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Tag: startup valuation india

  • Mamaearth’s IPO – A Beautiful Dream or Disaster?

    Mamaearth is an Indian company engaged in selling Health, Wellness and Fitness products.  The company was founded by Varun and Ghazal Alagh in the year 2016 and is headquartered in Gurgaon. It grew exponentially and reached a net worth of INR 115 crore in just four years.

    Mamaearth is the flagship brand of Honasa Consumer Limited, which started as a digital-first consumer brand. Its other brand portfolio includes brands such as BBlunt and Aqualogica. The brand is planning to launch an IPO and has filed the Draft Red Herring Prospectus (DHRP) with the Securities and Exchange Board of India (SEBI) on December 20, 2022.

    IPO Details of Mamaearth
    The Grey Area
    How an IPO Is Valued or Priced?
    IPO Valuation of Mamaearth

    IPO Details of Mamaearth

    The company has proposed an IPO worth INR 2900 crores.  The IPO will consist of a fresh issue of shares worth INR 400 crores and an Offer For Shares (OFS) of approximately 46.8 million shares. The funds raised through the IPO will primarily be used for improving brand visibility and advertising as well as opening exclusive brand outlets.

    The company’s founders Varun and Ghazal Alagh along with other investors like Sofina, Fireside Ventures, Evolvence India, Stellaris and angel investors like Kunal Bahl, Rohit Bansal, Rishabh Mariwala and actor Shilpa Shetty will sell a part of their stakes in the company through the OFS.

    Mamaearth's Shareholding Pattern and the Angel Investments in the Startup
    Mamaearth’s Shareholding Pattern and the Angel Investments in the Startup

    The list below gives a detailed view of the angel investments in Mamaearth.

    Angels Invested YOI Valuation
    Suhail Sameer ₹15 lakh 2016 $2 million
    Vijay Nehra ₹15 lakh 2016 $2 million
    Shashank Shekhar ₹15 lakh 2016 $2 million
    Kunal Bahl ₹69.6 lakh 2017 $5.16 million
    Rohit Bansal ₹69.6 lakh 2017 $5.16 million
    Shilpa Shetty ₹75.1 lakh 2018 $4.85 million

    The Grey Area

    There are several concerns floating on social media regarding the high valuation of Mamaearth.  The company which was valued at INR 120 crore in January 2022, is seeking a higher valuation of INR 300 crore through its IPO.  This target valuation is almost a thousand times higher than its registered profits.

    Mamaearth's Financials in FY22
    Mamaearth’s Financials in FY22

    The company does not have a consistent record of profitability.  While it posted a revenue of INR 932 crores with a net profit of INR 14 crores at the end of FY22, it registered a loss of INR 1332 crores in FY21 and INR 428 crore in FY20.  In the six months ending September 2022, Honasa Consumer posted a revenue of INR 722 crore with a net profit of INR 3.6 crore.  Apart from this, Honasa has also recorded a high advertising spend.  In FY22, the company spend approximately INR 391 crore on advertising, which is 40% of its revenue.  It has spent a similar percentage of its revenue on advertising in FY21, FY20 and the six-month period that ended in September 2022.

    All this information has led to a lot of speculation about the price MamaEarth will set for its IPO.  

    Sunil Damania, Chief Investment Officer of MarketsMojo says – “We doubt that management will go ahead with the higher price because there has been a lot of backlash on social media, especially given the amount of money Mamaearth is asking; whether you look at the market cap to sales ratio or the price to earnings ratio, which appears to be a little high.”

    Tech stocks globally are witnessing a downturn and many IPOs in the recent past have failed to maintain their initial high valuations, falling significantly since their listing.  Some prime examples include Zomato, Paytm and Nykaa.

    Sunil Damania continues – “Something similar could occur if Mamaearth opts for such a high valuation.  However, these are all speculative at the moment because neither the merchant banker nor the company has confirmed that they will proceed with this pricing.”

    Anirudh Damani, Founder of Artha Group has a different take.  He says – “I am jittery about all IPOs where more than 25% of the money getting raised does not go to the business i.e., it is an OFS from early investors and celebrity backers of the platform.  I have understood that almost 80% of this IPO will go towards OFS which does not bode well for public market investors.  It will be challenging to see any upside in the stock price with so many questions on super-premium valuation that will primarily provide exits to current shareholders.”

