July 2019

VALUATION OF STARTUPS

Lata R. Gujar More
Chartered Accountant

Generally, the 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 startup mean?

 

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.

 

These 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 reconstruction

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