Getting investments for a business can be challenging, and knowing how investors place value on your firm is important. Usually investors have their own criteria for what a business is worth, and those differ from investor to investor. In this article, we will discuss the rationale behind business valuation at different stages of its lifecycle and provide examples from the world.

The Role of Investor Perspective in Valuation

People say “different eyes, different views” when it comes to estimating the value of a business. For instance, consider this example.

One investor may think your business is worth Rs. 100, because they do not view the potential of your business as noteworthy at all.

Another investor with a different viewpoint may see great potential and decide your business value is Rs. 200.

This variation is an example of how business valuation can differ from investor to investor. While there may not be a standard approach, having an idea of how investors think across different phases of a company’s life cycle would definitely help.

Important Aspects That Impact A Business’ Valuation

A business is frequently assigned a valuation based on where it lies in its lifecycle. Here is an outline of how businesses are typically valued at varying stages of growth:

1. Startup Stage

At this stage of the lifecycle, the business exists only as a concept. The founder has recognized a problem and developed a product to help solve the issue.

For example, a “stand and pee” incapable device aimed at womenProblem: Women struggle to urinate conveniently in public places.

Characteristics:

No gross revenues or net profits to speak.

Profound likelihood of failure.

Disruption of the market by competitors is possible.

The product may not be well received by the market.

Investors seek high returns at this stage due to the significant risks involved. Because of this, they are likely to value the company lower than what is expected. Angel investors, who focus on very early stage funding, will most likely step in at this stage assuming that the risk is substantial, however, the potential reward is enormous in case the establishment works out.

For instance, in the beginning, PayTm was struggling and at some point, iterated and sold over 40% of its shares for Rs 8 lakh. But as the company grew, its valuation went through the roof. In a more recent sale, 1% of the company was estimated to be worth Rs 325 crores.

2. Young Growth Stage

At this stage, the business captured a bit of market share. The product is accepted in the market and the company makes initial sales.

Characteristics:

The company makes its first 1000 sales.

Gross profits are positive. However, net profits are negative due to the costs of marketing, building the team, and establishing the systems.

Example: A B2B e-commerce platform Udaan is in its young growth stage. With a valuation of $2.8 billion, Udaan has not only enabled stronger market penetration but continues to extend its market reach, backed by a strong team and enormous market potential.

3. High growth stage

In the high growth stage, the business has proven the concept with increasing revenue being generated year after year.

Characteristics:

Product acceptance in the market is solid.

Revenue is growing at a tremendous rate.

Businesses like BYJU’S, OYO, and Reliance Jio fall into this category, these companies capture remarkable year on year growth both in revenue and valuation.

Try BYJU’S for example. Two years prior, it recorded revenue of Rs. 500 crore, and it now estimates revenue between Rs. 3000 crores and Rs. 3500 crores. Although it has incurred losses previously due to extensive marketing budget spend, BYJU’S looks poised to turn a profit soon.

OYO: OYO has seen revenue grow three to four times each year, contributing to its $10 billion valuation.

Investors are typically willing to take the gamble due to a the business’s rapid growth and an ample expansion opportunities in the future.

4. Mature Growth Stage

Google and Facebook are taller, more mature growth companies. They have been around for quite some time now, and even though they continue to grow, much of it is reliant on innovation as well as diversification of revenue earning opportunities for the firm.

Characteristics:

Revenue streams are predictable and well-established.

Companies emphasize innovation to generate growth.

Valuation based on conventional financial data like Price-to-Earnings (P/E) ratio is commonplace.

For example, if a company reports a net profit of Rs. 100 and is valued in the market at Rs. 1000, then the price earnings ratio will stand at 10x, which indicates that investors are likely to rate the company at 10 times the annual profit.

5. Stable Companies

Stable companies such as Reliance Industries and Infosys have revenue profits that are stable and predictable. These companies are generally valued using the P/E ratio which is an indicator of how the market values the company’s earnings.

Characteristics:

Profit remains consistent year after year.

The P/E ratio is stable as well, residing in a certain perimeter.

Investors know that returns will be consistent.

For example, Reliance and Infosys which are considered stable companies generally have P/E ratios ranging from 20x to 30x. This implies that their market value is 20-30 times their annual profits which makes them a good investment for people looking to earn steady profits while taking lower risks.

6. Decline Stage

Decline stage companies such as Jet Airways or DHFL are undergoing a stage where the challenges sustained are proving futile towards sustainability.

Reasons for Decline:

There is no innovation; Passive action towards change in the market.

Business models dependant on dwindling and non-renewable resources such as steel and coal.

It is very challenging to value the companies in decline stage. There is a high chance that the investor may not want to invest and the future of the company seems ambiguous at best. These companies need to innovate or they will be left behind by more agile competitors.

Example: As Reliance Industries settled into a steady pace, it advanced myriadic ventures like launching Reliance Jio, the company’s new innovative biy where revenue models were changed, resulting in dominance growth.

Conclusion: Estimation of the Company’s Location.

In knowing how to evaluate a business, it becomes is important where the company’s position in the cycle of life rests. A promising idea in a startup will be valued differently as compared to an old well established business which is stable and makes profits consistently. What is fundamental in getting an investment is understanding how your company is living its stage and what value, investors are most likely to use around the company.

Your business is in the decline stage, and in order to help to revive the company, there is a necessity for innovation. In the growth stages, reveune, market share and profitability has to be focused upon to draw in investors who value potential and speed. With these stages combined with understanding how investors value businesses, makes it easier for undifferentiated entrepreneurs to navigate through the investment complexities that do exist.