Science behind Valuation

Coverage by Bhat Dittakavi of Variance.AI on “Science behind valuation” on 16th Mar 17
1) Uday Pilani from 50K Ventures
2) Ramesh Rao from THUB
3) Neel Vohra from TFund
Moderator: Ankur from THUB

Neel Vohra: Acceptance level is the key for investor. There is value in capturing the market and becoming a dominant force in the market like Facebook did.
Ramesh Rao: Market capture strategy
Demand outran the supply for Facebook as they had to add more servers faster and hence needed more money faster. Facebook and Flipkart are examples here.
Niche markets have to grow to become big market. Facebook started with universities and many never expected it to grow the way it has grown. Google and Facebook didn’t plan becoming ad marketing companies. Once they got the capture, they figured it out.
Market strategy has to fit with technology strategy. In software and app development, execution has to be flawless.
Q) Difference between strategic investor and VC  investor?
Neel) VC always comes with exit in mind. Corporate strategic investor may not come up with that mindset.
Ramesh Rao: CISCO lets you spin with a technology. They fund but they let the tech owner drive independently. They pull the public money invested in CISCO and funded these offshoots. Intel Capital also puts the money in startups but their valuations are not as high as the ones by typical VCs.
Q) Are valuations overhyped in India?
Uday) Valuations were increasing in India as people were still figuring out the size of the market. Market acquisition cost is the game Uber and Ola paid and now increased the price.
Neel) SoftBank funds Snapdeal again because they have no choice. They take a hit on the valuation and invest again out of choice.
Q) How M&A happens?
Ramesh Rao) Karl Icahn buys cocmoanird and restructured them and exists them at a premium.
Art of war is a good book.
Sometimes M&As happen to kill the competition. Intel goes to banking Guy with some strategy and structure in such a way that risk is mitigated for all.
I know unorganised paper as companies in elevators got acquired and consolidated by a guy and he sold that monopoly for $400M in China.
Q) Where do you invest now?
Neel Vohra) We are looking to invest $10000 to a $1MM early to pre-series and Series A. If it is deep tech, we are ok for no revenues. If it is ecommerce, we look for revenues. We give weight in promotor background. Deep tech companies end up selling to customers in the west.
Sunil) Getting money is a nice headache but still headache. Do due diligence on the investors. Pick the one that matches your industry. Rigor and Candor are key. Investors never know you and hence candor is the key. Domain specific knowledge of investor is the key.
In elevator pitch, 5 seconds and three statements and if they don’t respond, leave them. 5 minutes and 10 slides into the full pitch presentation, they are off. Increase the odds by trying to do the right things.
Q) Does location make a difference in valuation? Delhi investors look for ROI. Bangalore investors look for technology.
Neel) I am biased for Telangana as we are from THUB. I don’t see location drive valuations.
Uday) Mumbai being a financial capital, HNIs and bank heads look for Mumbai startups. They get wider audience. This is the reason perceptions com but idea rules.
Q) Does a syndicate give better valuation or two member investors?
If someone is representing the group, he knows what the group wants. He makes the call. Sometimes it is good for founder to deal with less number of investors. Alignment is the key. Strategic mentoring is also important. Don’t just look for the money.
Sunil) It boils down to personalities. It can be trickier than wife-husband relation. Syndicate of angels is common. They hear the pitching and do voting based decision. They will have one person on the board. Single investors are better for better personal connection. Think from the perspective, can this investor help me through his network raise more investments in next rounds? If you  don’t make money, he will blame you. If you did, he will take decisions. Younger founders make stupid mistakes that elder investors keep things on control. If it is a syndicate, you may get two people on board. Think through. It is not money, it is management and strategy.
Neel) Brand of investor works for you. In the VCs phase, it is not just money. They have to pick and choose. Many VCs means, multiple agendas one gas to handle.
Q) Is it good to get funded through entrepreneur who turned investor?
Sunil) Early stage founders should seek such investor who can handhold. Early stage challenges are operational. Later stage challenges are to do with working capital and growth capital. In this fund if funds help you raise big.
Uday) Networks have entrepreneur and experienced people on board.
Q) How to value a startup with scientists? 
Ramesh) What is it worth to whom? X is innovation, discovery and research. Y is markets and outreach. There is no correlation. Einstein died poor and Mark Zuckerburg is rich.
Collaborative work among scientists led to Netscape but it died. We can’t say.
Problem solving ability is value to google so they bought
Are you monetising?
How much you are monetising? 
By when will you monetise the investment?
These are three questions I ask before investing.
Q) When do you raise?
Neel) When you know you will exhaust cash.
Sunil) If I am entrepreneur, I would never go for VC. Ideal situation is when VC helps you grow viral, good.
Uday) Stretch with your own funds. More miles you walk, greater valuation you get.
Q) How much to Part with?
Uday) Cofounders shall be clear on who brings what. They shall spell it out. They assume 50-50 split. When the company gets traction, founders disagree on equity.
Sunil) Founder owns shares. Founders have fiduciary responsibilities. First 5 employees are most important. Stock options changes from 5 to 10 employees. Lab prototype and production prototypes are key. Split equally and focus on releasing the prototype out. Tony Hsieh of Zappos figured out to build a shoe company that sells to women online and sold it to Amazon for a billion. Get it out.
Uday) The day one cofounder becomes, the rest of them gang up.
Demanding 51% means it is an indication that you don’t trust others and it may work against you.


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