The Reserve Bank of India (RBI) has launched Unified Payments Interface (UPI) service for feature phones called UPI123Pay.
At present, efficient access to UPI is available on smart phones. Considering that there are more than 40 crore feature phone (e.g. Nokia dabba phone) mobile subscribers in the country, UPI123pay will materially improve the options for such users to access UPI.
With this launch of new UPI for feature phones, Das added that it would help the National Payments Corporation of India (NPCI), an umbrella organization serving retail payments and settlement systems in India, reach its goal of processing a billion transactions a day.
UPI123Pay will also assist RBI to achieve its objective of a less-cash economy and financial inclusion.
Features:
Feature phone users will now undertake a host of transactions based on four technology choices. These include calling an IVR (interactive voice response) number, app functionality in feature phones, missed call-based approach, and also immediacy sound-based payments, the RBI stated.
Such users can make payments to friends and family, pay utility bills, recharge the FAST Tags of their vehicles, pay mobile bills, and allow users to check account balances. Adding customers will also link bank accounts and set or change UPI PINs.
Further, the 24×7 helpline ‘Digisaathi’ will assist the callers/users with their digital payments queries via the website and Chabot.
Users can visit www.digisaathi.info or call 14431 and 1800 891 3333 from their phones for their digital payments and grievances queries.
Distinct options:
App-based Functionality: App could be installed on the feature phones, allowing several UPI functions open on smartphones to be functional on feature phones.
Missed Call: By dialing a missed call on the number displayed at the merchant outlet, feature phone users will be capable of accessing their bank account and performing routine transactions such as receiving, transferring funds, regular purchases, bill payments, and so on. The customer will accept an incoming call asking them to verify the transaction by entering their UPI PIN.
Interactive Voice Response: UPI payment via pre-defined IVR numbers would necessitate users making a secure call from their feature phones to a pre-determined number and completing UPI on-boarding formalities before they could begin making financial transactions without the internet.
Proximity Sound-based Payments: This technology utilizes sound waves to permit contactless, offline, and proximity data communication on any device.
How to use UPI123Pay?
A shared server site library permits feature phone holders to use digital processes to transact.
The UPI123Pay feature does not require internet connectivity to transact online. Additionally, this service is available in various Indian languages.
The smartphone and feature phone users can now effortlessly transact digitally with the new facility.
UPI for feature phones is a three-step process call, choose and pay.
Before initiating to make the payment, it is required that the user links their bank account with the feature phone.
Further, using his/her debit card, they will be required to set a UPI PIN.
Once the UPI PIN is created, the user can use their feature phone for transactions just like a smartphone user.
The feature phone user needed to call on the IVR number and choose the phone relying on the service mandated such as money transfer, LPG gas refill, FasTag recharge, mobile recharge, balance check, etc.
To transfer the money, one will have to choose the phone number to whom money is to be transferred, add the amount, and enter UPI PIN.
To pay to a merchant, they can use an app-based payment method or missed call payment method.
They can also use the voice-based method to make digital payments.
Actual steps/ process for using UPI123Pay
#Dial the IVR number 08045163666 on your phone.
#On the IVR menu, select your preferred language.
#Now, choose the bank linked with UPI
#Press ‘1’ to confirm the details.
#Press ‘1’ to send money by using your mobile number.
#Enter the mobile number of the recipient.
#Confirm the details.
#Now, enter the amount that you want to transfer.
#Enter your UPI PIN and authorise the money transfer.
Because the month of March 2022 has already begun, Indian citizens must complete a number of financial responsibilities by the conclusion of the month. Several deadlines, such as the final day for submitting a belated or updated income tax return (ITR), the PAN-Aadhaar link, and others, are approaching in March. As a consequence, here are the six most crucial financial tasks to consider and do, if any are applicable to you.
Calculate your advance taxes
Missed the due date instalment of 15 March? You can still save some interest component by calculating the income for FY22 and paying taxes on or before 31 March 2022.
