Valuation at the early stage for Indian Startups
Views on valuation & funds to be raised at the pre-seed stage for Indian founders
Namaste Dear Reader 🙏,
For an industry that champions transparency and knowledge-sharing, venture-capital firms are usually very tight-lipped in sharing the valuations they seek to invest in, especially during the early stage. For a founder, this can often be very confounding!
Ask an early-stage VC, “What is the valuation I should raise my first external cheque at?” The answer one gets is, “It depends!”
And perhaps, that is the correct answer: For a new startup, its business is nascent, the market unclear, and customers are limited while profits and cash flows are expectations on an excel sheet. Most will agree that number-based valuation exercises are futile so early in a business journey.
So, what is the valuation at which founders should raise their first round?
At the outset - a disclaimer, this post assumes that the startup and founder(s) is a good fit for external funding:
The opportunity lends itself to scale (preferably at high growth rates!)
More importantly, the founders have a high conviction that the external funds accelerate the business’ journey AND are okay with the higher level of scrutiny and pressure to exit.
Having got that out of the way, let’s look to find the right valuation for an Indian startup raising its first external cheque!
The latest global landscape looks like this:
Indian context:
Typically, Indian startups raise anywhere between Rs 50 lacs to 2.5 cr (USD ~60K to ~300k) as their first cheque or pre-seed round.
There are always exceptions in the path of fundraising and some startups may directly raise a larger seed round/ Series A, but this is an increasingly difficult path for first-time founders. The pre-seed round is usually raised from a mix of friends & family, angel investors, incubators/ accelerators, family offices, or Micro VCs. Larger VCs have also entered this space by launching their incubation programs (Sequoia Surge, Accel Atoms, and many more).
Founders raise their first round on the back of one or more of the following: unique insight into a problem, underserved/ poorly-served demand, beta feedback from early customers, or nascent traction from its initial adopters. Most raise the cheque to build out the product/ service, hire a larger team beyond the co-founders, and experiment in GTM channels across sales and marketing, all in the hope of finding Product-Market-Fit (PMF). What is PMF – Simply put, it means that you have discovered a profitable & repeatable method of serving an adequately large market with your product/ service.
How much should an Indian startup raise in their pre-seed round and what is the stake they must give up (dilution)?
As discussed previously, while this information is not shared publicly by most, I have compiled a non-exhaustive list of valuations offered by early-stage investment firms, which invest in Indian startups, for reference:
Note: The above numbers1 only consider the first priced cheque; Some incubators such as YCombinator, Techstars offer convertible notes in exchange for additional sums.
While the above is admittedly a limited sample, the chart does provide a broad sense of early-stage VC valuation expectations– roughly between Rs 5 cr to 15 cr (~$600k to 2 Mn). Most early-stage firms are unyielding about their minimum shareholding, but may be flexible with their cheque size – Crucial for founders to leverage this!
Still, Rs 5 cr to 15 cr is a wide range, so what is the correct valuation for your startup?
A parable:
Sri Ramkrishna Paramhansa narrated a beautiful parable on understanding the Atma. Paraphrased below:
An Indian washerman used stones near a riverbed to wash and clean the laundry. He came across a stone that had a different sparkle to it and thought about using it for his work. However, he soon realised that there WAS more value to the stone than perhaps he understood. The washerman went to his friend, the vegetable seller, and sought to know its price. His friend offered a day’s worth of vegetables in exchange for the stone. However, the washerman felt he must seek to know more before parting with the stone. He sought the opinion of a customer, a cloth trader, who offered him a hundred rupees, whilst a separate acquaintance offered him only fifty rupees! Finally, the washerman landed at the doorstep of a jeweller, who remarked, “This is amongst the largest, rough diamonds I have seen! I will offer a thousand rupees for it!”
Moral: One offers a price for an article according to one's comprehension of its value!
Find the right investors who best align with your vision and plans for executing the business. Most founders will want to (& should) raise at the highest valuation possible, however, that should not be the only criteria for seeking investment: Seek an investor who not only pays a fair price but helps you polish your rough thesis into actual execution.
Typically, investors offer a valuation at the higher end on account of the following factors, arranged in descending order:
Deal tension: The no. 1 criteria for most investors is whether you have other interested investors
Compelling signs of underlying PMF
Returning founders or experienced operators
Moonshot idea with a large market
Another aspect to consider is whether to raise a convertible round or a priced round?
A convertible round involves a company raising a sum of money where the valuation is deferred until the next ‘priced’ round. Usually, a company offers a discount (10 to 25%) on the price set in the next round whilst promising to raise it in a certain time frame.
I am personally not a big fan - Convertibles are best used in a scenario where there is reasonable certainty of a priced round in the next 6 -12 months. However, simply using them as a mechanism to postpone pricing equity until the valuation is inflated often results in unhappy outcomes for either the investor or founder.
Final TLDR, Rounding up my thoughts:
Rules of thumb for founders to consider while raising pre-seed round for Indian founders:
Raise for 12-15 months of gross burn or 18-24 months on net burn2
Keep dilution between 8 to 12% at pre-seed
Target valuation range = Rs 10-15 cr
Seek investors who are the right fit:
Previous experience
Level of involvement and value-add
Ability to support in future
Dr. Aswath Damodaran, a professor at NYU Stern School of Business, believes that valuation is a craft rather than a science or an art, i.e., the more you do it (carry out valuations), the better you get at it. The flipside for founders is that most builders usually tend to raise early capital only once in their lifetime and are unlikely to become experts at it. Hopefully, this post helps shed some light on valuation at the early stage for Indian founders.
I would love your feedback! Do share your comments & questions below or write to me @SaneDhruv
Pre-money valuation is the value of a company’s equity before raising a round of financing. Pre-Money Valuation+ Funding amount = Post-money valuation. All figures sourced from public databases including websites, news articles
Gross Burn – Estimated Revenue = Net Burn
Very well written! Particularly liked the parallels you have drawn from age old stories to current situations! Waiting for more:)
Never found a better article on Pre-Seed Or Pre-Money Valuation than this..
Thank you... Keep Writing and helping the first time founder's.. We need it on must