This is the 7th in the 8th session course on Entrepreneurship for working executives and this provides an overview of the different methods of valuing a company with emphasis on the DCF method. A couple of examples of how startups in India have increased their valuation have also been included based upon publicly gleaned information

1. Anilesh Seth
Ideator, Co Founder & CEO, KROW
www.krow.in
Strategic Advisor to the Qatalys Group of Companies
Mentor at the KYRON incubator
Visiting Faculty at CMR IT Exec MBA program
Ex-CEO/MD: LGSI, Qatalys & Supervalu India
www.slideshare.net/anilesh
http://In.linkedin.com/in/anileshseth
anileshseth@hotmail.com

2. Some fundamentals first: The time
value of money
• A certain amount of money available today is
worth more than the same amount available
in the future
• This is because the money available today can
earn interest – hence money is worth more,
the sooner it is received
• If you had to make a choice to collect a Rs
100,000 lottery that you won, today, or two
years from now, which would you choose?

3. Some fundamentals first: Present and
Future Value of money
• Let’s say you are going to invest 10,000 today @10%
interest per year
• The future value of this investment is
FV1= 10,000*(1+10%) = 11,000
• At the end of the second year this will be worth FV2 =
11,000*(1+10%) = 12,100
• Or FV2 = 10,000*(1+10%)*(1+10%)
• Or FV2= 10,000*(1+10%)^2
• The general equation is : FVn = PVn*(1+i)^n
• Conversely, to find the Present Value we would use the
equation: PVn = FVn/((1+i)^n)

4. Some fundamentals first: Discounted
Cash Flow (DCF)
• DCF is at the core of arriving at company valuation, based
upon expected future cash flows
• We would need to obtain the present value of each of the
future cash flows
• To do so we need to “discount” each such cash flow to the
present
• The discount rate to be applied would ideally be the WACC
or the weighted average cost of capital – which is nothing
but a blend of the cost of equity and debt
• For a start up this is more an “art” than a science!
• An investor who is seeking a 10 times return in 5 years may
want you to pass the 59% discount rate test!

5. Example of a DCF calculation
All monetary figures in rupees
DISCOUNT RATE 30.00%
Year 1 Year 2 Year 3 Year 4 Year 5
NET CASH FLOW 10,00,000 50,00,000 1,50,00,000 5,00,00,000 10,00,000
Year 1 discounted 7,69,231
Year 2 discounted 29,58,580
Year 3 discounted 68,27,492
Year 4 discounted 1,75,06,390
Year 5 discounted 2,69,329
TOTAL=PV 2,83,31,022
Or use the formula =NPV(rate, VAL1, 2) 2,83,31,022
Remember that the general formula for PV of a future cash flow is
PVn=FVn/(1+i)^n
Remember to discount each cash flow to the present and then add them all up

6. Raising money
• Beauty, like Value is in the eyes of the beholder!
• Yet we still need to arrive at some value for our
start up if we want to raise money
• There are many methods of arriving at value – at
the end of the day these are ranges that you use
to negotiate
• Some methods that are employed are: DCF, Asset
Based, Proxy Based (based upon industry
averages), Cost-plus based

7. Example of a start up: projected cash flows of a B2C
start up: How much to raise and how much to dilute?
ALL MONETARY FIGURES IN RUPEES
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
TOTAL REVENUE - - - 9,55,000 2,61,03,198 15,62,84,806 43,32,45,539 1,20,03,90,883
EXPENSES SUMMARY
PHONE/MOBILE DATACARDS 1,59,930 17,85,500 22,88,500 28,89,400 34,27,900
Rentals/Maintenance/DG/Housekeeping/Security/Utilities/Supplies/Refreshments4,59,000 24,33,600 25,41,600 94,26,000 96,04,200
Hiring/Training/Payroll 2,55,357 30,53,152 23,84,969 36,35,409 34,94,305
Travel Costs 1,94,000 34,92,000 97,92,000 2,35,08,000 3,53,52,000
Legal costs 8,00,000 40,95,525 1,27,350 3,15,075 1,12,700
TOTAL IT COSTS 2,88,600 26,50,650 38,21,950 55,97,550 77,04,600
MARKETING COSTS 18,03,125 4,59,18,000 8,58,27,450 8,81,99,287 11,92,51,665
MANPOWER COSTS 59,75,000 2,95,99,599 3,60,49,567 4,23,01,733 4,83,30,466
OTHERS 1,00,000 10,00,000 15,00,000 20,00,000 30,00,000
DEPRECIATION 1,26,667 11,20,333 31,77,000 42,15,333 53,77,000
- - - - - -
TOTAL EXPENSES 1,01,61,679 9,51,48,360 14,75,10,386 18,20,87,787 23,56,54,837
CASH FLOWS
NET PROFIT/LOSS -92,06,679 -6,90,45,162 87,74,420 25,11,57,753 96,47,36,047
ADD DEPRECITION 1,26,667 11,20,333 31,77,000 42,15,333 53,77,000
LESS CAPEX 6,00,000 31,05,000 94,70,000 38,15,000 65,40,000
LESS DEPOSITS 2,16,000 9,09,000 - 34,11,000 -
TOTAL CASH NEEDED -98,96,012 -7,19,38,829 24,81,420 24,81,47,086 96,35,73,047

8. Analysis
• How much money is required for Year 1?
Should we raise more than that amount? If
yes, how much more?
• Considerations:
– Present valuation and therefore dilution
– Lead time required to raise money in the future:
don’t forget your “burn rate” will be increasing

