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How to simply evaluate a company valuation in this case?

Asked by: 429 views Funding

Hello All Guru’s!

I am running my own business as providing software services/consulting to overseas clients and meanwhile I also put some developers on the ideas that I do have.

From that I build one platform for SMS messaging with investment of 3500 man/development hours, Which does not include the concept or management hours. 1st version is out and after customer feedback we also released 1.5 version and recently launched iPhone application too (1st company in India to do that).

I can get rate of $20/hr easily if I invest that team into overseas work. Currently business growth is very slow as I can not put more investment (to buy SMS from big companies and in recruiting sales people) of my own due to some reasons but profit margin is around 50-60% after all costs. There is good scope to scale the business and for that I need investment in two rounds of INR 20 Lacs each.

I have some Friends and Clients interested in investment. Now my major problem is to declare the company value and justify it so based on that I can allocate them share/stake in company based on what they are willing to invest.

Thanks for reading it completely and any light on this puzzle will be helpful :)

You can check the platform and can create demo accounts for free at http://app.smsbrain.in or at http://www.smsbrain.in

Regards,

Ashvin

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6 Answers



  1. ashvin on Sep 07, 2010 Reply

    Anyone?

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  2. AshishSinha1 on Sep 07, 2010 Reply

    @Ashvin
    I recommend couple of articles that can help you decide on the valuation
    http://www.pluggd.in/early-stage-vc-valuation-process-297/
    http://www.pluggd.in/startup-valuation-how-much-is-my-startup-worth-297/
    http://www.pluggd.in/startup-valuation-how-to-297/
    http://www.pluggd.in/how-vc-industry-works-297/

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  3. ashvin on Sep 07, 2010 Reply

    Hi Ashish,

    Thanks for the answer. Most of them are focused on selling the startup. I am looking for bit different perspective which is to get seed round / working capital in.

    Regards,

    Ashvin

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  4. SandeepChandalia on Sep 07, 2010 Reply

    Ashvin, There could be two ways of valuation:

    1.Input costs: Here you would include the actual costs as well as the opportunity costs involved ($20 *3500) for getting the product to this stage. Obviously for this, the person investing would need to agree on both the number of hours invested and the cost per hour. Add a premium for the higher risk that you took initially and also for your own time and effort. If you are not going to be taking any salary going forward as well, then look for a premium /value of that as well.

    2. Present Value: Assuming that you will get the investment as required, create cash flow projections for the venture. Now decide on a discounting rate for these cash flows (should be around the returns that the investor would be looking at). Discount the cash flows projected at this discounting rate. From this value, deduct the investment that you assumed in step 1. This would be the value of the venture before their investment.

    Depending on the amount that the investor would invest, you can arrive at their stake in the venture. So if you arrive at a value of say 60 Lacs and they are investing 40 Lacs, you should be ready to give them 40% stake

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  5. ashvin on Sep 07, 2010 Reply

    Dear Sandeep,

    Thanks a lot for your time writing this :)

    I got most of it except the discounting cash flow. I made cash flow projections (in very rough shape) till 2013. So here are few questions I got:

    1. Say if investor is looking for minimum return of 8% a year, What should be the discount rate and how to calculate it? Give one example and it will be helpful as I am trying to involve in these numbers and financial terms but new to this.

    2. If total valuation is 60L and they are investing 40L the ratio you calculated of 40% is that with premium as (40/60)*100 is not 40%. Let me know if I am missing something here.

    Sorry for asking so much in details as I am new to all these :)

    Ashvin

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  6. SandeepChandalia on Sep 07, 2010 Reply

    Ashvin

    1. If you are taking cash flow till 2013, then also take a zero growth in cash flows from that year since the cash flows wont stop on that date. Now discount the cash flow for each year using functions PV /NPV in excel. The rate in the formula should be the discounting rate that you and your investor agree to. Personally I feel 8% is too low for an equity investment.

    Since you wanted an example, assume a cash flow of 10L,12L & 15L for the next three years and then 20L as an annuity, then the PV of these at 15% would be 8.70L, 9.07L and 9.86L for the three years and 71.28L for the annuity cash flows. So the total value would be 98.92L and if you take out the investment of 40L then the pre investment value of the company should be 58.92L

    2. If you are investing 60L and investor is putting in 40L then the total investment in the venture is 100L (60+40) out of which the investor is putting in 40Lacs and hence 40% share for the investor. Don’t look at his investment as a percentage of yours (40/60)*100. Doesn’t make sense.

    And its okay to ask in detail. Completely understand :)

    Sandeep

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