Method
Valuation Method

Cash to duplicate Ddiscounted CF

approach method

Future Valuation
1st Chicago method
Multiple approach

Market Multiple Venture capital

Approach method

The Berkus Method

Berkus Method was created by venture capitalist Dave Berkus to find valuations of starups
specifically for pre-revenue startups, i.e., businesses not yet selling their products at scale. The
idea is to assign a monetary amount to five key success metrics found in early-stage startups.

18
The simple formula helps founders and investors avoid faulty valuations based on projected
revenues, which few new businesses meet in the expected time period. Most of the startups
failed to meet the expectations or the set revenue targets. They look good on the screen but
failed when implemented. Hence Revenue models and forecasted numbers cannot blindly
accepted.

The method works best if a similar kind of company is also there in the industry. Because first,
one needs to know how a similar company worth. Then the method assesses how the startup
perform in the below five key criteria:
• Sound Idea (basic value)
• Prototype (technology)
• Quality management team (execution)
• Strategic relationships (go-to-market)
• Product rollout or sales (production)

The methods give ‘value of similar company divided by 5’ as maximum monetary value to
every single point. And on the basis of this adjustments the final value of the startup is found
as shows in the below startup:

Company: ApnaKlub
Value of the similar company: 50 million ShopClues
Sound Idea (basic value) 6M/10M
Prototype (technology) 5M/10M
Quality management team (execution) 5M/10M
Strategic relationships (go-to-market) 3M/10M
Product rollout or sales (production) 3M/10M
ApnaKlub 22M

fewer than one in a thousand start-ups meet or exceed their projected revenues in the periods
planned.

19
There is no question that start-up valuations must be kept at a low enough amount to allow for
the extreme risk taken by the investor and to provide some opportunity for the investment to
achieve ten times increase in value over its life.

Risk Factor Summation Method:

The Risk Factor Summation Method or RFS Method also meant for pre-revenue startups but a
advanced version of the Berkus Method. The Risk Factor Summation Method, described by
the Ohio TechAngels.

First, one determines an initial value for the startups. Then you adjust said value for 12 risk
factors inherent to the business:

• Management risk
• Stage of the business
• Legislation/Political risk
• Manufacturing risk
• Sales and Manufacturing risk
• Funding/Capital risk
• Competition risk
• Technology risk
• Litigation risk
• International risk
• Reputational risk
• Potential risk

Initial value is determined as the average value for a similar company in the industry, and risk
factors are modelled as multiples of $250k, ranging from $500k for a very low risk, to -$500k
for a very high risk. The most difficult part here, and in most valuation methods, is actually
finding data of the similar company.

20
Example:

Company: ApnaKlub
Initial Value ₹ 2,00,00,000
Management risk High ₹ -2,50,000
Very
Stage of the business high ₹ -5,00,000
Legislation/Political risk Low ₹ 2,50,000
Manufacturing risk High ₹ -2,50,000
Sales and Manufacturing risk Normal
Very
Funding/Capital risk high ₹ -5,00,000
Very
Competition risk high ₹ -5,00,000
Very
Technology risk high ₹ -5,00,000
Litigation risk Normal
International risk High ₹ -2,50,000
Reputational risk Normal
Potential risk High ₹ -2,50,000
₹ 1,72,50,000

This method may be less useful as a stand-alone valuation method for investors, but it is my
opinion that this method should be one of several methods used by early-stage investors to
establish pre-money valuation because it forces investors to consider important exogenous
factors.

Scorecard Valuation Method

The Scorecard Method is another option for pre-revenue businesses. It also works by
comparing your startup to others that are already funded but with added criteria.

First, find the average pre-money valuation of comparable companies. Then, consider how the
business stacks up according to the following qualities:

• Strength of the team: 0-30%

• Size of the opportunity: 0-25%
• Product or service: 0-15%

21
 • Competitive environment: 0-10%
• Marketing, sales channels, and partnerships: 0-10%
• Need for additional investment: 0-5%
• Other: 0-5%

Then assign each quality a comparison percentage. Essentially, one can be on par (100%),
below average (<100%), or above average (>100%) for each quality compared to your
competitors. For example, the company gives its ecommerce team a 150% score because it’s
complete, fully trained, and has experienced developers and marketers, some from rival
businesses. Then multiply 30% by 150% to get a factor of .45.

