Understanding Start-up Valuation

Contributed by: Mohit Shah

The VC Society, IIM Bangalore invited Mr. Pratik Poddar for a speaker session on “Understanding Start-up Valuation.” Pratik currently works at Nexus Venture Partners and has graduated from IIT Bombay with a bachelor’s degree in Computer Science and Engineering. After graduation, he started his career with Morgan Stanley as a quant analyst/algorithmic trader working on building mathematical models to hedge risks in Japanese Mortgages and trading US Equity ETFs. Post Morgan Stanley, Pratik worked at Blackstone Private equity where he evaluated deals in restaurant, financial technologies, education, and consumer electronics products in India. Before joining Nexus, Pratik spent three years working on his startups in social e-commerce and content platforms where he experienced firsthand the challenges of building a company. Pratik was all India Rank 3 in IIT JEE and all India Rank 2 in AIEEE. This event was an overwhelming success with 100+ participants from PGP, EPGP, FPM, PEPPM and start-up founders from NSRCEL.

Mr. Pratik started the session by explaining the major difference between a venture capitalist and private equity and then explained four main sources of funds for ventures namely Venture Capital, Private Equity, LBO Private Equity, and public investors. He then described eight startup valuation tools which are:

  1. Discounted Cashflow method
  2. Comparable multiples method
  3. Ownership constraint
  4. Pricing due to competitive scenario
  5. Pricing by Strategic Investor
  6. Premium to last round
  7. Exit scenario expectation
  8. Storytelling

He further went on to explain that classical academic valuation methods like discounted cash flow and comparable multiples method are hardly used due to non-availability of reliable data required in such techniques. The final valuation also depends on negotiation and the interpersonal connection that the entrepreneur establishes with the Venture capitalist. Pratik used his investment in various start-ups as examples to explain the concepts more clearly, and he also answered questions from the participants in between and at the end of the session. After the session ended, participants were given some time to network and interact with Pratik one on one.

The participants gained an understanding of the world of Venture capitalist and all the different tools used for valuation which was earlier a mystery for them. ‘Understanding Start-up Valuation’ therefore was a very informative session and definitely added value for all the participants.

Mohit is a student of the PGP 2018-20 batch at IIM Bangalore and a member of the Venture Capital Society.

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