FIRSTPOST TECH2 NEWS ANALYSIS
By Manish Saxena
Valuation of startups has always been an intriguing subject. What is even more intriguing is how the valuation figures of these startups (often called unicorns if the valuation crosses USD 1 billion) gets reported in public forums. Since successful startups frequently raise funds to grow, often the reported valuation figure for a particular startup is based on a simple extrapolation of the recent round of funding raised by the company. For example, if the company raises USD 100 MN for a 10% stake, it is generally perceived that the value of the entire company is 1 billion i.e. (100mn/10%). This is also often referred to as a fully diluted valuation. The fully diluted valuation assumes that all the shares of the company have equal rights and hence have equal value i.e. the value of 10% stake is representative of the remaining 90% stake. Though the fully diluted valuation seems intuitive and easy to understand, it does not take into account the preferences attached to the instrument through which the recent investor has invested in the company. These preferences lead to a very different value for different class of shares and hence the value of the entire company derived by simply dividing the amount invested with the stake acquired may not represent the true value of the start-up. This is particularly true in case the company is still in early stages and quite far from a possible IPO.
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