Note: The views & opinions expressed in these essays are strictly my own, and not those of any entity I may be associated with as an employee, consultant, promoter, investor, etc.
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Technology Entrepreneurship in India - Raising Capital
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› Oct 2011: Equity Risk Premium for India
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› Nov 2010: Technology investment in India - WATER
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Risk Capital for MSMEs
› Mar 2010: Risk mitigation for investors in MSMEs
› Mar 2010: Why don't (Indian) MSMEs get risk capital?
› Feb 2010: Angel investing - Will it work for Indian MSMEs?
› Feb 2010: What's so special about innovative MSMEs?
› Feb 2010: Where do Indian/NRI (V)HNIs invest?
› Feb 2010: Funding options for innovative MSMEs in India
› Jan 2010: Innovative MSMEs in India
Startup valuation
(Last revised Mar-2012, Send comments to galatime@gmail.com)
Amongst the many painful aspects of raising risk capital is agreeing with investors on the valuation of your company. Despite various attempts at calculation (DCF, P/S multiples, market comparables, etc.), early-stage valuation is guesswork at best, and largely determined by the bargaining power (i.e. desperation) of each party involved.
Startup valuation can change quite a bit due to the various terms and conditions baked into the investment agreement. If you are unfamiliar with these terms, you must understand their impact on your company's valuation, e.g.:
- The option pool shuffle - how the option pool dilutes common stockholders (esp. the founders), lowers your pre-money valuation, and favors preferred stockholders if un-issued & un-vested options get cancelled in the next round.
- VC math differs from entrepreneur math; beware of 'participating preferred' stock with 2x+ liquidation preference.
- Investors may ask for 'full ratchet' (instead of weighted-average) anti-dilution protection; this does not impact current valuation and insures the investor against the possibility of over-valuation. However, it will wipe you out in the future, if a recessionary fund-raising environment leads to a down-round.
How Much Is My Company Worth?
Typical equity stakes and funding amounts are a function of stage (pre-seed, seed, Series A/B, etc.). To determine valuation, match your funding needs to a stage (say Rs 1 to 1.5 crore for seed-stage), and pick the equity stake that you and the investors are OK with(say 20 - 25%). That gives a range of Rs 3 to 6 crore - admittedly broad, but nonetheless a useful starting point for discussion.
Anand Lunia's article on valuation benchmarks for angel investing provides useful data-points on typical amounts and stakes for Indian startups.
It is also useful to keep track of VC deals in India, especially those in your sector & industry. Subscribe to sites like VC Circle, PluggdIn, Venture Intelligence, etc. Invariably, you will run into 'market' data on valuation, e.g.:
- 2.5 crore investment for 25% stake, for a company with monthly revenue of Rs 4 lakh; presumably, the growth rate of revenue is quite high.
Tools
Venture capital valuation spreadsheet
Valuation estimator (useful list of relevant criteria)