Section 234C interest is levied on each advance tax instalment. So if you have not paid your advance tax instalments on time, you will have to pay interest at 1% per month.
Section 234B interest is levied from 1 April till the date the tax is paid.
If you directly calculate your tax liability at the time of filing of filing your return (which happens in July), you will have to pay interest under both section 234B and section 234C.
So, it is advisable to compute your income and pay taxes on or before 31 March 2022.
Filing belated or revised Income Tax Return (ITR)
The deadline for filing a revised income tax return (ITR) is 31st March 2022. Following the epidemic of Covid-19, the government has extended the deadline for reporting updated ITRs for FY 2020-21 from December 31, 2021 to March 31, 2022. Also because the deadline for filing a belated or revised return for AY 2021-22 is March 31, 2022, you must submit your updated or belated ITR on or before that date to avoid a penalty under Section 234F of the Income-tax Act of 1961.
Aadhaar-PAN link
Following the government extended deadline from September 30, 2021 to March 31, 2022, Aadhaar linking with PAN is now possible till March 31, 2022. To avoid PAN becoming inactive, these two most important documents should be linked on or before the deadline. As a result of possessing an invalid PAN, you may be subject to a Rs 10,000 penalty under section 272B.
KYC compliance of bank accounts
The Reserve Bank of India (RBI) has set a deadline of March 31, 2022, for periodic updation of KYC in order to prevent restrictions on account operations for non-compliance. The account holder can avoid having his or her bank account suspended by satisfying KYC compliance.
Making contributions towards your tax saving instruments
As a tax saver, keep in mind that beginning in FY 2021-22, an individual can choose between the old and new tax regimes, making use of tax exemptions. As a result, it’s critical to make sure you’ve made the needed minimum contribution before the end of the fiscal year to keep your tax-saving instrument operational. As a result, you must ensure that you have successfully deposited the required contribution in your tax-saving instrument on or by March 31, 2022, or your tax-saving funds would become invalid and your tax liability for the fiscal year 2021-22 will be increased.
Every citizen of India is liable to pay tax if their income comes under the Income Tax bracket. The government depends mainly on its tax collection to finance its spending throughout the year. This funding is utilized in the development of nation, reforming infrastructure, and the betterment of society, which helps in shaping the economy of the country. There is a tax structure in India that is followed and as per the tax slabs; individuals are required to pay their taxes.
Let us understand about advance tax and how advance tax is calculated in India.
What is Advance Tax?
Advance tax is the amount of income tax that should be paid much in advance instead of lump-sum payment at the year-end in instalments as per the due dates given by income tax department. Advance tax is also known as ‘pay as you earn’ tax and is supposed to be paid in the same year the income is received.
Who Needs to Pay Advance Tax?
As per section 208 of Income-tax Act, 1961, a taxpayer needs to pay advance tax if their tax liability is 10,000 or more in a financial year.
Advance tax is for those who earn money from sources other than salary. It is applicable for self-employed individuals, professionals, and business men if their income exceeds a certain limit This includes money that comes from shares, interest earned on fixed deposits, rent or income received from house tenants. Senior citizens who are more than 60 years of age are exempt to advance tax.
How to Calculate Advance Tax?
Listed below are the 4 steps that will help you calculate advance tax:
1. Make an estimate of the total income earned by you.
2. Subtract all expenses from your income, including medical insurance premiums, phone costs, travel expenses, etc.
3. Now, add other income that you received apart from your salary. This includes interest from FDs, house rent, lottery earnings, etc.
4. If the amount of tax calculated is more than 10,000, then you are liable to pay advance tax.
How to Pay Advance Tax?
