Advisors · Equity

To define Startup valuation for ideation staged startup

Naitik Chandak Hiring CXOs !

October 20th, 2019

Hello all,

We are India based startup and right at moment are on idea stage. We got some government support but we are also raising some amount from the angel investors.

The problem is, my core team is from technology background and we are not sure how to prepare financial plans for startup valuation while pitching to the investors.

I got to know that Discounted Cash Flow model is best for early stage startups, but I need some strong advise which model should I go for and how to make sure it will work.

If anyone knows here or wants to connect for the same, please let me know to sort it out.

David M

October 22nd, 2019

You need more than revenue and expense projections. That is the bare minimum and will not impress investors. You need sales forecast and COGS-Income Statement, Expenses-Income Statement, Receipts and Disbursements-Cash Flow Statements, Assets, Liabilities and Equity-Balance Sheet. Additionally you need financial footnotes explaining your projections. If you do this you will be ahead of 95% of entrepreneurs who do the bare minimum of revenues and expenses. I rarely see this but when I do, the entrepreneur has usually had success at raising funds, and it greatly aids me with connecting and building out the operational strategy to scale and gain additional investors. Feel free to connect to me and we can chat more about it. Don't get caught in the entrepreneur mistake of dismissing any part of the Business Plan. It is all important and all connects and must function cohesively. Do not worry about valuation at this stage. That will come. Get the solid business plan first.

Paul Garcia marketing exec & business advisor

October 20th, 2019

There are easy-to-follow templates for 3-year expense and revenue worksheets. This is all you need in terms of financials.

What is much more important is that you address all the risks in your enterprise. Investors do not invest in ideas. They invest in plans. Those plans need to be well-researched, validated, and comprehensive.

Your value today is zero, so don't sweat it your valuation. Instead, focus on how quickly you will be able to start generating revenue, how you have tested your assumptions, and carefully catalogued and minimized your expenses because you have completed your research and validation steps before asking to spend anyone else's money. Additionally, they will want to see what financial contribution the current ownership has made (not just labor), and they will likely want a personal guarantee.

Try picking up a copy of Alejandro Cremades's (creator of CoFoundersLab) book, The Art of Startup Fundraising. It will discuss the seven types of funding that are available to businesses, and what the expectations attached to each type of funding are.

Dane Madsen Organizational and Operational Strategy Consultant

October 21st, 2019

I advise many startups, usually with team technology, and traction, at very early stages. Establishing a valuation is impossible. As @Paul Garcia states, your valuation at the idea stage is zero. If you believe you need outside capital to build the company, the most effective way is to use a SAFE or similar instrument where valuation is deferred until you have adoption and revenue.

David M

October 23rd, 2019

Bottom line with all of it, financials mean absolutely ZERO if your business plan does not back it up. And if your business plan is great but has no financials, your business plan will have little credibility. Too many entrepreneurs do one or the other, or one is half hazard put together...usually financials. I don't know of any investors who invest in "ideas" with no business plan, and that is frightening if a government is doing it with tax payer dollars! If you found investors who invest in ideas alone, congratulations! You found the dumbest investors on the planet, or the least experienced, or careless. Doesn't mean you both can't have success but there is little substance at the idea stage. Its like telling someone you want to build a custom 5,000 square foot home that will be beautiful and asking them for money and not showing them any blue prints. Not good or responsible business.

Ravi Kiran Salestech Founder, Discovery Stage Investor, Business Model Mentor, #JTBD Fan, Ex Advg CEO @ravitwo

October 23rd, 2019

Hi Naitik, I am in India, building my own tech startup, have run my own accelerator that has produced one of India's best known unicorns [now a decacorn] and have invested in over 40 start-ups so far. So I empathise with your situation. The only difference is my background is business, not tech.

I can see two kinds of answers to your question, given by all the good people here - 1. what instrument 2. what valuation.

If you were in the USA, right now SAFE would be a good instrument for you to use. But the Indian regulator hasnt yet cleared SAFE, so be careful if anyone offers you that instrument. I know at least 2 start-ups in India who are stuck because they agreed to SAFE.

That means you can either go for equity dilution or convertible note [called CCD or OCD in India]. Equity dilution is easy to understand although there would always be discussion about the valuation. CCD/OCD defers the discussion on valuation to a future date, but may come with some regulatory issues in India. You need to talk to your investors on both options, understand the legalities surrounding both and then take a call. Like in all start-up decisions, there is no black and white, just many shades of grey. And oh, you must get into the legalities and the language of the document yourself, it will help you a lot as you build.

As an angel investor, I prefer equity, because it's a simple. I know many founders think deciding on valuation too early is not wise, but my experience says otherwise. In fact thinking about valuation makes a founder learn about new things.

And no, DCF is not a method for valuing an early stage start-up, let alone idea stage. In fact, I wonder if you should raise any money at all at idea stage, I would encourage you to rethink. If at all you need outside money, think about taking small personal loans from friends and family, or a single investor. The more people you take money from, the complex your life will get.

Having said that, I dont know what you are building and how much first round money you need, so I keep my mouth shut after this. Otherwise, this reply may become a book. :-)

P.S. Inbox me if you need more help in this area. I will do the best I can.

Paul Garcia marketing exec & business advisor

October 22nd, 2019

@David is right that there is more to it that simple expense-revenue, but the templates of 3-years projections include ALL of the other specific worksheets to which David is referring. They are also referred to in a complete business plan. I did not mean to exclude them as detail of what goes into your projections. My statement was summary.