valuation approaches or methodologies are based on the evaluation of assets,
revenue, profitability, etc. of the business. However, in case of startups,
they neither have an asset base nor revenue. For example, the valuation of
Airbnb is over twice as much as that of Hyatt – although Airbnb is effectively
the world’s largest hotel chain without owning a single hotel room! Hence, the
exercise of valuing a startup poses various challenges to the valuer.
In effect, valuing a startup is an exercise of calculating the best
estimate of the sum of its parts, i.e., all its resources, intellectual
capital, technology, brand value and financial assets that the startup brings
to the table. In this article we will cover the basics of startup valuation
progressing over stages of financing, need of valuing start-ups and methods of
valuation, followed by a case study in the Indian market.
So what does a
WHAT IS A STARTUP?
A startup is a
business enterprise incorporated to solve a problem by delivering a new product
or service under conditions of extreme uncertainty. It is a company typically
in the early stages of its development.
entrepreneurial ventures are typically started by one to three founders who
focus on capitalising upon a perceived market demand by developing a viable
product, service or platform. The founders’ effort is to turn their idea into a
repeatable and scalable business.
In the Indian
scenario, the Department for Industrial Policy and Promotion (DIPP) issued a
notification in February, 2019 defining a startup as an entity which is in
existence up to a period of ten years from the date of incorporation /
registration with a turnover for any of the financial years since incorporation
/ registration not exceeding Rs. 100 crores and working towards innovation,
development or improvement of products or processes or services or, if it is a
scalable business model, with a high potential of employment generation or
wealth creation – provided that an entity formed by splitting up or