Just like regular tax payment, advance tax payment is also done using challan. There are many banks that allows you to pay advance tax through challans. You can also pay advance tax online from the comfort of your home. Here’s a step-by-step guide that will help you pay advance tax online without any hassles –
1. To pay advance tax online, you need to click on the government’s official website – http://www.tin-nsdl.com
2. Choose the correct challan that is ITNS 280, ITNS 281, ITNS 282 or ITNS 284 as relevant to pay your advance tax.
3. Fill in your PAN card details along with other important information such as your address, phone number, e-mail address, bank name, etc.
4. Once you have entered all the details, you will be redirected to the net-banking page of the website.
5. Now, you will receive all the information regarding your payment. Enter all payment details and pay your advance tax online successfully.
What are the Benefits of Advance Tax?
Here’s a list of benefits you get when you pay tax in advance –
1. It reduces the burden of paying tax at the last moment.
2. It helps in mitigating stress that a taxpayer may undergo while making tax payment at the end of fiscal year.
3. It saves people from failing to make their tax payments.
4. It helps in raising government funds as the government receives interest on the tax collected.
What are Due Dates for Payment of Advance Tax?
Here’s a schedule of advance tax payment for individual taxpayers –
15 June – 15% of advance tax liability
15 September – 45% of advance tax liability
15 December – 75% of advance tax liability
15 March – 100% of advance tax liability
1. What if I pay advance tax* less or more than required for a financial year?
The IT Act has provided four dates and the percentage of advance tax to be paid on each of these dates. If by chance you have paid the excess advance tax you would receive a refund subject to section 237 of the Income Tax Act with 6% interest per annum on the excess amount subject to Section 244A of the Act if the excess is more than 10% of the tax liability.
If on March 15, you find that you have a shortfall of advance tax to be paid you can still pay the advance tax before 31st March and the same would be treated as advance tax.
2. What is the penalty for missing the dates of payment of Advance Tax?
If you miss the dates for payment of advance tax you will be levied interest under section 234B and 234C of the Income tax Act.
3. Can I claim deduction under 80C while estimating income for determining my advance tax?
Yes, you can claim deduction under Section 80C while estimating income for determining your advance tax.
4. Is an NRI liable for payment of advance tax?
Yes, an NRI is liable for payment of advance tax on the income earned in India as per provisions of the Income tax Act in force for the relevant assessment year.
In case of any confusion or queries, please seek professional guidance.
Ever wondered how the shares of loss-making companies are priced?
Well yes, seems like SEBI has started wondering too.
But not before these huge IPOs have caused massive losses to the public.
Zomato is near its issue price, Paytm has eroded 2/3rds of investor wealth, so on and so forth.
Last Friday, the securities market regulator has come out with a consultation paper to tackle the issue of pricing of such IPOs.
First – what is currently being done?
At present, only few ratios like Earnings Per Share (EPS), price to earnings, return on net worth etc are required to be disclosed.
What is the problem identified by SEBI?
They say that these parameters are typically descriptive of companies which are profit making and do not relate to a loss-making firm.
What does the consultation paper propose?
In addition to the current ratios, additional disclosures of Key Performance Indicators (KPIs) to be made-
– relevant KPIs during the three years prior to the IPO and an explanation of how these KPIs contribute to pricing
– KPIs to be audited/ certified
– disclose all material KPIs that have been shared with any pre-IPO investor at any point of time during the three years prior to the IPO.
– Details of “immaterial” KPIs and their justification
– Comparison of KPIs with national/ global listed peers
It is far from being a law yet and is only open for the public comments.
Apart from KPIs, an issuer firm has been proposed to make disclosure of valuation of issuer company based on secondary and primary sale, in the 18 months prior to the date of filing of the DRHP/RHP.
This is subject to conditions where either acquisition or sale is equal to or more than 5 per cent of the fully diluted paid-up share capital of the issue firm in a single transaction or a group of transactions in a short period of time.
With reference to valuation of an issuer company based on secondary sale or acquisition of shares and primary or new issue of shares, Sebi has suggested disclosure of floor price and cap price being times the Weighted Average Cost of Acquisition (WACA) based on primary/ secondary transaction(s) should be disclosed in a tabular form.