    How an IPO Is Valued or Priced?

    An Initial Public Offering or IPO listing is when a private company issue shares publicly in the stock market for the first time.  This is done either to raise more funds for expansion or to recover from losses or debts.  An audit is conducted for the company where all data regarding the company’s financials is carefully scrutinized.  This data includes the company’s assets, liabilities, revenue generation, market performance, etc.

    There are several methods in the IPO valuation process to define share value.  These methods are

    1. Relative Valuation through which the company’s share value is measured by considering the value of similar companies
    2. Absolute Valuation that measures the strength and financial status of the company
    3. Discounted Cash – Based Valuation that analyses expected cash flows, future performance, investment, potential revenue sources and more
    4. Economic Valuation considers various parameters like the business’s residual income, debts to be paid, assets value owned and liabilities, risk-bearing potential, etc.
    5. Price-to-Earning Multiple Valuation that compares the company’s market capitalization to its annual income.

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    IPO Valuation of Mamaearth

    There are various factors that affect the price of shares offered in an IPO.  In relation to Mamaearth, these factors are:

    Financial Performance Over the Past Few Years

    Mamaearth’s financial performance has been erratic and it has not been in sustainable stable growth.

    Most of the tech stocks have failed to maintain their high valuations and have seen sharp declines in the recent past.

    Number of Stocks Issued by an IPO by a Particular Company

    The biggest concern is the OFS offer which is being seen as an exit strategy by many of the promoters of the company.

    Company’s Potential Growth Rate

    The amount raised from the IPO will be used to increase brand awareness and advertising but there is no clear direction.

    Company’s Business Model

    Mamaearth is primarily a digital-first company.  Its Return on Ad Spends (ROAS) has not improved in the last three years suggesting it has very few returning consumers.

    Recent Market Price of Companies Listed on the Stock Exchange

    Tech companies like Paytm, Zomato and Nykaa have all failed to sustain their stock prices.

    Conclusion

    MamaEarth is showing great courage by announcing an IPO at a time when tech stocks are witnessing a global slump. However, rising digital penetration, high disposable income, as well as growing awareness in the beauty and personal care segment give the company room for growth and expansion in the future.

    FAQ

    What is an IPO?

    IPO [Initial Public Offering] takes place when a private company issues share publicly for the first time in the stock market. Once the company declares an IPO, the stocks no longer remain private and are collectively owned by all shareholders.

    What are the Factors Affecting IPO Valuation?

    Here are several major factors that affect the price of the shares offered in an IPO

    • Company’s financial performance over the past few years
    • Share market trends
    • Number of stocks issued in an IPO by a particular company
    • Company’s Potential Growth Rate
    • The Recent Market Price of Companies Listed on the Stock Exchange

    How can you tell if an IPO is good or not?

    Thoroughly review the company’s business model, management credentials, and historical performance. A good starting point when evaluating the best IPO to buy is the red herring prospectus. It contains most of the information you need to evaluate the company.

    Is Mamaearth a private company?

    Yes, it is a Gurugram-based D2C babycare and skincare unicorn. Mamaearth could be converted into a public company as it readies for an IPO.

  • Why Do Startups With the Highest Valuations Make the Least Profit?

    Just because of valuation, startups often take the limelight as unicorns even when they are losing hefty amounts of money. This may seem strange, but older businesses are not regarded as strongly as startups, and in most cases, these existing businesses are valued well below their genuine value.

    Every day, businesses of every kind face an unpredicted plethora of threats. It is important to recognize that losses can be either caused by temporary (short-term or medium-term) or some continuous long-term issues.

    Number of Funding Deals for Startups Across India from 2015 to 2022
    Number of Funding Deals for Startups Across India from 2015 to 2022

    Unicorns in India, or companies valued at $1 billion or more, are contradicting the traditional wisdom that valuations are based on future earnings. As their losses mount, private investors are compensating them with progressively greater values.
    While lots of businesses continue to lose money quarter after quarter, a select handful achieves enormous success and become national brands. The trick, of course, is determining which of these businesses will make the transition to profitability and blue-chip position.