Do this for each startup quality and find the sum of all factors. Finally, multiply that sum by
the average valuation in the business sector to get your pre-revenue valuation. Example:

Company: ApnaKlub
Weight Vs Average Project
Strength of the team: 0-30% 20% 125%
Size of the opportunity: 0-25% 25% 100%
Product or service: 0-15% 15% 95%
Competitive environment: 0-10% 15% 80%
Marketing, sales channels, and partnerships: 0-10% 10% 25%
Need for additional investment: 0-5% 15% 100%
0.9375
Initial Value ₹ 2,00,00,000.00
Multiplier 0.9375

Valuation ₹ 1,87,50,000.00

This method can also be found under the name of Bill Payne Method, considering 6 criteria:
Management (30%), Size of opportunity (25%), Product or Service (10%), Sales channels
(10%), Stage of business (10%) and other factors (15%).

22
Cost-to-Duplicate Method
The key to this method is in the name. You’re figuring out how much it would cost to recreate
your startup elsewhere — minus any intangible assets, like your brand or goodwill i.e., taking
into account all costs and expenses associated with the startup and the development of its
product, including the purchase of its physical assets. All such expenses are taken into account
in order to determine the startup’s fair market value based on all the expenses. Investors simply
add up the fair market value of your physical assets. You may also include research and
development costs, product prototype costs, patent costs, and more.

The cost-to-duplicate approach comes with the following drawbacks:

• One major drawback is that this method inherently doesn’t capture the full value of a
company, particularly if it’s generating revenue. In calculating your startup’s valuation,
you may have to ignore elements that are particularly relevant, like your customer
engagement.

• Not taking into consideration the company’s future potential by running projection
statements of its future sales and growth.
• Not taking into consideration its intangible assets along with its physical assets. The
argument here is that even at a startup stage, the company’s intangibles may have a lot
to offer for its valuation, i.e., brand value, goodwill, patent rights (if any), and so on.

Example:
A company called Bandhoo - Provider of a digital platform. The company's platform uses
technology to support different facilities multiple segments in the construction sector like
issuing tenders for subcontracting to get the lowest possible price quotes, procure repair and
maintenance services, an integrated system that manages various contractors, subcontractors,
and building material suppliers among few, helping construction contractors to find new jobs
and materials and find workers for their projects. Following are the identifiable heads of costs
incurred for creating a company like Bandhoo:

23
 Company: Bandhoo
Cost
Tech Development 0.45M
R&D 0.3M
Employee Payroll 0.2M
Maintenance 0.1M
Legal Fee 0.1M
Advertising 0.15M
Miscellaneous 0.2M
Valuation 1.5M

Future Valuation Multiple Approach

The Future Valuation Multiple Approach solely focuses on estimating the return on investment
that the investors can expect in the near future, say five to ten years. Several projections are
carried out for the said purpose, including sales projections over five years, growth projections,
cost and expenditure projections, etc., and the startup is valued based on these future
projections.

Example:
Let’s consider ROE multiple to get the value of NYKAA.

Fig. 6: ROE of NYKAA

Source: Moneycontrol.com

24
NYKAA has current ROE of 6.45 with the valuation of 72964Cr
Now assume that NYKAA’s ROE will 8 in 2023 than its valuation according to ROE multiple
will be 90500Cr.

Market Multiple Approach

The Market Multiple Approach is one of the most popular startup valuation methods. The
market multiple method works like most multiples do. Recent acquisitions on the market of a
similar nature to the startup in question are taken into consideration, and a base multiple is
determined based on the value of the recent acquisitions. The startup is then valued using the
base market multiple.

