Venue: The dining hall at the venue for a VC (Venture Capital) pitching event at Ahmedabad India.
“ I still think we have overvalued the Venture A by approximately 1.5 times” , said Mr. X , picking up his plate.
“ As I always say X, we need to think beyond projected figures, look beyond numbers and think from holistic perspective, Valuation is more of an art than just number crunching.” replied Mr. Y calmly, while picking up few pieces of apple from freshly cut fruit salad.
“Valuation is more of an art than just number crunching.”
The above conversation caught my attention immediately .I picked up courage to jump into the conversation between Mr. X and Mr. Y
“ I have often read this adage and I wonder why people say so” , I said with enthusiasm.
Mr. X (a smart looking gentleman with greyish hair and in his early 50s ) frowned at me while Mr. Y (another smart looking gentleman of-course!!) seemed quite amused.
I realised that I had not introduced myself to both of these gentle men and felt bit embarrassed.
“Oh I am sorry , allow me to introduce myself” , I said .
After exchanging pleasantries and brief introduction,I requested Mr. Y to share his thoughts on valuation.
“Young man , I’ve a flight to catch for Mumbai in next 4 hours so it will be great if you allow me to do talking and you play a part of active listener” said Mr. Y maintaining his calm posture and smile.
What followed next was a brief session about insights of a serial entrepreneur cum investor, He shared his wisdom for valuation. I am reproducing some part of it here:-
No doubt numbers ( read critical ratios , key metrics , forecasts, etc ) play an important role in valuation process for a venture or start up but there are other aspects as well which can be clubbed as 3S for valuations :-
- Saleability – The very 1st S is saleability. In simple terms , the venture or start up should be able to sell . By selling, we don’t mean just the sales figure. It means selling in more holistic and engaging way. The venture/start-up should be able to identify their Unique Selling Proposition (USP),
- It should be able to sell their products or services.
- It should be able sell its vision to bankers, investors to get the funding.It should be able to sell itself as a vibrant and growing organization to acquire talent and key persons with compatible skill sets.
- And ultimately when the challenges become overwhelming enough , they should be able to sell themselves to the potential alliances or takeovers i.e they should have a realizable exit plan.
" The venture/start-up should be able to identify their Unique Selling Proposition (USP)"
- Scalability- The 2nd S corresponds to ability to scale up the venture in terms of revenue generation, customer acquisition, expansion of product range, scaling up to new geographies, etc. Scalability allows a venture to leverage upon economy of scales as well as paves path for becoming a serious competitor in its respective area of operations. Scalability also leads to higher valuation prospects for venture. Scalability also provides an insight and clarity about the vision of entrepreneur regarding his or her venture. Scaling should be both vertical (increasing profit margins) as well as horizontal (increased product offerings to wider target customer segment without cannibalizing the existing product)
"Scalability also provides an insight and clarity about the vision of entrepreneur regarding his or her venture"
- Sustainability – The 3rd S is the most important S in this 3 S nomenclature. Things usually don’t go as per plan, forecasts may not be get converted to realizable sales, the key recruit which was suppose to lead the new sales campaign doesn’t show up, a new competitor has come up with much better strategy and is potentially may dent your market share. These are some of the challenges which every start up or venture faces in some part of its life. Sustainability in broader term refers to resilience of organisation and ability of team (Read: Key management personals) to cope up with VUCA (Volatility, Uncertainty, complexity and ambiguity) scenarios in the market place. It also gives a hint about the flexibility and agility of organisation in key business areas.
"Sustainability in broader term refers to resilience of organisation and ability of team (Read: Key management personals) to cope up with VUCA (Volatility, Uncertainty, complexity and ambiguity) scenarios in the market place."
“Well ,young man, I hope I was able to explain you The 3 S of valuation effectively in such a short time, I am not that good at oratory skills”, said Mr. Y while putting his empty plate on the table.
Mr. X who had kept looking at his watch during the entire conversation seemed to be at ease now. “Mr. Nikhil, thanks for being a patient listener!!”, said Mr. X , “this is the first time I’ve seen someone listening patiently to Y without interrupting”.
“The pleasure was all mine, I hope you guys won’t mind if I share the same on social media”, I asked politely while shaking hands with Mr. X and Mr. Y.
“Well, you just learnt another ‘S’ which we value in a venture : Sharing”, said Mr. X giving me a wink.
“And we will discuss about this 4th ‘S’ at next VC event in Ahmedabad, I hope you will be there” said Mr. Y before a final hand shake with me.
