Startup;

Valuation and
Significance
Content
1. Introduction d. Emerging Startups Ecosystem
a. What is a Startup e. Startups Growth till Sep 2020
b. Indian Startup Ecosystem 5. Types of Funding
c. Startup Hubs in India 6. Sources of Funding
2. Stages of Startup 7. Impact of COVID19
3. Best Funded Indian Startup 8. Valuation Methods
4. States’ Startup Ranking 2019 a. Berkus Method
a. Ranking Framework b. First Chicago Method
b. Emerging Startups Ecosystem c. Venture Capital (VC) Method
c. Startups Growth in 2020 d. Score Card Method

2
Introduction

3
What is a Startup?
A Startup is a young company which found by one or more
▸ A startup is an entrepreneurial venture in search
of enough financial backing to get off the ground.
entrepreneurs. It is found to develop unique product or service
and bring it to market. A typical startup tends to get its initial ▸ The first challenge for a startup is to prove the
funding from the founder(s) or their friends and families. validity of the concept to potential lenders and
investors.

One of the startup's first tasks is raising a substantial amount of ▸ Startups are always risky propositions but
money to further develop the product. To do that, they have to potential investors have several approaches to
make a strong argument, if not a prototype, that supports their determining their value.
claim that their idea is truly new or a great improvement to
something on the market.
The startup ecosystem is hailed as an incubator for innovation
and a key contributor to job and wealth creation. In reality most
startups fail in their first years of operations.

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Indian Startup Ecosystem
(In a Nutshell - as on March 2020)

55,000 40,000 28,979

Startups Launched in India Active Startups in India DPIIT Registered Startups

385 $63 Bn 5,400

Funded Startups that have Funding Raised by Indian Funding Deals Witnessed
Shutdown Startups

3,202 7 Years 34
Number of Funded Startups Average time taken by Unicorns in Indian Startup
Indian Startups in Reaching Ecosystem
Unicorn Status.
5
 Startup Hubs in India
Bengaluru
A Startup hub is a place where a startup can learn, know, and Home to some of the country’s biggest technology companies
grow. A startup failure rate is very high and there is a high (100 +MNCs), Bengaluru has a lot of technology talent.

36%
chance that 90% of the startups going to fail. These numbers Ranks among top 3 cities globally for launch of tech start-ups.
indicate that startup needs a friendly ecosystem where it can
High density of entrepreneurs and investors attracts budding
grow with all the easily available resources. entrepreneurs.

Bengaluru 1,876 Delhi – NCR

Delhi-NCR 1,554 Strong presence of startup incubators/accelerators run by

30%
Corporates, Govt., Educational Institutions and Venture
Mumbai 1,044
Capitalists.
Chennai 198
Growth of Noida and Gurgaon as startup hubs, has put Delhi
Pune 184
City

NCR on the startup map of India

Hyderabad 180
Ahmedabad 74 Mumbai
Jaipur 53 Financial, commercial and entertainment capital of India.

20%
Kolkata 42
Advantage of a huge consumer base.
Goa 20
In a few verticals like FinTech, Media & Entertainment,
- 500 1,000 1,500 2,000 FoodTech and Travel, Mumbai is competing with established
Source: inc42.com No. of Deals hubs like Bangalore and Delhi NCR for the top set.

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 Sports & Recreation 0.20%
Water Supply 0.20%
Biotechnology 0.50%
0.60%
% Share of Startup's Sectors
Machine Learning
Hardware Development 1.00%
Food 1.40%
Travel & Tourism 1.50%
Social Enterprise 1.80%
Enterprise & Corporate 1.90%
Software Development 2.00%
Transport & Logistics 3.00%
Media & Entertainment 3.10%
Product Development 3.50%
Energy/Renewable Energy 4.20%
Consumer Goods 4.70%
Financial Services 4.80%
Social commerce 5.00%
IT consulting/solution 5.50%
Manufacturing 5.90%
Agriculture
7.70%
Education
Health
8.00% The analytics and data sector was the most
Data and Analytics
8.70% preferred choice for start-ups, that too
14.10% with a wide margin, followed by health,
education and agriculture.
Source: The Hindu
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Stages of Startups
8
 05