Example:
ShopClue was acquired by Singapore’s Qoo10 for $ 70 million and the company has the
customer base of 100 million per year as per startuptalky. If we use the customer base (customer
visit) as the multiple then we can find out the value of Apnaklub which has the customer visit
of approx. 500000+, i.e., Apnaklub valuation:

Company: Apnaklub
ShopClue:
Value at the time of
acquisition $70 Million
Customer visit per year 100 million per year
Value per customer visit 0.7 million

Apna Club:
Customer visit per year 500000+
Valuation $350000

The Value can differ if we use some other multiple or any other company as the base instead
of ShopClue. That’s why valuing a startup can be very subjective and there is not right or wrong
answer. The valuation highly depends on the objective of finding the value.

25
Comparable Transactions Method
The Comparable Transactions Method is one the most popular startup valuation techniques
because it’s built on precedent. The Entrepreneur answering the question, “How much were
startups like mine acquired for?”

Depending on the type of business, the entrepreneur wants to find an indicator which will be a
good proxy for the value of his startup. This indicator can be specific to the industry, i.e.,
Monthly Recurring Revenue for SaaS, HR headcount for Interim Number of outlets for Retail,
Patent filed for Medtech/Biotech, Weekly Active Users or WAU for Messengers. Most of the
time, investors can just take lines from the P&L: sales, gross margin, EBITDA, etc.

The Method can be used for both pre-revenue and post-revenue startups, it is simple, but
required a precedent to compare. Finding a precedent can be difficult because startups are often
unique per se. Below is the example of this method can be deployed:

For instance, imagine that Rapid, a fictional shipping startup, was acquired for $24 million. Its
mobile app and website had 700,000 users. That’s roughly $34 per user. Your shipping startup
has 120,000 users. That gives your business a valuation of about $4 million.

Investors can also find revenue multiples for similar companies in the industry. In your market,
it may be normal for SaaS companies to generate 5x to 7x the previous year’s net revenue.

With any comparison model, investors need to factor in ratios or multipliers for anything that’s
dramatically different between your two businesses. For example, if another SaaS company
has proprietary technology and you don’t, you may want to use the multiplier on the lower end
of the range, like 5x (or lower) in our example above. This method is similar to the Market
Multiples Approach.

26
 Hypothetical Example:
Similar Transaction Method
Weekly active
Companies: Sold for (in crore) Revenue multiple users multiple
Similar Company 1 ₹ 800.00 3 2
Similar Company 2 ₹ 900.00 4 2
Similar Company 3 ₹ 1,000.00 5 1
Similar Company 4 ₹ 1,100.00 6 6
Similar Company 5 ₹ 1,200.00 7 7
Similar Company 6 ₹ 1,300.00 8 5
Similar Company 7 ₹ 1,400.00 9 6
Similar Company 8 ₹ 1,500.00 10 2
Similar Company 9 ₹ 1,600.00 9 4
Similar Company 10 ₹ 1,700.00 8 6

Valued Company 500 700

Weighted average multiple 6.9 4.1
₹
Valuation Based on ₹ 3,450.00 2,870.00

Book Value Method

As the name suggests, in this method the investors value a business on the bases of its fixed
assets. The value is equal to the book value of the business’ tangible assets.

The book value refers to the net worth of the company i.e., the tangible assets of the business
i.e., the “hard parts” of the business.

The method is simple and easy to use, but the Book Value Method is not so relevant for startups
as it is focused on the “tangible” value of the company, while most startups focus on intangible
assets, for example, RD in biotech industry, user base and software development for a Web
startup, etc.

27
Example:
Numbers is in thousand dollars

Company: Shopify
Total Assets 1,33,40,172
Total Liabilities 22,06,831
Value 1,11,33,341

Liquidation Value Method

the liquidation value is, as implied by its name, the valuation owner applies to a company when
it is going out of business.

But this method is rarely good from a Entrepreneur perspective, Things that counts for a
liquidation value estimation are all the tangible assets, such as, Real Estate, Equipment,
Inventory… Everything business can find a buyer for in a short span of time.
The mindset is, if the entrepreneur sells whatever the company can in less than two months,
how much money does that make? All the intangibles on the other hand are considered
worthless in a liquidation process the underlying assumption is that if it was worth something,
it would have already been sold at the time you enter in liquidation such as patents, copyright,
and any other intellectual property. Practically, the liquidation value is the sum of the scrap
value of all the tangible assets of the company.