9. Some more terms
• What is pre-money valuation?
Simply put, this is the value of your firm before you have
raised money. Lets say based upon future cash flows your
firm valuation is Rs 10 crore. This is pre-money valuation
– or the value BEFORE you have infused money from your
investors
• What is post-money valuation?
This is nothing but the pre-money valuation plus the
funding amount that you are seeking. So in the above
example if you are raising Rs 1 crore then your
post=money valuation is Rs 10 crore plus Rs 1 crore = Rs
11 crores

10. Some more terms
• What is dilution?
This is the amount of control you would be giving away in
terms of stock, when you raise money. Remember that Pre-
Money dilution and Post-Money dilution is not the same
• In the previous example, the pre-money value is Rs 10
crore. If you are raising 1 crore, and you agree to a pre-
money dilution, then the value of your enteprise AFTER
funding is deemed to be Rs 10 crore out of which you are
giving away 1 crore worth or 10%.
• However if you agree to give away stock on a post-money
valuation basis then the value of your company is Rs 11
crores and you are giving away 1/11 = 9.09%

11. Some more terms
• Do we assume that after 5 years the company ceases to operate?
We can’t do that…
• But we can assume that it will settle down to a lower growth rate
that reflects its maturity over time
• Hence in the fifth year we should compute a “terminal value” of the
company that is reflective of its future cash flows – albeit at the
lower growth rate. This terminal value too needs to be discounted
to the present and added to the present value to arrive at the true
enterprise value
• The general formula for this is:
Final projected year cash flow * (1 + long term cash flow growth
rate)/(Discount rate – long term cash flow growth rate)

12. OK…back to our example
• Without worrying about the added complexity (tho strictly speaking
required) of the terminal value, the Present Value of the cash flows
projected over 5 years is:
– At a discount rate of 20%: About Rs 45 Crores
– At a discount rate of 30%: About Rs 29 Crores
– At a discount rate of 40%: About Rs 20 Crores
– At a discount rate of 59%: About Rs 10 Crores
• Remember, if we had used the terminal value also, these figures
would be higher
• Assuming a valuation of 20 Crores has been agreed with the
prospective investor, this is the Pre-money valueation of the
company
• If you are raising Rs 1.5 Crores at this stage, your Post-money
valuation would be 21.5 Crores and you would be diluting 1.5/21.5
or roughly 7% of your company

13. Illustration of how value accrues
• Here is a simplified example of how value accrues as the
founders dilute more over time to raise cash. This is purely
illustrative and simplified to show dilution on the part of
the founders only, in each subsequent round…
Stage Timeline Value Funding Post Money Dilution (%) Founders Stake Founders Value
Idea/Formation 1 Yr Ago 10,00,000 0% 100.000% 10,00,000
POC/Angel Now 5,00,00,000 50,00,000 5,50,00,000 9.091% 90.909% 5,00,00,000
Series A 1 Yr Later 22,00,00,000 8,00,00,000 30,00,00,000 26.667% 64.242% 19,27,27,273
Series B 2 Yrs Later 1,50,00,00,000 30,00,00,000 1,80,00,00,000 16.667% 47.576% 85,63,63,636
Founders holding % decreases
Founders holding value increases
TIME
In rupees

14. OK – now onto a quick treatise on
other methods of valuation
• Asset based: Net tangible book value:
– All tangible assets (like cash, WDV of assets, accounts receivable, etc) minus all
liabilities and debt
• Revenue multiple: X * Revenue
• Earnings multiple: X * EBITDA
– Use the average industry profitability as a proxy/indicator
• Cost plus: Sometimes a start up will arrive at a valuation based upon the
market value of the effort they have put in plus a premium on the
idea/product that they have created
The problem with valuing a start up is that you have no history to show. Hence
investors will talk about the management team, the “traction” gained, entry barriers
patentable idea that you may have , recent valuations in similar cases etc….
All the valuation techniques enable you to write down indicative ranges based upon
different approaches/industry proxies and provide both you and the investor a starting point
To negotiate….
Remember that an idea is as good as its execution – and hence the importance of the
management team…

15. Examples of how value accrues

16. Company redBus
Launched August 2006
Capital Rs. 5,00,000
Feb 2007
First round
$1 million Seed Fund and undisclosed investors.
•$500,000 - Seed Fund.
•$500,000 - other investors
July 2009
Second round
$2.5 million - Inventus Capital Partners, Seed Fund and other
unnamed investors
May 2011
Third round
$6.5 million - Helion Venture Partners, Inventus Capital and
Seedfund
March 2013 •Net revenues -Rs 55 crore
•Expected to post a net profit of around Rs 2 crore for FY13.
June 21, 2013 Ibibo Group acquires redBus at an estimated $100 million (about Rs
600 crore).

17. Company Flipkart
Founded 2007
Capital Rs. 4,00,000: Sachin Bansal and Binny Bansal
2009
1st round
$1 million: Accel India
•Assume 15% stake sale at $6.6m valuation. Promoter +
Employees = 85% | Investors = 15%
2010
2nd round
$10 million : Tiger Global.
•Assume 30% stake sale at $33m valuation. Promoters
+ Employees = 59.5% | Investors = 40.5%
June 2011
3rd round
$20 million: Tiger Global.
•Assume 25% stake sale at $80m valuation. Promoters
+ Employees = 44.625% | Investors = 55.475%

18. Company Flipkart
August 2012
4th round
$150 million : MIH (part of Naspers Group) and ICONIQ
Capital.
•Assume stake sale of 15% at $1b valuation. Promoters +
Employees = 37.93% | Investors = 62.07%
10 July 2013
5th round
$200 million: Existing investors including Tiger Global,
Naspers, Accel Partners and Iconiq Capital.
•Assume stake sale of 17% at $1.2b valuation. Promoters
+ Employees = 31.48% | Investors = 68.52%
Oct 10, 2013 $100million:
• Additional 160 million funding announced

19. Thank you!