SEBI also said that an issuer firm should offer a detailed explanation for offer price along with comparison of the issuer ‘s KPIs and financials ratios such as EPS, return on net worth and net asset value for the last two full financial years and the interim period, if any, included in the offer document.
This will enable the investors to have a comparative view of the KPIs and other financial ratios for the same period, as per SEBI.
This is another instance where the regulator has woken up after the public has been fooled.
Having said that, this is definitely a step in the right direction.
For any comments or queries, please reach out to us at contact@vprpca.com
We saw the rise of 44 unicorns in India during the last calendar year itself. Studies have shown that raising funds for a startup in India has never been easier.
The Hon’ble Finance Minister used the words “digital”, “startups” and “technology” in historic proportions in Budget 2022. In one of the many firsts, the Speech also acknowledged that there are various on-ground challenges plaguing the startups and new businesses in India.
It was indicated that the Government will form an expert panel to look into the same and resolve those issues. This is a laudable move. Yet it gets us nowhere.
The tax and regulatory environment is not geared to handle the booming venture capital and private equity investment in Indian start-ups. It definitely helps to be officially recognized as a start-up which provides tax breaks, angel tax exemptions etc. under Income tax laws.
The official start-up recognition scheme is not completely inclusive as it requires the start-ups to be doing something “innovative” in order to qualify as a start-up. This has led to merely 54,000 registrations under the start-up scheme since past 6 years.
Mind you, over 1.5 lakh companies are incorporated each year alone in India. With a booming funding environment, investors are not selectively investing in “innovative” companies anymore.
Over the years, various round table discussions have been held with bureaucrats and even the Prime Minister and various industry representations have been submitted as well – all of which ask for widening the definition of a start-up.
The Budget 2022 was historic for start-ups but in many ways, it has actually done close to nothing.
Public Provident Fund (PPF) is one of the most popular investment options in India, largely due to higher interest rates and complete Income tax exemption.
However, a lesser known feature is that one can obtain a collateral-free personal loan against PPF balance available at 1% interest rate.
We gain an insight on the key features, pros and cons of this product.
Key features
The significant features of taking a loan against your PPF account are as follows:
Account holders can avail this loan facility between the 3rd and 6th financial year from when PPF account was opened. The loan ends in the 6th FY since starting from the 7th financial year, the PPF account can be partially withdrawn.
The loan amount is capped at 25% of the balance at the end of the second financial year preceding the year in which the loan was applied for.
Interest is charged at 1% more than the interest earned on the balance in the PPF account. Once the interest rate is set for a loan, this rate will be applicable till the end of the tenure.
In case the loan against the PPF account is not paid off within 36 months, the applicable interest rate will be hiked to 6% more than the interest earned on the PPF balance.
The principal amount needs to be paid off first, followed by the interest accumulated. The interest amount should also be repaid in two monthly installments or lesser.
If the principal is repaid within the loan tenure, but there is a portion of the interest amount that remains to be paid, then the outstanding amount will be deducted from the PPF account balance of the individual.
It is not possible to avail a second loan on the PPF account until the first one has been paid-off completely.
Pros
No collateral or mortgage required – You will not be required to pledge any asset in the form of a collateral when taking a loan against your PPF account.
Repayment tenure of 36 months – The loan can be repaid within 36 months. This timeline is calculated from the first day of the month following the month in which the loan is sanctioned.
Low interest rates – This is one of the most significant benefits of availing a loan against your PPF account. Interest rates are far lower than those of traditional personal loans from banks.
Flexibility in repayment – The repayment of the principal amount of the loan can be done either in two or more installments (on a monthly basis) or as a lump sum.
Cons
PPF loan is available at 1% interest rate but you will forego the interest accumulation on the loan amount. So the actual cost of a PPF loan is PPF interest rate plus 1%. At the current interest rate, a PPF loan would effectively cost you 8.1%.