04 • Exit/IPO/M&A

03
• Repeatable user
acquisition
02 • Early traction • New growth channels
• Loyal • Series C and above
customer base rounds of funding
01 • Early revenue • Series A,B
• Self funding rounds of
• Funds from funding
• Idea formulation
friends/family
• Idea validation
• Angel investment
• Prototype
• Minimum viable Product

9
Best funded Indian Startups

10
 Total funding
Start-up Industry Description
(in $ Bn)
E-Commerce,
It is the company which operates Paytm; a mobile
Shopping and 4.40
commerce and digital goods platform.
Financial Services
It is a ride-hailing platform where anyone can book
Transportation 3.80
taxis online; through its app.

Travel and It is a hotel chain that offers a range of stay

3.20
Tourism experiences across India and abroad.

It develops, builds and operates renewable energy

Energy 2.80
production facilities.

Commerce and
1.80 It is an online shopping platform.
Shopping
Commerce and

Source: www.disfold.com
1.80 It is a food ordering and delivery platform.
Shopping

Education 1.40 It is an online education services provider

Commerce and
1.10 It is an online food and grocery store.
Shopping
Logistics 0.93 It is a logistics and supply chain services company.
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12
Ranking Framework of India
▸ Ranking Framework was introduced in 2018.
▸ It was introduced to encourage states and UTs to promote good business
practices for startups.
▸ In 2019 there were active participation of 22 states and 3 Union Territories.
Madhya Pradesh
▸ The results of the 2nd edition of States’ Startup Ranking were announced on
11th September 2020.

Maharashtra
Gujarat
Telangana

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Best Performer (State) Top Performers

Gujarat Karnataka
The Government of Gujarat has taken several initiatives in The Government of Karnataka has taken several initiatives in
establishing: developing:
▸ In identifying regulatory issues from disruptive sectors through ▸ Futuristic policies to support new disruptive technologies.
proactive mechanism.
▸ Regulatory committee; for reviewing the challenges faced by
▸ One of the largest incubators in the country. startups working in emerging technologies.
▸ The Student Startup and Innovation Policy. Its objective is to
increase the capacity of premier educational institutes.

Kerala
Best Performer (Union Territory) Institutional support for women-led startups, including seed funding,
pre-incubation support and special subsidies.
Andaman and Nicobar ▸ Robust venture funding mechanism for startups.
The Union Territory of Andaman and Nicobar Islands has taken several ▸ Support from various government departments.
praiseworthy initiatives. Some of them include:
▸ Culture of Innovation
▸ Startup warehouse by Department of IT, in association with the
Industries Department and Society for Promotion of Vocational
& Technical Education
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Leaders Aspiring Leaders

Maharashtra Telangana
Maharashtra State Innovation Society to encourage innovative Telangana is known as “WE Hub - a women focused incubation
approaches and create favorable environment for innovative center”
businesses.
Uttarakhand
Odisha
Strong online mechanism to deal with regulatory issues faced by
A State Startup Policy and a Biotechnology Policy startup

Rajasthan Haryana
iStart Rajasthan – a single window resource for investors, Angel Investment workshops in alliance with Startup Hub Gurugram
incubators, startups, accelerators and mentors and Hartron Innovation

Bihar Jharkhand
Bihar is known as “department of Industries” Department of Information Technology & e-Governance

Chandigarh Nagaland
Forming a single window online system to obtain industry Nagaland Innovation Fund in alliance with leading international and
approvals and clearances national investors; wherein the state actively invests with matching
capital.