    Valuing a loss-making business can be a difficult task. A business with negative earnings or incredibly low earnings is considerably more difficult to appraise than one with positive earnings. In reality, rather than basic assessments, loss-making enterprises are valued primarily on hopes.

    In this article, we are going to discuss why we see that startups with the most valuation have the least profit.

    Startup Valuation
    Why High Valued Startups Have the Least Profit?
    Cases of High Valuation Low-Profit Startups

    Startup Valuation

    In simple words, startup valuation is the way of assessing a firm’s value, or valuation. An individual investor in a startup trades for a portion of the company’s stock during the seed fundraising round. This is why valuation is crucial for entrepreneurs since it allows them to determine how much ownership they must provide a seed investor in return for their financing. It’s also crucial for an investor, who needs to know how much of the company’s stock they will get in exchange for the money they put in during the early stages. As a result, startup valuation can be a deal-maker or a deal-breaker, which is why it does not include any speculation based on the valuation of other comparable businesses.

    Furthermore, before assessing a firm’s real worth, creators must have a thorough understanding of how the entire startup valuation process works. If there is little to no revenue-generating, founders tend to quote an excessively high amount to investors to raise seed funding, so the expectations will be rather high. However, if a firm is unable to fulfill the lofty targets, it may have to secure funding at a reduced valuation in the next round.

    This could backfire in the long term, and the startup or entrepreneur may have a difficult time persuading other seed financiers or companies to finance them. In contrast, if the business quotes are too low, it may wind up offering investors a larger portion of the company’s equity, which will be a negative factor.

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    Why High Valued Startups Have the Least Profit?

    Startups are not anxious about their losses or lack of profit-making capacity. Instead of focusing on this, they continue to advertise their long-term vision of expected profit generation. Founders of such startups tend to showcase their different techniques, technologies, and solutions to attract investors. They are good at storytelling and selling.

    Investors get inspired by the founders and their exclusive pitch and make startup investment risks with the hope of gaining profits in the future. Here, both the startups and the investors work based on future assumptions. The hope remains on the fact that the startup would be able to kill its competition and create its market. But when reality hits and things do not go as per the plans, these startups with high valuations (because of the huge investments) start going low on profit-making.

    It is the brand name and its worth that attracts investors to invest, taking the valuation of a startup to another level. For example- Groww (an investing platform), even with the least profits, raised a funding round in October 2021, which skyrocketed its valuation to $3 billion. However, Zerodha (financial services company), one of its biggest competitors, is highly profitable yet its valuation stands lower than Groww.

    According to Kunal Shah (CEO of CRED), “Unicorn tag, high valuation are all vanity metrics till the company delivers profits”.

    The discounted cash flow is the explanation for this unusual valuation. The discounted cash technique is used to value and evaluate the worth of the startups. When valuing a company, the discounted cash flow technique is used to forecast cash flow as well as the anticipated rate of return on investment. Businesses that are inevitably destined to fail in terms of income flow generation are given a higher discount rate.

    Such startups simply continue to be overvalued by executing a couple more spectacular funding rounds. After which the investors understand or anticipate that they’re not going to be successful after analyzing the stats and other relevant information and pulling any additional funding. These businesses will likely close or downsize their operations, leading to widespread job losses and a repeat of the 2008 financial crisis unless they figure up some sort of magical formula.

    Cases of High Valuation Low-Profit Startups

    Zomato

    The revenue of Zomato has soared by a significant percentage year over year, and losses have also risen by a substantial proportion. However, when you look at the overall picture, Zomato is present in 24 countries, including India. Furthermore, it has a monopoly in Restaurant Search in India, despite the presence of competitors making it more likely to succeed. Advertisements, classifieds, internet shopping, and consulting are further sources of its revenue.

    Revenue and Loss of Zomato from FY 2018 to FY 2022
    Revenue and Loss of Zomato from FY 2018 to FY 2022

    In FY22, Zomato recorded a revenue of $505.76 million, whereas its loss stood at $145.92 million. As a result, instead of seeing losses as a determining factor in funding, we perceive its brand value.

