How are Start-ups Valued?
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And most importantly, is the right way?
Funds raised until the companies make its’ debut in the stock market,
> Seed Money,
> Series-A, Series B/C/D……. (Maybe) Z
> PE rounds
are Pre-IPO stages.
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In these rounds, one of the most common methodologies for valuation is the Multiple based and they vary based on stage of the company, industry, etc. Sometimes these multiples are jaw-dropping.
So how are these multiples decided?
Comparable transactions in the past, also known as CTMM. It will be based on a certain metric (revenue/LTV/EBITDA) that is used to value a company in the same/similar industry and stage.
Does it indicate the true value of the company?
Estimating the value of two companies with equal revenues but different business models using the same multiple is not accurate, simply because in my opinion value is derived from the business model, regardless of how similar products/ technologies are, it is the monetization plan around it that dictates the cash flow potential.
To understand if it is fair or not, just Google the 3 IPOs in the last 6-12 months that were most celebrated, just notice their issue share price, listing day closing price and today.
The Solution?
While multiple-based approach exists for a reason, there should be an adjustment factor that needs to be applied to lay emphasis on the cash flow efficiency of the model. DCF already does that, we just need to figure a way to bypass the notion “DCF is just excel”
We should incentivize entrepreneurs to focus on sustainability along with growth in topline.
We should create Unicorns that can generate ‘Positive Cashflow from Operations’ not in stock market