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Emerging Startups Ecosystem
Chhattisgarh Uttar Pradesh
Collaboration with local core industries for developing technology Information Technology & Electronics Department
smart solutions for traditional industries.
Assam
Himachal Pradesh A large network of mentors comprising senior officials from
Special Incentives to boost women entrepreneurship government and industry

Andhra Pradesh Delhi

Building cohesive partnerships to foster growth of the startup A strong network of incubators through academic institutions
ecosystem across the NCT

Tamil Naidu An effective mechanism for awareness and outreach through boot-
camps and hackathons
Department of Medium, Small and Micro Enterprises
Mizoram
Madhya Pradesh
Conducting events for startups, including bootcamps, hackathons
Futuristic policies to support disruptive and new technologies in and Grand Challenges
startup ecosystem
Sikkim
A comprehensive and time-bound grievance redressal mechanism
for public procurement Commerce & Industries Department

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Start-up growth till Sep 2020
The entire
By the start up
department for On an ecosystem
simplified for the
Promotion of average raised
start-up
industry and funding
ecosystem in
internal per between 2014-
India
trade(DPIIT) start-up 2019**

of
India is home to the total
India is the now recognized start
have a up have reported
with combined start up one or more
ecosystem in policy women directors
the world valuation of
over$73 Billion*

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Types of Funding

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 Self Funding
An entrepreneur should ascertain how much Seed funding
amount he/she can contribute from his/her Self funding
Seed Funding
own pockets. It is an investment made at the introductory stage of the
startup. It helps the business to identify and create the
best direction for the startup.
Venture .

Series A
When the services or the final product
reach the market, this funding comes into Venture Series A Series A investment, being the very first round of
picture. funding, doesn’t ask for external funding. At this
stage, startups have formulated a specific plan
for their service or product. It is majorly used for
improving the brand credibility and marketing.

Series C Series C
Series B
Series A startup can receive as many rounds of investment as
When a business relies on Series B B possible, there is no certain restriction on it. However,
investment, it portrays that the product is IPO during Series C investment, the owners, as well as the
marketed right, and the customers are investors, are pretty cautious about funding this round.
actually buying the product or service, as
decided earlier. Such funding helps a Types
business in paying salaries. IPO
Of When a startup decides to raise funds from the public
including institutional investors as well as individuals, by
Funding selling its shares, it is known as an IPO (Initial Public Offering).

50
Sources of Funding
20
 Bussiness Incubators & Acc
Business incubators (or "accelerators") generally
focus on the high-tech sector by providing support for
new businesses in various stages of development.

PERSONAL INVESTMENT LOVE MONEY

When starting a business, the first investor The money loaned by a parents,
should be oneself—either with their own cash friends, spouse or family. It is the
or with collateral on their assets money which will be repaid later as
the business profits increase.

GOVT. PROGRAM ANGEL INVESTSMENT

There are various Government agencies
Angels are generally wealthy
providing financing like subsidies and grants.
individuals or retired company
executives who invest directly in small
firms owned by others

BANK LOAN AND NBFC VENTURE CAPITAL

It is the most commonly used source of funding for An equity position is taken by Venture
small and medium-sized businesses. Consider the capitalists in the company. It is taken to help it
fact that all banks offer different advantages such as carry out a higher risk but promising project.
customized repayment or personalized service. This involves giving up some ownership to an
external party.
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“
Impact of COVID19

22
The Indian startup ecosystem has seen a lot of success in the past years. However, this flourishing growth saga
was suddenly hit by the COVID roadblock.
The global pandemic has taken a lot of lives along with crashing the economy of most of the countries. There is
no way that the startups could retain such a hit. Startups were hit direfully as compared to Big Businesses.

