Valuation and India’s Unicorns

Valuation of a business

Valuation and India’s Unicorns

Valuation of a business:

Fund raising is usually dependent on the financial model and the valuation report of a business. Valuing a start-up is a difficult process as there is little or no revenue or profits to work with. A startup faces the risk of uncertainty in respect of success, demand, resources and growth. Valuation is done to understand what is the worth of the business and at what price (% of share) should the investor provide funds.

“Business valuation is determining the economic value of a whole business or company unit.”

Valuation if often conducted when a business (established or startup) is looking to sell a portion of its business in exchange for funds. It includes an analysis of the company’s management, its capital structure, its current earnings, its future earning prospects, growth levels and overall success of the business.

For startup, the valuation would usually comprise of financials that ‘will be’ generated in the future. To eliminate the risk of uncertainty, these financials are usually presented in present value terms.

Reason for valuing a business:

A valuation report is useful in determining the fair value of the business or a particular unit. It is the market value at which a buyer might be willing to invest into your business or buy it out. But this is quite simple. Now there is a concept of intrinsic value. It refers to perceived value of the business or a particular unit based on the future earnings and growth of the business.

Different Methods of Valuation:

1. Cost Approach:

This is the simplest method of valuation. As the name suggests, the value of the business is determined based on its replacement cost i.e., what will be the total cost to set up the same business. The limitation of using this method is that it may not give the true value of the business.

2. Market Value Approach:

This method of valuation takes into account the value that is prevailing in the market. It means that what the investors are ready to pay for this business or a particular. The problem with this approach is that the business might be unique and there might not be a market price for it.

3. Asset-Based Valuation:

Under this method, the value of a business determined based on the difference between the net asset value minus the total net liabilities on the balance sheet. The drawback of this valuation is that it provides a historical value of the business and cannot predict the future growth of the same.

4. ROI – Method:

An ROI-based business valuation method evaluates the value of your company based on your company’s profit and what kind of return on investment (ROI) an investor could potentially receive for buying into your business.

5. Discounted Cash Flow Method:

The discounted cash flow valuation method, also known as the income approach, for example, values a business based on its projected cash flow, adjusted (or discounted) to its present value. The DCF method can be particularly useful if your profits are not expected to remain consistent in the future.

The selection of the valuation method depends on the type of business as well as the target investors determined by the company.

India and its Unicorns:

A unicorn is the term used to describe a privately owned startup business with a valuation of more than $ 1 billion. As of March 2021, there are around 600 such unicorns around the world with a cumulative valuation of over $ 2000 billion. India has 35 unicorns with a cumulative valuation of $ 80 billion. Below is the list of some of the known and successful unicorns: