Co-founders and the small C-Suite team including of course the CFO at startups, as much as key business leaders and entrepreneurs, are a worried lot today. There’s, of course, the on-going volatility in the global stock markets adding to the overall gloom and negative business sentiment, but what’s been troubling them most has possibly been about wary investors increasingly shying away from early stage startups, while even some of the bigger names in the startup entrepreneurial ecosystem are beginning to feel the pressure of raising money.
One of my techie friend started a venture with two of his mates and they had a product ready petty soon. This was relatively easy as they had the money to build the product but now the problem arises that how he would launch that product in the market? He needs money for which investors will have to come into the picture. But before going to investors, he needs to figure out the amount he requires and also value the product. And he doesn’t have a clue about how to do it.
Valuation is an important part that a founder or an executor always has in his mind. Valuation matters to investors as they are getting the company share in lieu of the money they are going to spent.
Let us see this situation with the help of an example:
In this above example, founder is looking for a seed investment of Rs. 1cr. And the investors invest Rs. 1Cr. in lieu of the 10% of the equity. Typical deal, the pre- money valuation will be Rs. 10 Cr. But this does not mean that the company has Rs. 10Cr. worth now. Owners probably could not sell the company for that amount.
“Valuation at the early stages is a lot about the growth potential, as opposed to the present value.”
How to determine valuation?
Determine the value of the company at the seed/early stage is commonly described as the art of describing the growth rather than a science.
Let us see what factors does influence the decision of the Investors:
Let’s discuss these points One by one:
- Hotness of the Industry:
Investors travel in packets just like they are going behind with others who already take leads in the market. If something is hot and others are already investing in the industry, they may pay a premium so as to stand in that particular industry.
- Pre-Valuation Revenues:
Revenues are more important for the startups. Revenues make the company easier to value. In the initial stage if you have a functioning product and up to the most the product is yielding the revenue from the market, then this could be the most effective point that will affect the investor decision.
- Reputation of the Team:
Before going to take a round for investment one must build his/her authority or the image in the market. The most important thing what a VC looks is the founder capability and his image in the industry or belongs to the particular industry.
Traction is a sign that your company is taking off. Traction is basically quantitative evidence of customer demand. You can always get more traction
In other words, traction is growth. The pursuit of traction is what defines a startup.
Out of all things that you could possibly show an investor, traction is the number one thing that will convince them. The point of a company’s existence is to get users, and if the investor sees users – the proof is in the pudding.
- Distribution Channel:
Even though your product might be in very early stages, you might already have a distribution channel for it. This will help a lot for the VCs to get to know what the startup is and can become the turning point of the decision of that investor.
Methods of doing Valuation
Some of the valuation method that may be used in the valuation of a start up or the methods by which the valuers’ find out the valuations of the businesses:
- Discounted Cash Flow Method:
This Method is the most usable and appropriate method to value the company in the initial stage. The discounted cash flow method takes free cash flows generated in the future by a company and discounts them to derive a present value (i.e. today’s value).
This Method mainly depends on the free cash flows that you are going to earn in the future and affected by the various factors which includes the inflations and unstabilities that will come in the market at the future stage.
- Venture Capital Method:
The venture capital method reflects the process of investors, where they are looking for an exit within 3 to 7 years. First an expected exit price for the investment is estimated. From there, one calculates back to the post-money valuation today taking into account the time and the risk the investors takes.
- Market comparables method:
The market comparables method attempts to estimate a valuation based on the market capitalization of comparable listed companies.
4. Decision Tree analysis:
Decision trees are used to forecast future outcomes by assigning a certain probability to a particular decision.
The name decision tree analysis comes from the ‘tree’ like shape the analysis creates where each ‘branch’ is a particular decision that can be undertaken.
Does a startup need high valuation at initial stage?
It is not compulsory. When a startup gets a high valuation for the seed round, then for the next round they need an even higher valuation and, that means the startup needs to rise up in his position a lot. There are two ways of looking at this:
- GO BIG or GO HOME: It means that in the seed round raise as much as possible at the highest valuation possible, spend all the money fast to grow as fast a possible. If it works you get a much higher valuation in the next round, so high in fact that your seed round can pay for itself. And, if it doesn’t works then there is also no problem.
- Raise as you Go: Raise only that which you absolutely need. Spend as little as possible. Aim for a steady growth rate. There is nothing wrong with steadily growing your startup, and thus your valuation raising steadily.
In conclusion, market forces right now greatly affect the value of your company. These market forces can do a favorable job or unfavorable job for the company in the field of the growth and yielding revenue from the market for the appraisal of the company. The best thing a startup can do to arm itself with a feeling of what values are in the market before you speak to an investors is by speaking to other startups like yours that have raised money and see if they’ll share with you what they were valued and how much they raised when they were at your stage. This will help a startup in getting better valuation at an early stage.
Source : Yourstory.com website
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One of the biggest challenges that SMEs face is about hiring an expert help. As business owners, we are told to do both, to manage costs and to get help rather than be an expert in all the things.
One area of expertise is often overlooked by SMEs is the area of strategic financial management. As small business grows, their needs tend to outgrow what their book-keeper or accountant can offer. And their success and on growing growth is likely to be constrained by not having access to the right level of financial advice.
What is an outsourced CFO?
The problem is the company will only realize when the information needed to support the decision making in the business is not available – Financial guidance/advice. A CFO- CHIEF FINANCIAL OFFICER is a professional found in the large corporate sitting at the top of the finance and administration hierarchy that reports directly to the CEO.
Need assistance in making your business happen? OUTSOURCED CFO aims to help your company navigate its financial function. As new and young companies cannot afford a qualified CFO to navigate this facet their business, hence outsource CFO seems to be best option.
What is the cost of an outsourced CFO?
OUTSOURCED CFO works closely with you to customize your financial solutions for the business. The solutions provided are cost effective and helps increase your business profitability. Depending on your company’s requirements, and the services you render the cost varies. You can hire an outsourcing service package or can have it customized as per your company’s needs – whichever ways; they are the most affordable options than hiring an in-house CFO.
Which is a good option, in-house CFO or an outsourced CFO?
SMEs can get high level of financial guidance without cutting a big pay check. If you are like most of the small business owners, your CFO is most probably either non-existent or underutilized.
OUTSOURCE CFO is a good investment for your business- Instead of hiring a full time in-house CFO; you can choose to outsource your needs by OUTSOURCING CFO Assignments. An outsourcing arrangement helps you to:
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- Implements professional inputs
- Get an access to professional insights
- Create hassle free operations
What are the benefits of an outsourced CFO?
When you OUTSOURCED CFO services, you can choose to have the CFO resource work as per your needs. An outsourced CFO can contribute to the growth of the company by:
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- Proactively streamlining and drive internal business cash flow by managing working capital and improving profitability
- Streamline business accounting and ensure that bookkeeping is done in the manner if it is required for year-end financials and tax time.
- Develop, implement and process that ensures consistently accurate accounting.
- Develop forecasting tools to help with planning and analysis for the business.
- Contributing to the activities related to the revenue generation such as extending channelized support to the marketing efforts, raising capital, coordination with decision making members etc.
- Implementing and improving system of communication between the key elements concerning the business like advisory boards, bankers, investors, etc.
What to look for when selecting an outsourced CFO?
Hiring an OUTSOURCED CFO is an important yet tough decision when it comes to your start-up financial management, while keeping the cost structure flexible. However, it matter a lot who you hire.
It would be easier to find the right fit, if you are clear about your company’s requirements. The important thing is to find a right OUTSOURCED CFO that can meet your current needs and grow with the company. Begin with these questions:
- What specific experience do you have working with start-up businesses? Start-up demands having a unique skill-set therefore, they’ll need who is expert at financial projections, accounting credentials and managing budgets. Also, the start-up CFO needs to have good negotiations and strategic planning skills and extensive contacts with potential funding sources.
- What is your domain expertise? Different professional services may specialize in couple of specific areas. Ensure that the one you consider can offer you full service support.
- How do you work with the clients? You are trying to understand if this person has the capability and desire to partner with you in the development of your company’s financial structure. This encompasses an ability to wear multiple hats and flexibility to adapt to quickly changing circumstances.
Your relationship with your OUTSOURCED CFO should be like trusting professional that helps you in all the aspects of the business.
How will an OUTSOURCED CFO contribute before a company goes for his first round of funding?
SMALL-MEDIUM BUSINESSES that hire an outsourced CFO get the expertise Chief Financial Officer without having to pay for the cost that typically commands. Before the company goes for his first round of funding, an outsourced CFO can help with:
- Well-documented business plan covering all important levels of business with appropriate assumptions in line with industry structure and economy.
- A well-defined financial plan plays a crucial role in evaluating early stage venture; hence the financial documents like P & L Accounts, Balance-sheet and Cash flow are the most important paper work of this entire exercise.