The time period is very limited. It may not be practical for some investors to require funds at such an early stage, except in case of emergencies
You lose the compounding effect on the interest amount foregone due to the loan. WAs PPF loan is available in the earlier part (between 3rd and 6th FY), the compounding effect of the interest foregone will be much high at the time of maturity.
Cumbersome compliances: PPF is largely a Government instrument and availing this loan carries considerable paperwork and compliances, as compared to a personal loan which is available in 3 seconds nowadays!
Conclusion
All in all, the loan against PPF balance has numerous restrictions while giving an attractive interest rate.
PPF should be seen as a retirement fund and withdrawals/ loan should be avoided, unless in case of emergencies.
However, it can prove to be better than a personal loan where interest rates sore as high as 20% p.a.
The information is purely general in nature and not intended to be an investment or financial advice. Please consult a professional for any advice before taking any action.
India is the world’s fastest-growing economy and yet there is no mention of the Indian debt market on global indices. Most major economies are listed since a long time.
“India has made significant strides in macroeconomic stability, and its government is more motivated than ever to encourage corporate-investment-driven growth,” says Chief India Economist Upasana Chachra.
“We think India will be included in two of the three major global bond indices in early 2022.”
Beyond the direct benefits of index inclusion—it could trigger $170 billion in bond flows over the next decade, lifting Indian bond prices while lowering borrowing costs—this milestone could have profound implications for the country’s currency, corporate bonds and equities.
A few implications of global-bond-index inclusion for India, and why it could signal the emergence of a new India.
1. Immediate Boost for Government Bonds
Major indices don’t simply track their respective markets—they influence them. When an index adds new constituents, portfolios pegged to those benchmarks must adjust their allocations accordingly. “India’s inclusion would trigger significant index-related inflows, followed by an allocation from active global bond investors,” says Min Dai, Head of Asia Macro Strategy.
2. Shrinking Deficit, Stronger Rupee
Index inclusion, while significant on its own, would also signal policymakers’ desire to support higher economic growth through investment. “This will push India’s balance of payments into a structural surplus zone and indirectly create an environment for lower-cost capital and, ultimately, be positive for growth,” says Chachra, adding that India’s consolidated deficit could shrink to 5% of its GDP by 2029, down from 14.4% for the 2021 fiscal year.
India’s currency would also feel the impact. The shrinking deficit could bolster the value of the Indian rupee by 2% a year against a basket of other major currencies, in exchange rate terms. While India’s long-term 4% annual inflation would imply a 2% depreciation in the value of the rupee in nominal terms, at around a 6% yield, Indian government bonds could offer investors medium-term returns of around 4% in dollar terms, “which is quite attractive for foreign investors,” says Dai.
3. Capital needs of Corporates
Inclusion in global bond indices could also help Indian corporations with their capital needs. When foreign capital flows into government bond markets, it lowers overall borrowing costs, improves debt sustainability and also drives demand for other—read corporate—fixed-income securities. That’s potentially good news for India’s domestic corporate bond market, which foreign investors have largely overlooked.
Foreign investors would gain access to a significantly larger pool of Indian corporate issuers.
4. Equities Buoyed by Better Growth
The opening of India’s sovereign bond market may also bode well for equities, which stand to benefit from lower borrowing costs and a healthier macroeconomic backdrop. Among these, large private banks could be the most obvious winners. Still, nonbank financials— such as those focused on mortgages, credit cards, insurance and asset management—could enjoy the spillover effects of a more robust bond market in India.
Sources:
1. Morgan Stanley research report
2. India’s global indices report
3. RBI Press Release dated 8 October 2021
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On the occasion of the first National Startup Day, let us take a look at how startups are valued.
Background
By its very nature, valuation is highly subjective. For instance, let us consider the world-famous painting of Mona Lisa. The painting is worth billions for some whereas others may consider it as an average piece of work. Therein lies the beauty of valuation; it is in the eyes of the beholder.
