Present Industry Landscape for Startup

The Internet-based businesses globally have seen unprecedented growth and now with India taking a center stage in global markets, many Indian startups have come out, especially in the last couple of years, (substantially Tech-enabled) to solve a multitude of problems we face in our daily life.

Till 2015, Indian digital retail and eCommerce companies and their valuations were being closely linked to the soaring valuation of US tech start-ups and investors are under the fear of missing out. The online retail companies were relying on a different metric of valuations – “GMV” which is defined to indicate total sales value for merchandise sold through a marketplace over a period.

However, it must be noted that GMV is not reflected on their financial statements and their actual revenues are just a fraction of GMV. The GMV or sales (as per financial statement) is then multiplied by a multiple (x times) to get the Valuation of the entity.

Interestingly the trend of Investments has remained difficult and different in 2016. Many e-tailers have reported decline in number of orders significantly as they cut discounts leading to drop in their GMV raising eyebrows on their fresh funding rounds as Investors are looking when ventures would turn profitable leading to diminution of their valuations.

Approaches for Business Valuation

For valuing mature companies, there are broadly three approaches to valuation namely Asset Approach, Income Approach & Market Approach

However these approaches do not find much of relevance for valuing the Start-ups as they often have insignificant revenue or EBITDA metrics, insufficient history, no meaningful comparable(at their stage) and long term income/ cash flow projections are quite difficult to estimate.

Valuation Methodology for start-ups

These valuation methodologies for startup are different in the sense that: Venture Capitalist(VC) Method works backward to calculate the % shareholding VC should get, once it’s been decided how much amount needs to be invested in any venture.

First Chicago Method takes into consideration three business scenarios: Success, Failure and Survival case and associate probability to each case depending on a number of factors like Promoters, Team, Traction, Competitive advantage, Strategy etc. to find the futuristic value of a start-up under the most likely set of parameters and its business model. In nutshell, this method gets benefit of averaging under different scenarios that a startup may end with.