9,300 4,00,000 15%

Number of Startups; 2019 Total Direct Employment Growth in 2019
COVID19
Impact Falling Revenues
60% of B2C Startups are facing closure. 92% of Startups facing a decline in
revenues.
40% of Startups are temporarily shut or winding
up operations.
62% have seen 34% have seen
revenue dip revenues
Cash Reserves

0-3 months 70%

more than 40% plummet by over
3-6 months 22% 80%
9+ 9%
months
70% of the startups have runway less than 3 months Source: Nasscom
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 Stress during COVID19
Technology Upgradation/Product
Funding Roadmap Development
Funding Shortage is felt by most of Startups have been challenged by the need
the startups and can affect long to quickly upgrade their existing tech
term sustainability infrastructure and issues specific to
product development & enhancement.

Growth & Business Development

The most impacted area by COVID;, most
of the start-ups saw a decline in the Business Operations
pipeline of new projects and scaling.
Issues like shortage of raw material,
payments, lack of customer connect due
to travel restrictions were faced by
businesses.

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 Some more Affected Area
Steps taken to address impact High impact areas in Business Operations

Employee right sizing 13%

Account 66%
Receivables
Switching to low cost vendors 24%

Travel 58%
Restriction
Pay cuts 53%

Order 40%
Reduction in marketing spend 65% Cancellations

0% 10% 20% 30% 40% 50% 60% 70% 0% 20% 40% 60% 80%

Reduction in
Manpower Crunch Low Revenue Delays in Payment
Marketing Expense

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 Emerging Opportunities
EdTech Healthcare
It is expected to grow at a CAGR of 52% to As the global pandemic had spread in the world,
become a nearly Rs. 150 Cr. industry by 2021. the sector boosted and came into action for
All of it because of school closure and lack of remedial actions to the deceased. 40% of the Tech
online classes. startups consider Healthcare as a big opportunity.

E-Commerce Social Media

The Rs. 62,800 billion Indian retail market is the With people locked in their homes, users were
fourth largest in the world and is largely browsing 53% more on Facebook and 32%
unorganized. About 13% respondents bought more on Instagram. Twitter has reported that
online for the first time, while about 40% bought daily usage is up 23%
more online during the lockdown.

Artificial Intelligence OTT Video Streaming Market

India’s AI spending will grow from $300 The OTT sector in India witnessed a 30%
million in 2019 to $880 million in 2023 at a rise in the number of paid subscribers,
CAGR of 30%, said an International Data from 22.2 million to 29.0 million between
Corporation (IDC) report. As per IDC's March and July 2020. According to a
2020 Covid-19 Impact survey, half of India report, the OTT market in India is set to
enterprises plan to increase their AI reach from Rs. 42.50 billion in FY19 to Rs.
spending this year 237.86 billion by FY25,.

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27
Valuation Methods
First Venture
Chicago Capital
Method Method

Valuation Score
Berkus Method Card
Method of Method
Startups

28
Berkus Method
▸ It was created by Dave Berkus, an American angel investor .
▸ It uses qualitative and quantitative factors to estimate the valuation based on five elements – sound idea,
prototype, quality management team, strategic relationships, product rollout or sales.
▸ A monetary value, which is set up to $500K, is assigned to each quality driver and the values shall be
adjusted depending upon the priority of a new business.

The Berkus Method will not be relevant once the startup starts generating revenue, but it can provide a
simple approach to determining your value while in negotiations with investors.
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First Chicago Method
▸ It is a business valuation approach used by private equity investors and venture capital for early-stage
companies.
▸ This model combines discounted cash flow and multiple-based approach.
▸ It evaluated the risk involved in forecast cash flows using 3 different scenarios:

a) Base case is based on less delays and growth to complete the projects, requiring higher costs.
b) Best case is normally compliance with the Business Plan.
c) Worse case relates to a perpetuation of the status quo. Sometimes the planned operations may involve
initial losses and result in a value below the additional capital needed.

Using a rate of return required by venture capitalists, the three values are weighted by the probability of
each Scenario occurring and then added together. An estimate of the additional equity required is then
deducted to calculate the Net Income Value.