So, what is the difference between book value and liquidation value? If a startup really had to
sell its assets in the case of a bankruptcy, the value it would get from the sale would likely be
below its book value, due to the adverse conditions of the sales.

28
Example:

Company: Shopify
Cash, Cash Equivalents & Short-Term Investments 77,68,093
Accounts receivable 4,41,367
Loans Receivable 69,697
Accrued Interest Receivable 13,067
Taxes Receivable 44,165
Other Receivables 99,658
Prepaid Assets 71,461
Hedging Assets Current 1,824
Other Current Assets 29,988
Valuation 85,39,320

It can be seen that the liquidation value of Shopify is less than the Book value of it. Because
liquidation value is calculated in a stress environment and consider only the liquid assets,
whereas book value considers all the assets at the market value.

Discounted Cash Flow method

If the business will keep growing at a steady pace, and keep generating indefinite cash flows
after the n years period. You can then apply the formula for Terminal Value: TV = CFn+1/(k-
g)

If the business considers an exit after the n year period. First, Entrepreneur wants to estimate
the future value of the acquisition, for example with the comparable method transaction. Then,
the investor has to discount this future value to get its net present value. TV = exit value/(1+k)n

Although technically, you could use it for post-revenue startups, it is just not meant for startup
valuation.

Example:
Following are The DCF valuation of Colgate:

29
 Capital structure
Shareholders fund 1,165.86
Debt 0
Total Mix 1,165.86
% of Equity 100.0%
% of Debt 0.0%
Debt to equity 0.00

Cost of Equity
Risk free rate(Rf) 6.86%

Beta 0.46341941
Market risk
premium 4.84%
Cost of Equity 9.1%

WACC
Sources Weight Cost Weighted Cost
Equity 100.0% 9.10% 9.10%
Debt 0.0% - -
WACC 9.10%

Particulars Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Terminal

6550.98077
Revenue 5,130.70 5,387.41 5,657.86 5,942.75 6,239.03 9
1857.98066
EBIT 1,313.07 1,428.91 1,530.05 1,643.44 1,769.51 8
- - -
- 385.114095 413.653076 445.384508 -
Less: Tax -330.500344 359.655735 7 1 8 386.8615519

EBIT after Tax 982.57 1,069.25 1,144.94 1,229.78 1,324.12 1,471.12

Add:
Depreciation 162.074872 165.665155 170.0805032 163.8192861 161.8855435 164.705072
-
Less: Capex -166.38 -166.43 -142.55 -160.36 -180.15 163.175224

Less:Change in
NWC -523.624159 31.1034964 63.51128679 68.12217945 124.3752001 130.5939601

30
 Free Cash
Flows to the
Firm (FCFF) 454.64 1,099.59 1,235.98 1,301.36 1,430.23 1,603.24

Time Period
(Mid Year) 0.50 1.50 2.50 3.50 4.50 4.50
Growth Rate 5%
Discount Rate
(WACC) 9%
Discount
Period 0.96 0.88 0.80 0.74 0.68 0.68

PV of Free 427.4024 282.6075 188.2871 140.07574 41088.3927

Cash Flows 324.961406 75 504 657 67 2

Enterprise
Value 42451.72706
Less: Debt 0
Add: Cash &
Bank 1,152.66
Add:
Investment 18.61
Equity Value 43622.99994
No of Shares
(in Cr) 27.2
Per Share
Value 1603.786763

First Chicago Method

The first Chicago method meant for post revenue startups

The First Chicago Method answers to a specific situation “what if your business idea has a
minute chance of becoming huge” How to assess this potential? The First Chicago Method
named after the late First Chicago Bank, deals with this issue by making three valuations:
• a worst-case scenario

31
 • a normal-case scenario
• a best-case scenario

Each valuation is made with the DCF Method or, if not possible, with internal rate of return
formula or with multiples. Investors then decide of a percentage reflecting the probability of
each scenario to happen. The valuation according to the First Chicago Method is the weighted
average of each case.

