Growth Valuation for Raising Capital: For Founders & Finance Managers

Most start-up founders face the need to raise growth capital to scale up their enterprise. But a founder almost always has multiple questions in mind during this pivotal movement.

These questions include

How much growth capital should I raise?
What is the current fair valuation of my start-up?
What is the stake dilution I should plan to raise growth capital?

Flument’s Growth Valuation Indicator can help founders navigate this crucial stage easily, by making the estimation of fair value Simple & Affordable.

The Path to Understand Valuation

The value of a firm is a function of three variables—its capacity to generate cash flows, its expected growth in these cash flows, and the uncertainty associated with these cash flows.

- By Aswath Damodaran

It is always seen that while some start-ups raise money at insane valuation; many others struggle to close rounds even at rock bottom valuations. Its true that many of these valuation decisions are driven by comparative benchmarking and market dynamics. Its also true that some of the deals are driven by raw emotions (like ensuring business survival, fear of missing opportunities etc).

At all fund raising stages, founders often grapple with the estimation of both fair value and perceived value for their startup.The perceived value is usually high in technology startups, where the company is operating in an untested market OR growing at a fast pace compared to its competitors. But a good understanding of the "intrinsic value" of the business, along with the “perceived value” as seen by the broader market; can help a founder extract better value during fund raise discussions with investors.

A good understanding of fair value and perceived value of the business can help the founder close the fund raise at a realistic valuation, and terms of dilution that are favourable to them. Before delving more into valuation let's look at the type of Growth Capital available for founders today.

Types of Growth Capital

A founder today has variety of options to raise capital. Lets look at the popular options in the diagram below.

Many founders bootstrap or tap into friends and family in the initial stages of the enterprise. However as the business prospect improves, equity dilution (via seed capital, venture funds etc) are other popular ways to raise capital. At this stage, the founders negotiating strength with investors will often depend on the strength of the concept or any positive customer traction that can be showcased.

Raising funds from investors would often result in the dilution of founders equity in the enterprise. If the founder is not interested in diluting equity, he/ she can also explore alternative options, such as debt and bank loans. However in the initial stages of an enterprise, availing these bank financing options require pledging of collaterals (i.e. personal assets like gold & property), can create a liability and repayment obligations that are often difficult to manage.

This makes equity dilution the preferred way forward for most founders for raising growth capital to fund business expansion. The table below gives a broad idea of the scale of the capital raise that is usually possible at various growth stages. Please note that the amounts mentioned for each stage are indicative and may change as per the operation experience & background of the founder, the value proposition of the business, the overall customer traction, and lastly the financial performance of the start-up.

How is Fair Valuation Done today?

Founders and Investors mostly do not engage valuation experts to identify the fair value of a start-up during the seed & inception stages. However as the start-up matures and requires further fund tranches to propel its growth, professional valuers (CA's etc) are brought in for the valuation exercise. These analysts look at a combination of valuation techniques (Discounted Cash Flows, Book Value, Multiples etc) to complete the valuation exercise. This valuation exercise is also done via an independent assessor (mostly during Debt & Bank Financing); and a Valuation Report / Certificate is generated affirming the valuation of the start-up.

Can this Valuation be performed in a better way?

Today valuation of a start-up is normally done at the last stages of the fund raise. This valuation exercise takes a long time frame, and is often dependant on the availability of the valuation professionals or analysts. And this exercise is usually is a inflexible & rigid activity, where the valuer uses a standard set of assumptions and variables to estimate the fair value of the enterprise.

What if the Founder can change the assumptions & variables and look at their impact on business valuation on an ongoing basis? What if the Founder can manipulate the business variables, and estimate the revised valuation without the aid of analysts & experts? This is where Flument Fair Valuation Model can make a difference.

Flument Growth Valuation Indicator

The Flument Growth Valuation Indicator, makes business valuation simple and transparent for Founders & Finance Leaders. This self-use model helps Founders and Finance Managers to independently calibrate the various assumptions and business variables, to see their potential impact on business valuation.

Flument Valuation Indicator is a Discounted Cash Flow Based Valuation Model that is shared in an MS Excel format. Flument Valuation Consultants prepare this Excel Model, after discussing the business variables that drives the Revenues & Costs, and thereby influences the P&L Statement, Balance Sheet and Cash Flows Statement. Flument Consultants also factor in the Founder’s growth assumptions in the most granular manner, that can later be independently calibrated as per requirements.

As per specific requests from founders, we also a few steps further by triangulating the business valuation using other techniques (Book Value Method, Revenue & Earnings Multiples etc). The market dynamics including competition is also analysed through relevant primary and secondary research for additional validations. Lastly, as per the unique requirements and feedback from founders and finance managers, we can also incorporate any situation specific filters & assumptions in the valuation model.

The following diagram describes Flument Growth Valuation Schema in full detail.

Flument Valuation Indicator gives both Founders and Finance Leaders not just the fair value for the start-up, but also a estimation of the range in which a deal can be concluded. If the investment negotiation has already commenced, the model can also indicate the level of under valuation or over valuation with respect to the deal price under discussion.

Flument Growth Valuation Indicator: Benefits for Founders and Finance Managers

❖ This Valuation Indicator with built- in Scenarios, gives the ability to look at the overall business potential, by easily changing the various operating variables and growth assumptions.

❖ Founders and finance leaders can gain more assurance and confidence in discussions with Investors for raising funds.

❖ Founders can prevent needless dilution of stake from any investment deal, that undervalues the company & its growth prospects.

❖ Founders and finance managers can also understand the impact of various variables on the business valuation independently, on an ongoing basis, without the constant aid of investment analysts & valuation professionals.

❖ If the founder has lack of bandwidth, Flument team can also undertake Primary and Secondary Research to understand the comparable valuation of peers & competitors in the market.

❖ Flument team can also include additional variables, assumptions or filters to customise the Growth Valuation indicator, as per the specific needs of the enterprise.

Talk to us for more details!

Whether you are looking to quickly value your start-up, or adopting a self-use Fair Valuation Model, or understanding comparable valuation through primary & secondary research; we have solutions for all your needs.

Please contact us with the nature of your requirement, and our valuations team will set up an exploratory online meeting as per your convenience.