Evaluating Startup Valuation at EDII’s Empresario 2016

I was invited to be a judge for the ‘Startup Valuation Competition’ at Entrepreneurship Development Institute of India’s (EDII) Annual Entrepreneurship Fest ‘Empresario 2016’. Being there last Saturday and sitting alongside the entrepreneur (Abhishek) whose company was being valued in the competition was fun. I learned a lot from my interactions both with the entrepreneur and the participants. While all the teams involved people who had a management background, there was one team of third year engineering students, who impressed both of us (judges) by their attempt at valuation.

During the little conversations that we had (Abhishek and I) prior to the event, the entrepreneur kept harping on how and why valuation was so much art than science. He recounted his earlier rounds of raising money and the current one in which they are engaged – and highlighted the little science that could justify valuations. He even quoted some other startups (both from India and abroad) that had unimaginable valuations. But much to the entrepreneur’s surprise, almost all the teams attempted to use the Discounted Cash Flow (DCF) method to arrive at a value. We had teams arriving at values ranging from 0.1x to 100x where x – entrepreneur’s value of his own company. Two companies came close to x and both of them did not use the DCF method.

At the end of the session the entrepreneur (Abhishek) clearly highlighted the importance of looking at subjective parameters to arriving at value. Without discounting the DCF the entrepreneur (himself an engineer) clearly explained why early stage companies need to be seen through a different valuation lens. I wish he and his partners raise the money they require at the valuation that they deserve and gain all the success.

Some interesting learnings as a teacher of entrepreneurship:

  1. The students who designed and organised the competition (Manoj Karthik, Monil Gunjaria, and Dipali Shah of PGPM-BE Course) need to be lauded. Not only did they take the courageous approach of writing a fresh case study for the competition, but also that of a startup that was in the process of raising another round of funding. There are students who can write well. Why don’t we (teachers) identify and engage with them (interested students) to do more serious content creation?
  2. I think fresh cases of startups make the class so lively and interesting. Getting the entrepreneur to do the evaluation along with an academic gave the event a balance that many entrepreneurship educators need to learn from. Can we not have classes where we can teach together (academic + entrepreneur)?
  3. Can we not write so many cases of startups around us? Will that not make classroom learning so much more interesting? Will it not shed light on which tools, techniques, methods are best suited in relevant contexts? Will not entrepreneurship education become more contextual then? The constant complaint is that not many companies share information – but my question to academics is: how many have you asked after the first few said no?
  4. One team in particular used a crazy heuristic to arrive at a multiplier that gave both me and my co-judge (the entrepreneur) goosebumps! How could this be so close to what so many scientific and historic methods give after tremendous calculations? I’m still stumped!! I asked them many questions to learn on their assumptions. This is what makes valuation a fun game. This is what makes teaching so much fun. I learned from my students (participants) and came away more informed.

I had written a few weeks back on how crazy this startup valuation is but being a judge at this competition gave me a bird’s eye view to the reality that ‘may be we are not equipping our MBA finance students with the right tools to engage in such kind of new age valuation’. Its time we did something to our valuation syllabi in entrepreneurship courses (if there is one?).

I had lunch with Mr Shalabh Mittal (CEO of the entrepreneurial venture School for Social Entrepreneurs) and listened to a brilliant panel discussion moderated by him post the meal. Though it was on sustainability, I kind of liked the philosophical debates and perspectives shared. I had a good Saturday.

I will write soon on the many techniques currently being used for valuing startups in a following post, but until then, read the newspaper and look with awe at the subjectivity that exists in all the startup valuations being reported. They are facts!! Enjoy.

I am glad that I chose teaching for a career. Every time students conduct an event, they surprise me by doing things that teachers can only learn from. But will teachers be ready to learn?

 

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