The three most common globally accepted methods of valuing a business are tabulated below for ease of understanding:
1. Income approach
Popularly known as the Discounted Cash Flow (DCF) method. In this approach, estimated cash flows for the foreseeable future are discounted to present value and business is valued accordingly.
2. Asset approach
This approach is generally used when the business is not a going concern viz. during liquidation, untimely losses etc. The assets and liabilities are valued based on their current realisable value and that is considered as value of the business
3. Market approach
This approach assigns the value of a business based on the value of comparable companies in same/ similar industries, adjusted for their specific parameters.
These methods have been used in valuation of businesses since decades and have been accepted by businessmen, lawmakers, Courts and investors alike.
However, one common feature in the above approaches is that it pre-supposes a business which is established and generating cash flows using its assets.
Start-ups, by their very definition, are disruptors. They disrupt industries, products, processes using innovative means. It is difficult to call them “established” in any sense or assume that their cash flows (if not already spent on marketing) will remain constant. Profitability seems to be a cursed word in the start-up investor circles.
As we will explore later in this article, the traditional methods find themselves inadequate to arrive at the value of a new age start-up.
With the dawn of the 21stcentury, new methods have emerged which attempt to find the true value of a start-up. But a good valuer understands that the actual value lies less in the numbers and more in the story of the start-up.
In this article, we look at the basics of valuing any business and how to go about valuing a new age start-up.
Valuation of start-ups
The valuation of start-ups is often required for bringing in investments either by way of equity or debt. The biggest differentiating factor in valuation of a start-up is that there is no historical data available on the basis of which future projections can be drawn.
The value rests entirely on its future growth potential, which, in many cases is based on an untested idea and may not have been based on adequate sampling of consumer behaviour or anticipated consumer behaviour. The estimates of future growth are also often based upon assessments of the competence, drive, and self-belief of, at times, very highly qualified and intelligent managers and their capacity to convert a promising idea into commercial success.
The major roadblock with start-up valuation is the absence of past performance indicators. There is no ‘past’ track record, only a future whose narrative is controlled based on the skills of the founders. It can be equated as founders walking in the dark and making the investors believe that they are wearing night vision goggles. While this is exciting and fun for the founders, this is risky for the investors.
This is why valuation of start-ups becomes critical and the role of a professional comes in – it is a way of definitively helping investors navigate the dark using facts, rather than fairy tales.
Why traditional methods cannot be applied?
Each of the commonly used methods discussed above pre-suppose an established business – which is profitable, has established competitors and generates cash using its assets.
However, this is missing in new age start-ups whose value can lie majorly in the concept and potential, rather than numbers with a track record.
The failure of each of the traditional methods in case of new age start-ups is tabulated below:
1. Income approach
A vast majority of start-ups operate under the assumption of not generating positive cash flows in the foreseeable future. Off late, this business model has been accepted and normalised by the investor community as well. Since there are no or minimal positive cash flows, it is difficult to correctly value the business.
2. Asset approach
There are two reasons why this approach does not work for new age start-ups:
– Start-ups have negligible assets – a large chunk of their assets are in form of intellectual property and other intangible assets. Valuing them correctly is a challenge and arriving at a consensus with investors is even more difficult.
– Start-ups are new but they normally operate under the going concern assumption; hence their value should not be limited to the realisable value of assets today.
3. Market approach
New age start-ups are disruptors. They generally function in a market without established competitors. Their competition is from other start-ups functioning in the same genre. Lack of established competitors indicates that their numbers may be skewed and not be comparable enough to form a base. However, out of the three traditional approaches, we have seen few elements of the market approach being used for valuing new age start-ups as well, especially during advanced funding rounds.
As we have discussed above, the traditional methods fall short in recognising true value to new age start-ups. The inherent question that arises is what methods should we use for valuing new age start-ups. To understand that, we have to see what factors drive their value (no prizes for guessing – profitability is not one of them).
