The culture of opening doors to venture capital/private equity investments has transformed the way businesses have grown and evolved. The stories of mighty unicorns are no longer hard to come by. These are times when you come across reports about how companies, across different sectors, are getting funded. There is nothing more encouraging to ignite the entrepreneur in you. But, take a pause, and think deep. You need to explore the other side of the story as well. There are so many start-ups that have failed to see the light of the day; not because they were obsolete, small, or “not so fancy types”, but just because of not concluding a fundraise at the right time.
It is estimated that about 25% of PE/VC deals in the US do not succeed on account of differences in valuation! The bounce rate in India is even higher, and may be out of our radar to make any quantifiable comments!
But as entrepreneurs, it is equally important that you need timely access to capital to (1) scale your business and (2) keep ahead of competition. Hence, the larger objective of should be of concluding a transaction in the longer run. I do recall my colleague mention this to our clients: “Do you want to have 100% of a USD 1 Mn company (OR) have 50% of a USD 50 Mn company”!
Valuation is critical to any transaction. A fair value ensures that both, the buyer and the seller, benefit in the process. But how do you estimate a fair value to your business.
You have already come across theories that repeatedly say: “valuation is as much an art as it is a science”. While we broadly agree to this theory, we would like to take you a step ahead.
Valuation is a combination of multiple factors. We do come across articles that cite, “Entry valuations high in India”, “Valuations are to be lower in the next 12 months”, “Exit valuations will decrease this year” etc. If this may be the case, there is a prejudice notional “investment climate factor” built into the valuation process while investors scout for opportunities. The bigger question now is; how would you overcome such factors that are beyond your scope of imagination!
Business valuations are always relative to the position you take in the transaction process. The case can even be switched upside down, had you been asked to get into the shoes of the investor. Hence, we understand that defining the position is critical in the process. You need to map your business life cycle and locate yourself in that map. Time is relevant to any valuation; modern valuation algorithms that are available on the internet can throw up a different value of your company for every “micro” second!
Let us examine what is critical to success. As stated above, you may have to confront with factors like macro level investment climate while negotiating a transaction. A rational valuation report that (1) captures your position – relevant to time and the sector in which you operate – (2) and your outlook and orientation towards the future, can be of help to conclude a fruitful transaction. Get your valuation done in a professional way; seek expert advice and prepare yourself for a smooth fundraise. Always keep yourself better engaged with your advisor throughout the process. Better engagement may lead to increased chances of safeguarding your larger vision and objectives!
Find an advisor who can create, augment, and deliver value to your larger vision in the most professional manner. A professional valuation can mark a significant impact in your fundraise.
The author is an Associate @ SAS Partners Corporate Advisors.