30
Venture Capital (VC) Method
▸ It is most commonly used in the venture capital industry and for valuing startups. The idea is that Venture
Capitalists and other investors shall realize their returns after an exit (also called ‘liquidity event’) and they
expect a rate of return on their investment. The same can be expressed as:
Expected Return on Investment (ROI) = Exit Value / Post-Money Valuation
Where,
Exit Value – expected value of a company to be sold
Return on Investment – expected rate of return
▸ First, an expected exit price for the investment is estimated.
▸ After that, post-money valuation is calculated by accounting the time and the risk the investors takes.
▸ The return on investment can be estimated by determining what return an investor could expect from
that investment with the specific level of risk attached.
▸ This method is often used in valuing pre-revenue companies where it is simpler to calculate an exit value,
once, certain milestones are reached.

31
Venture Capital (VC) Method
▹ Let’s understand by taking an example of a company which is expected to generate a revenue of USD 10
Million after one year and sale multiple of 2x for a similar listed company. This implies the exit value shall be
USD 20 Million.
▹ This exit value should be discounted by using an expected rate of return, say 20%. This means,
▹ 20*(1+20%)^1 = 24 (post-money valuation)
▸ Let us assume, if the investor would invest an amount of USD 4 Millions, then the pre-money valuation will
be USD 20 Millions.
▸ The investor’s stake would be – USD 4 Million / USD 24 Million = 16.67 %

This is to be noted that estimation of exit value and Return on Investment (ROI) is a subjective assumption.
The VC method is not a complete model to value early-stage companies. However, it is broadly used as a
thumb rule and a starting point for more thorough studies as this method is simple and straightforward.

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Score Card Method
Target
▹ Score Card method is also known as Comparison Factor
Maximum
Company's Factor
Bill Payne Method and one of the most Range
Score
preferred methods used by angel Strength of the team and management 30% 125% 0.3750
investors. This method compares the Size of the opportunity 25% 150% 0.3750
Product/Technology 15% 100% 0.1500
startups to other funded startups in
Competitive Environment 10% 75% 0.0750
similar stage of region, stage and Market/Sales/Partnerships 10% 80% 0.0800
market. Need for Additional Investment 5% 100% 0.0500
Other Factors 5% 100% 0.0500
▹ An average pre-money valuation is Total 1.1550
determined for pre-revenue startups Average Pre-Money Valuation of Other Startups USD 2 Million
by adjusting the average valuation of Pre-Money Valuation of Target Startup USD 2.31 Million
selected startups.
This method is indeed subjective as the determination of target
▹ Assuming, average pre-money
company’s score and range of comparison factor is a subjective
valuation of other funded startups to
matter.
be USD 1.5 Million.

33
Services
Valuation Immovable Assets (Real Estate)
▸ Valuation of Land, Building Residential / Commercial / Industrial Estates
Business & Business Interests ▸ Valuation of Infrastructure Assets, Expressways / Toll Ways &
Specialized Assets
▸ Business & Equity Valuation
▸
▸ Valuation of Start-up / IPO / REIT / M&A, Leverage Buyout Valuation
▸
Valuation for Capital Gain Tax, Stamp Duty, Litigation & Dispute
▸ Valuation of ESOPs and Sweat Equity
▸
Impairment Studies for Financial Reporting, PPA, Cash Generating Units
▸ Valuation for Tax, Capital Gain, Transfer Pricing
▸
Mines, Mineral Advisory and Valuation
▸ Valuation for Financial Reporting, Fairness Opinion, Purchase Price
▸
Valuation under Insolvency & Bankruptcy Code (IBC)
Movable Assets (Plant & Machinery)
Allocation (PPA) for M&A
▸ Determination of Swap Ratio under Merger and Demerger
▸ Valuation of Industrial Assets and Plant & Machinery
▸ Valuation of Inventory / Stocks and Debentures / Receivables ▸ Valuation of Infrastructure Assets & Specialized Assets, Power Plants
▸ Litigation and Dispute Support
▸ Fairness Opinion, Purchase Price Allocation for M&A
▸ Impairment Studies for Financial Reporting, Cash Generating Units
Intangible Assets ▸ Valuation under Insolvency & Bankruptcy Code (IBC)
▸ Valuation of Brands, Goodwill, Trademark, Copyright, Patents, Other
Intangible Assets & Intellectual Property Transaction Advisory
▸ Valuation for Financial Reporting, Fairness Opinion, Purchase Price
Allocation (PPA) for (M&A) ▸ Buy side due diligence and closing due diligence
▸ Impairment Studies of Intangible Assets ▸ Vendor due diligence and vendor assistance
Financial Instruments ▸ Sale Purchase agreement (SPA) and Business Transfer Agreement (BTA)
▸ Valuation of Financial Securities, Instruments & Derivatives
▸ Assistance in deal negotiation
▸ Valuation for M&A Transaction, under Insolvency & Bankruptcy Code