    Flipkart

    Although this is one of the most difficult startups to evaluate, the basics stay the same. Flipkart is attempting to instill in Indians the habit of shopping online. This is also being funded by investors. Online retail sales in India currently account for only 1% of total retail sales. If it were to rise to even 7-8% (as it is in the United States), E-tailer revenues in India would soar by a significant percentage. This is the expectation of investors.

    In FY22, Flipkart India’s revenue reached $6.034 billion, and losses widened by 40% to $410.75 million.

    Ola/Uber

    We usually went down, asked for multiple buses and taxis, and got refused by a majority of them when there was no Ola/Uber. But, thanks to Ola, we can now book a cab from the comfort of our own homes or offices and only get out when they arrive. It has made our lives more convenient with the added benefits of being cashless and air-conditioned. As a result, we have developed a strong trust and habit in them, which is exactly what they desire.

    Revenue and Loss of Ola Cabs from FY 2017 to FY 2021
    Revenue and Loss of Ola Cabs from FY 2017 to FY 2021

    In FY21, Ola Cabs’s revenue was $125.41 million, and its loss was $101.27 million.

    These are some of the names that stand in full pride with huge valuations as they have gained the trust of investors as well as the masses but at the same time continue to make lesser profits.

    Conclusion

    A startup’s worth is based on its potential to generate future cash flows, how much potential it has for future aspects, and keeping other essential factors constant. Apart from revenue generation, job generation statistics also matter. Investors believe that the startup they are investing in will grow to be a giant one day and that they will be able to make a profit of nearly ten times their initial investment. This risk allows them to stay competitive and keeps them in the play. Therefore, when valuing or comprehending startups, their prospects are perceived rather than the losses.

    FAQs

    What is startup valuation?

    It is the process of evaluating a company’s worth in the market based on different factors like profit-making capacity, growth potential, market conditions, etc.

    What are startup valuation methods?

    Popular methods include:

    • Berkus Approach
    • Market Multiple Approach
    • Risk Factor Summation Approach

    Which is the highest-valued company in India in 2022?

    Reliance Industries is the highest-valued company in India in 2022 with a $202 billion valuation, followed by Tata Consultancy Services ($139 Bn) and HDFC Bank ($97 Bn).

    Are all Indian unicorn startups profitable?

    Only 23 out of 100 Indian unicorn startups are profitable. These include Mamaearth, Lenskart, Nykaa, Zerodha, etc.

  • What Is Startup Valuation? Methods Of Startup Valuation

    Startup valuation is both art and science combined. The gut, instinct, and gut instincts are usually involved. Well established companies are easier to value because you can throw their revenue in a spreadsheet and work its magic. They have numbers. A startup in its initial state lacks solid numbers. Only forecasted values are available, and those are just an estimation.

    Why is valuing a startup necessary, you might ask. Valuing helps an investor decide if the startup is worth investing in. And why are startups valued so high? Showing a high and solid valuation attracts investors like bees to honey. The valuation also helps entrepreneurs in determining how much of a share to give to investors in exchange for their money.

    But having a high valuation at the start is not compulsory. It just means that a high valuation at the seed round implies higher valuation in the next round. For that, you will need to show considerable growth. A general metric is showing 10x growth over eighteen months. There are two strategies regarding valuations:

    • Go big or go home – Raise a large amount at the highest valuation and grow as fast as possible. If successful, the seed round will fund itself. And the dilution rate is less as compared to a slow-growing startup.
    • Slow and steady – This involves a steady growth rate where you raise only as much as you need and spend as little as possible.

    Factors That Impact Startup Valuation

    Industry

    If the industry is booming, investors are more likely to sink money into your venture.

    Customer base

    Showing that your company has customers is a surefire way of showing high valuation.

    Reputation

    If the owner has a stellar record of running businesses or the product/service is a successful one, investors are more likely to get attracted even if the business lacks a customer base.

    Supply & Demand

    If the demand is high, a high valuation can be placed. If the supply is higher than demand, investors might be less willing to invest a large amount.

    Product

    Lack of need for the product or if the product is not of good value, the valuation of the business is lowered.

    Competition

    The business will find it difficult to carve a niche for itself if there is no scope left, i.e if there is heavy competition.

    Management

    Sometimes, an outstanding team is enough to inspire confidence in an investor. Lacking that can make things go downhill.

