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#4 Startup Funding

Startup Funding

Startup Valuation-VC method & Scorecard Method

I have an idea..I want to go to venture capitalist..angel investors

But how much valuation of company should I make?

I want to have aco-founder in my company..how much percent stake should I share with him?

So today we will discuss about this

Before going to any investor you have to check what’s the valuation of your company

There are basically 2 methods for valuation..First : ScoreCard method

As the name suggest what we do here,pick up a company of same category as yours

which has same stage as yours..Let’s say you are a startup which is 6 months now..so you will pick up a company which is on the same stage and of 6 months

Not only 1 company..but all companies of this range will be picked up..and will check how much investors they got on what valuation

And then average will be calculated

Let’s say the average of companies having same catgory comes out to be 1 Crore

So what will VC do here…it will compare how are your management skills

How is your finance skills,business model?

How is your competition? have a patent or not? whats your USP?

So based on this,they will add and subtract some percentage

For eg.let’s say you have a company which has no competition

Then you get +20%.if you have petent too..then also +20%

But your educational qualification is not that much.so -30%

Your company’s architecture is not good..so again -5%

So like this they will add and subtract on the average valuation and your net aluation will be calculated

This method is rarely used..the most common method used is VC method..so let’s understand that here

Let me give you an example to make tou understand this

Your company’s current sale annually is 10 crores

VC thinks he cam sell your company at 10X more to some big company after 5 years

So valuation of your company at this time is 10 times i.e.100 Crore

But this is after 5 years. But VC is a hungry man

he wants that every year he should get 100% return

After 5 years yours company’s valuation will be 100 crore

So in 4 years..how much it will be? Half of it

We are assuming 100% return..so how much? 50 Crore

after 3 years..25 crore

In 2 years..12.5 crore

In 1 year..6.25 crore..so this is your company’s current valuation

If you give 50% stake to VC..then you will get half of it and 50% will be gone

So in short..your company’s sale this year was 10 crore

And how much valuation? 6.5 Crore

Now this thing can vary a little

Let’s say the 100% can be more or less..depends on how they want to take the risk

What they think about the potential? Thre are many factors as we talked in scorecard method

How are the managers,technologies,how many patents..how much market size and market share..

Competion? So due to this factors that 100% may vary

In technical terms we call that 100% as IRR..Internal Rate of Return.and the 100 crore..i.e exit value when it will exit

And that we multiplied with 10,that was exit multiple

One most important thing is the 6.25 crore we talked about is your post valuation

In this vc will also invest so they try to negotiate with company on the pre valuation

Like if you demand 25%,then they will say 25% is ours and will minus that

So the value after minus will be the pre valuation

So if you are going to investor,then negotiate on post valuation

Dont do it on pre valuation. I am awaring you before hand

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