34
Services
Risk Consulting Risk Consulting
Strategic & Risk Advisory Services ▸ M&A Advisory:
▸ Techno Economic Feasibility Studies
• Sell Side, Buy Side
▸ Economic Viability & Financial Appraisal
• Domestic & Cross Border
▸ Business Plan Review
▸ Partner, Joint Venture & Strategic Alliances
▸ Government Disinvestment & Privatization
Technical Support Services ▸ Fund Raising – Equity, Mezzanine, Structure Finance & Debt
▸ Lender’s & Investor’s / Independent Engineer Services ▸ Distress Investment Banking – One – Time Settlement, Priority and
▸ Technical Due Diligence, Technical Opinions Interim Funding, Rescue Financing and Buyouts
▸ Chartered Engineers Opinion & Certification
▸ Project Cost Investigations
▸ Project Appraisal & Monitoring DISPUTE & LITIGATION SUPPORT
Agency for Specialized Monitoring (ASM)
▸ ▸ Valuation Services
▸
Term Loan Monitoring
▸ Damages & Loss of Profit Assessment
▸
Working Capital Monitoring
▸ Independent Expert Testimony
Cash Flow Monitoring
▸ Anti – Trust & Competition Advisory
Financial & Treasury Risk Advisory ▸ Post – Acquisition Disputes, Joint Venture & Shareholder Disputes
▸ Assessment Of Credit Risk, Market Risk & Interest Rate Risk ▸ Civil & Construction Disputes, Real Estate Disputes
▸ Assets Quality Review & Stress Testing ▸ Intellectual Property Rights Dispute
▸ Assessment of Expected Credit Loss
▸ Assessment of Asset Liability Management & Liquidity Risk

35
 Office Locations
Mumbai Office Head Office, Delhi Toronto Office
NITIN A. GARG SACHIN GARG SUSHIL MALHOTRA
Mob: +91-9871174480 Mob: +91-9811722446 +1.36599.82051
Email: [email protected] Email: [email protected] Email: [email protected]
Cabin No. 18, 3rd floor, B-5, Oriental House, 1 Hollowgrove Blvd Brampton,
Wing-B, Workamp Estate, Commercial Complex, Ontario L6P1B2, Canada
Shah Industrial Estate, Gulmohar Enclave,
Saki Vihar Road New Delhi-110049
Andheri East Mumbai-400072 Tel: 011-26960167,
Tel: 022-40509215 011-26853881
Fax: 011-26853873
Gurgaon Office Bengaluru Office
SUNIL KUMAR KRISHNA PRAKASHA
Mob: +91-9711628387 Mob: +91-9632830651
Email: [email protected] Email: [email protected]
M-12/16, DLF Phase-2, Suite No. B 6, Instasquares,
Gurgaon-122002 # 151, 27th cross,
Tel: 0124-2562017 Opposite Ayyappa Temple,
Fax: 0124-2562016 6th block Jayanagar,
Bangalore-560082
Tel: 080-65700725

36
Research Team

Manager Valuation Asst. Manager Valuation Associate Valuation

Mohit Behal Adil Afaque Amit Balhra

37