Guiding startups through company valuation and fundraising

• Investors prioritise potential growth over profitability of startups
• Twelve to 18 months is an ideal interval between fundraising rounds

WHEN raising funds, startups are often concerned about getting the right valuation for their company and are afraid of being given the short end of the stick. At Cradle Buzz 2018, a panel session entitled “What’s your Business Worth” was aimed at addressing the worries of entrepreneurs.

Panellists for the session were Commerce.asia executive chairman Ganesh Kumar Bangah; Monk’s Hill Ventures venture partner Reez Nordin; and Intres Capital venture partner Amin Shafie. The panel was moderated by Cradle Seed Ventures chief executive officer Dzuleira Abu Bakar.

Opening the session, Ganesh shared his take on company valuation. He says, “A good valuation is where a startup founder has yet to develop his product fully but is committed to growing and the investor makes money.”

Addressing a question on whether the right price exists, Ganesh says entrepreneurs should instead be concerned with raising just the right amount of money to take their business further. “Don’t be too worried about the value of your company and set the right expectations when negotiating.”

He explains the importance of having a good and comfortable relationship with investors. “When you fight for a higher valuation, your investors are going to have higher expectations of you. If you don’t meet those expectations, you are will face much more pressure – it can cost you your company or even worse, your career.”

Meanwhile, Amin touched on how often a company should look to raise funds. He says, “When a certain product only hits an incremental amount of progress from the last round of investment, it spells trouble because the value has not increased as promised.”

With many stages of funding such as pre-seed, seed, pre-A round, Series A and so on, Amin believes the interval to raise funds should be considered. “A company may have raised between RM1.5 million to RM4 million in a Pre-A round. But the time interval from then to Series A is too short.”

Amin adds, “In this case, what justifies the company being at the Series A stage? It is no longer about development of the product. Instead, it’s about finishing the money and needing more.” Traditionally, most companies make significant progress in 12 to 18 months, he believes.

How can entrepreneurs value their company?

Providing guidance on how to arrive at an estimated value, Ganesh suggests looking at other similar listed companies as a comparison and scaling it from there. “I think the easiest indicator is looking at comparable companies and if the revenue is close.”

In terms of disruptive startups who may not have comparables in the market, Ganesh recommends looking at growth rates and forecasts in similar industries and market size. However, he adds “It’s tough to believe that a business does not have a comparable because there will be competitors.”

As for Reez, he prioritises ownership or stakeholding in a company. “As a Series A investor, we want to ensure that we get X amount of percentage in return for the investment. That will determine the post-money valuation of the company.”

He explains, “Investing in Series A, we are aware that the company will continue to fundraise in the future which will dilute our stake which is why ownership is important to us.”

Amin concurs with Reez, “We understand that it takes at least three rounds of investment before there can be an exit. The valuation of a company is usually the smallest point that I want to discuss with a potential investee.”

“Instead, we want to put forth the value we can add to a company. We always propose the price of the company based on the sector it is in and tell entrepreneurs how we can help with their hurdles,” Amin says.

In line with this, Amin offers advice to entrepreneurs, “Find someone who will help you make less mistakes throughout the way. Between time and money, time is more valuable for a company in terms of product development because money comes as a result of a significant product.”

Ganesh chips in with another trend he has noticed of late. “Many entrepreneurs opt for an auditor to value their company and provide this to the investor.”

He strongly advises against it saying it is a waste of time and money, “Investors know exactly how auditors arrive at the value – they take a forecast and do a discount on it.” 

Points to ponder for entrepreneurs

At the early-stage juncture, Reez says growth is valued more than the profit-and-loss of a company. “Valuation at this stage is usually based on revenue and potential for growth going forward.”

Agreeing with Reez, Amin says investing in the early stage is a risk. “For early-stage investors, they do provide more added value to a startup than a company that is already making profits with a slower growth rate.”

“It’s one of the things we consider when doing portfolio management. If a company grows faster, the value of my shares are higher due to incremental progress of the company,” he explains.

In a similar vein, Ganesh tells entrepreneurs “Valuations are less important than the amount of added value an investor can give to you. If an investor’s 30% stake can double your valuation, your 70% stake will be worth a lot more.”

Related stories:

Aaron Sarma shares eight tips for budding entrepreneurs at Cradle Buzz 2018

Commerce.Asia Enterprise aims to accelerate omni-channel commerce

Khazanah’s Mohd Ridzwan (Reez) Nordin joins Monk’s Hill Ventures as venture partner

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