Example:
Let suppose Apnaklub, as we have seen above, could value 25 million in the best scenario, 12
million in the average scenario and 4.5 million in the worst case scenario, then following will
be the Apnaklub valuation as per the first chicago method:

Company: ApnaKlub
Scenarios Probabilities Value Weighted Average
Best 50.00% 25 12.5
Average 30.00% 12 3.6
Worse 20.00% 4.5 0.9
Valuation 17

As per first Chicago method Apnaklub would value around 17 million. Note: the valuation can
differ widely if you change the probabilities of each scenario and the values attached with it.
As it is said again & again its very subjective how one view the whole environment and the
future of the company.

Venture Capital Method

Meant for post revenue startups

As its name indicate, the Venture Capital Method stands from the viewpoint of the investor. It
is meant for post revenue startups but and it's another option to consider if you need a pre-
revenue valuation. It also reflects the mindset of investors who are looking to exit a business
within several years. An investor is always looking for a specific return on investment, let’s

32
say 20x. Besides, according to industry standards, the investor thinks that entrepreneur’s
business could be sold for $100M in 8 years. Based on those two elements, the investor can
easily determine the maximum price he or she is willing to pay for investing in your box, after
adjusting for dilution.

There are two formulas investors use to worked toward your valuation:
• Anticipated Return on Investment (ROI) = Terminal Value ÷ Post-Money Valuation
• Post-Money Valuation = Terminal Value ÷ Anticipated ROI
First, entrepreneur calculate his startup’s terminal value, or the expected selling price after the
VC firm has invested. You can find this using estimated revenue multiples for your industry or
the price-to-earnings ratio.
Determine the anticipated ROI, such as 10x, and plug everything in to find your post-money
valuation. From there, subtract the investment amount you’re asking for to get your pre-money
valuation.

Example:
Suppose that Apnaklub at the time of VCs exit, after 10-15 years, will value around 60 million.
Then investors will try to find out that to earn 15% return how much Apnaklub should be
valued currently. The same has been depicted in the following table:

Company: ApnaKlub
Companies value at the time of exit 60
Target ROI 15%
Post Money valuation 9
Less: Amount invested 2.5
Pre money valuation before adjusting for a dilution 6.5
Anticipated Dilution 50%
Pre money valuation after adjusting for a dilution 3.25

33
 Conclusion
What can be regarded as the best valuation method?

There is no direct answer to this question, and you must have understood that after reading the
whole paper. To answer this question, you should keep following points in mind:

First, keep in mind that the only methods really used by VCs are comparable and a rough
estimate of how much dilution is acceptable by the founders — e.g., giving out 15% to 25%
for a seed round comprised between €300k and €500k, or making sure that the founders remain
majority shareholders after a Series A.

Second, remember that valuations are nothing but formalized guesstimates – an informed
guess. Valuations never show the true value of your company. They just show two things:

• how bad the market is willing to invest in one’s Business Idea, and
• how bad investors are willing to accept it.

There are no precise valuations for early-stage companies. In most cases, professional
VCs/investors will, therefore, calculate a number of valuation models and scenarios and take a
weighted average of them (depending on the estimated fit of the model to the underlying
business case), as a starting point or an instrument for negotiations. A deal will eventually
happen for a certain price (market price) and companies will also refer to this price as their
“market-valuation”.

34
 Bibliography
1. Nasser, Stéphane “Valuation For Startups—9 Methods Explained.” ICT strategic
consulting. Jun 14, 2016. <http://ictstrategicservices.com.au/wp-
content/uploads/2017/05/Valuation-for-Statups-9-Methods-Explained.pdf>.

2. Payne, Bill “Valuations 101: The Risk Factor Summation Method”. Blog.gust.com.
Nov 15, 2021. <https://blog.gust.com/valuations-101-the-risk-factor-summation-
method/>.

3. Achleitner, Nathasius “Valuation methods”. Venionaire capital. 2003.

<http://www.venionaire.com/first-chicago-method-valuation/>.

4. Entremont, Pierre “How much should you raise? An economic approach.”

Pentremont.medium.com. Sept 8, 2015. <https://pentremont.medium.com/how-much-
should-you-raise-an-economic-approach-765e15ac42e2#.c33tnl5hv>.

