Valuation Game is On!

                            

When we think of starting a business, we face many issues in understanding how we will run that. Even that thought makes us step back. 

To start a business we need to register ourselves, have various direct and indirect expenses like rent, electricity bills. At initial stage to start a business we need to have enough money and also we have to bear the loss as well. 

Now, the picture of funding comes to scene to defend us from the loss. But, is it so easy to get a funding or getting an angel investor?

There are many threats in it, like you went to an investor explained the whole plan why will they support you, they will take your idea and build up their own business out of it. On the other scenario after you have establish  your business you feel if there is money pump in business will grow because of lack of money it is running under loss. In this case nobody will trust you with money apart from investors. 

But why will they do it?

They will in fact take around 60-70% of the company's equity from you. Again it’s a loss.

Moreover, in the recent scenario although the start-ups are at loss but owners are growing their network and becoming rich.

Suppose there is ordinary product which costs you Rs 100 you had spent Rs 900 more to look it more attractive to the buyers and it is having a good sell with the help of social media and influencer you made your product popular among all. Seeing that famous influence is using your product few more influencer will try to merge with you and automatically with the help of this the chain moves on.

On the other hand people are approaching you for partnership when they asked your net worth you have said its Rs 10,000 so with a lot of money the partner buys 10% share. But the net worth is still Rs 9000. 

Now, with money pumping in company's revenue increases (not profitability). Investors fund money mostly on revenue and not on profitability. 

Let's say the valuation has increased to Rs 1 Lakh, with 90% of share net worth also increases to Rs 90, 000. Again, sell the share of 10% this time at Rs 10,000 in this case the 1st person also earns money (seed investment) as well as the owner.

Although, the company goes through loss but still net worth remain Rs 80,000 with more money pumping in. The process continues and valuation keeps on increasing.

Now, the owners also take their salary from companies along with this. 

Also, for more investors to come they generally keep the CEO's post open. Investors value companies that will grow to be successful over companies that have great ideas but may never get out of the gates. When an investor sees the CEO role open and vacant, they know that the founders will be willing to bring in talent to “grow the business” and hence they respect the valuation. With that investors want to see advisers that have built successful companies before on your advisory board.

Last but not least press is the king more than a relation is what required getting a good investor.

Still the question is what market wants a profitable company or a valued company.

                                                                                                                                        To be continued.....................

                                                

                                                                                                                                       -Debopriya Gupta

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