    Pre-evaluation revenues

    This depends on whether you already have a commercial product/service in hand and if it is generating any revenue. An existing revenue is a positive cause for convincing an investor.

    Methods of Valuation of Startups

    Cost-To-Duplicate

    In this method, the hard assets are taken into account and the cost of duplicating the same business elsewhere is estimated. Unfortunately, this method does not take into consideration the growth potential and intangible assets such as brand value, industry trends, or reputation. This method gives us the ‘lowball’ estimate of the venture.

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    Discounted Cash Flow

    This method determines the cash flows generated in the future and sets and applies a discount rate to the value to arrive at the probable valuation. The cash flow determination depends on market fluctuations and the ability of the analyst to make good assumptions. The discount rate is proportional to the risk factor.

    What is Startup Valuation
    Discounted Cash Flow

    Berkus Method

    This is the most popular method in use. It is used for the valuation of pre-revenue startups. This is how it works :

    If It Exists Add Company Value Upto
    A Sound idea $ 0.5 million
    Prototype or working model $ 0.5 million
    Quality management team/ Reputed leader $ 0.5 million
    Strategic relationships/ Partnerships with industry $ 0.5 million
    Product rollout or sales (initial revenue) $ 0.5 million

    Comparables/Multiples Method

    This method works on the principle ‘one price for all’, meaning similar companies are worth the same.  Essentially, similar startups are compared. It uses industry ratios such as price-to-earnings ratio, price-to-sales ratio, values-to-earning before interest, etc., It also takes factors that are not similar for both companies into account.

    What is Startup Valuation
    Comparable Company Analysis

    Image Source: CFI

    One disadvantage of this method is that there is a slim chance of finding similar startups as business ideas tend to be unique.

    Scorecard Valuation Method

    The average pre-money valuation of all startup businesses in the area is determined. The startup in question is valued against them on the basis of a scorecard. The Scorecard consists of the following factors and their weightage.

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    Risk Factor Summation Method

    This method uses the same average pre-money valuation method and compares twelve elements of a target startup to a funded and profitable startup. The elements are as follows:

    • Management
    • Stage of the business
    • Legislation/Political risk
    • Manufacturing risk
    • Sales and marketing risk
    • Funding/capital raising risk
    • Competition risk
    • Technology risk
    • Litigation risk
    • International risk
    • Reputation risk
    • Potential lucrative exit

    Each parameter is awarded a value ranging from +2 to -2, with +2 being a positive valuation of the company for that parameter and -2 being negative.

    Valuation By Stage Method

    This method is similar to the Berkus method but treats the parameters in the latter as subsequent stages. Generally, the stages appear to be:

    • ‘An exciting business plan’ -may warrant around half a million
    • ‘A strong management team’ – may warrant one million
    • ‘Availability of prototype or finished product’- may warrant around 1-2 million
    • ‘Partnerships or steady customer base’- may warrant around 2-5 million
    • ‘Shows signs of growth and profitability’- may warrant greater than 5 million

    The amount is the valuation of the company and gives an idea of how much an investor might be willing to invest in your startup.

    Venture Capital Method

    Professor Bill Sahlman of Harvard business school introduced this method. The following formulae are used:

    • Return on Investment (ROI) = Terminal (or Harvest) Value ÷ Post-money Valuation
    • Post-money Valuation = Terminal Value ÷ Anticipated ROI

    This method is meant for pre- as well as post-revenue startups.

    First Chicago Method

    This method is a very qualitative way of determining the state of the startup. Three different evaluations are given based on the best-case scenario, the worst-case scenario, and the normal scenario.

    What is Startup Valuation
    First Chicago Method

    Book Value Method

    This method is used when the startup faces a loss and is going out of business. The valuation is done considering only the tangible assets of the company. Growth, revenue, branding, etc., do not matter.

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    Any method on its own is not sufficient to get a correct estimate. The best approach would be to evaluate the startup using multiple methods. Those methods on average will give us an approximately accurate guesstimate. Not to mention some methods are merely qualitative. Valuations are handy when you turn to fundraising.

    There is no hard and fast rule when it comes to scoring funding. Sometimes, the person, the brand, or the team might convince the investor rather than the calculated numbers. It is a matter of skillful negotiation and instilling faith in the investor that your company deserves the funding.