5. Perez, Luís “VALUATION METHODOLOGIES FOR BUSINESS STARTUPS: A

BIBLIOGRAPHICAL STUDY AND SURVEY.” Brazilian Journal of Operations &
Production Management 15 (2018), pp 96-111. 2018.
<https://bjopm.emnuvens.com.br/bjopm/article/view/426/499>.

6. “What are Startup Valuation Methods.” CFI.com. April 1, 2022.

<https://corporatefinanceinstitute.com/resources/knowledge/valuation/startup-
valuation-methods/>.

7. Ministry of commerce and industry “Number of startups recognized by DPIIT.”

Pib.gov.in. Jun 3, 2021.
<https://pib.gov.in/PressReleasePage.aspx?PRID=1724043#:~:text=743%20startups
%20were%20recognized%20in,in%20the%20year%202020%2D2021>.

8. Mint news “Number of startups growing by 10% per year in India.” Livemint.com. Feb
22, 2022. <https://www.livemint.com/news/india/number-of-startups-growing-by-10-
per-year-in-india-11645534268016.html>.
35
9. Padmanabhan, Arun “Economic Survey 2022: At least 14,000 new startups recognised
in India, up 20 times in five years.” economictimes.indiatimes.com. Jan 31, 2022.
<https://economictimes.indiatimes.com/tech/startups/economic-survey-2022-at-least-
14000-new-startups-recognised-in-india/articleshow/89243366.cms>.

10. Kanwal, Sanyukta “Number of Start-up India recognized businesses from financial year
2016 to 2020.” statista.com. Mar 16, 2022.
<https://www.statista.com/statistics/1155602/india-start-up-recognized-businesses/>.

11. Lowe, David “16 Startup Infographics That Entrepreneurs Cannot Live Without.” Blow
it up. Dec 16, 2019. <https://medium.com/d-lowe-playbook/16-startup-infographics-
that-entrepreneurs-cannot-live-without-6188c4671fd8>.

12. Padmanabhan, Arun “Economic Survey 2022: At least 14,000 new startups recognised
in India, up 20 times in five years.” economictimes.indiatimes.com. Jan 30, 2021.
<https://www.google.com/url?sa=t&source=web&rct=j&url=https://m.economictimes
.com/tech/startups/economic-survey-2022-at-least-14000-new-startups-recognised-in-
india/amp_articleshow/89243366.cms&ved=2ahUKEwiM7N2p_LD3AhXbSmwGH
WsdCggQFnoECAwQBQ&usg=AOvVaw1FNv67AUH0NFN4meI4OYY5>.

13. India “Indian startups raised $42 billion in 2021: report.”

economictimes.indiatimes.com. Jan 30, 2022.
<https://www.google.com/url?sa=t&source=web&rct=j&url=https://m.economictimes
.com/tech/funding/indian-startups-raised-42-billion-in-2021-
report/amp_articleshow/88875670.cms&ved=2ahUKEwjGpYP__LD3AhUsSWwGHf
25BoAQFnoECA0QBQ&usg=AOvVaw0x6K3b3vI4wIaWPRMpoDp->.

14. Majumdar, Romita “30 Startups To Watch: The Startups That Caught Our Eye In July
2021.” Inc42.com. Aug 8, 2021. <https://inc42.com/features/30-startups-to-watch-the-
startups-that-caught-our-eye-in-july-2021/>.

15. Brex “How to Do a Startup Valuation Using 8 Different Methods.” Brex.com. Jul 21,
2021. <https://www.brex.com/blog/startup-valuation/>.
36
 Appendix
Definitions:
Startup: According to Wikipedia, A startup or start-up is a company or project undertaken by an
entrepreneur to seek, develop, and validate a scalable business model.

Valuation: According to Wikipedia, valuation is the process of determining the present value of an
asset.

Some useful charts:

The Highest Value startups in the world:

Source: Statista.com

37
How Startup funding works:

Source: FunderandFounders.com

38
Funding Source Data:

Source: Statista.com

39
Basic Data About Apnaklub:

Source: inc42.com

Basic data about Bandhoo:

Source: inc42.com

40
Balance Sheet of Shopify:

Source: yahoo.finance.com

41