Value Drivers for start-ups
While every start-up can be vastly different, we now take a look at few key value drivers and their impact on the valuation of a start-up.
Product
The uniqueness and readiness of the product or service offered by the start-up creates a large impact on the valuation of the company. A company which is ready with a fully functional product (or prototype) or service offering will attract higher value than one whose offering is still an ‘idea’. Further, market testing and customer response are key sub-drivers to gauge how good the product is.
Management
More than half of Indian unicorn start-ups have founders from IIT or IIM. While it may seem unfair prima facie, it is a fact that if the founders are educated from elite schools and colleges, the start-up is looked upon more favourably by the investors and stakeholders alike. Accordingly, it is imperative to consider the credentials and balance of the management. For instance, a team with engineers is not as well balanced as a team comprising of engineers, finance professionals, MBA graduates. Keeping aside the obvious subjectivity in evaluating the management, the profile of the owners plays a key role in valuing the start-up.
Traction
Traction is quantifiable evidence that the product or service works and there is a demand for it. The better the traction, the more valuable will be the start-up.
Revenue
The more the revenue streams, the more valuable the company. While revenues are not mandatory, their existence is a better indicator than merely demonstrating traction and makes the start-up more valuable.
Industry attractiveness
The industry attractiveness plays a key role in the value of a company. As good as the idea may be, in order to sustainably scale, various factors like logistics, distribution channels, customer base have a significant impact on the value of the start-up.
For example, a new age start-up in the tourism industry will be less valuable, as innovative or unique their offering is, if significant lockdowns are expected in the future.
Demand – supply
If the industry is attractive, there will be more demand from investors which make the individual companies in the industry much more valuable.
Competitiveness
The lesser the competitors, the more valuable the start-up will be. There is no escaping the first mover advantage in any industry. While it is easier to convince the investors about a business which already exists (for example, it must have been easier for an Ola to convince investors when Uber was already running successfully), it also casts an additional burden on the start-up to differentiate itself from competition.
Methods for valuing start-ups
One key observation would be that most value drivers described above are highly subjective. Hence, there is a need for providing standard methods using value drivers above in order to value the start-up in a manner comparable to others.
There are many innovative methods for valuing start-ups which try to reduce the subjectivity in valuation of start-ups which have come in the recent times.
Let us take a look at the most common methods of valuing start-ups:
1. Berkus Approach
The Berkus Approach, created by American venture capitalist and angel investor Dave Berkus, looks at valuing a start-up enterprise based on a detailed assessment of five key success factors:
(1) Basic value,
(2) Technology,
(3) Execution,
(4) Strategic relationships in its core market, and
(5) Production and consequent sales.
A detailed assessment is carried out evaluating how much value the five key success factors in quantitative measure add up to the total value of the enterprise. Based on these numbers, the start-up is valued.
This method caps pre-revenue valuations at $2 million and post-revenue valuations at $2.5 million. Although it doesn’t take other market factors into account, the limited scope is useful for businesses looking for an uncomplicated tool.
2. Cost-to-Duplicate Approach
The Cost-to-Duplicate Approach involves taking into account all costs and expenses associated with the start-up and the development of its product, including the purchase of its physical assets. All such expenses are taken into account in order to determine the start-up’s fair market value based on all the expenses. This approach is often criticised for not focusing on the future revenue projections or the assets of the start-up.
3. Comparable Transactions Method
Coming close to the traditional market approach, this approach is lucrative for investors because it is built on precedent. The question being answered is, “How much were similar start-ups valued at?”
For instance, imagine that XYZ Ltd, a logistics start-up, was acquired for Rs 560 crores. It had 24 crore active users. That’s roughly Rs 23 per user.
Suppose you are valuing ABC Ltd which is another logistics start-up with 1.75 crore users. That gives ABC Ltd a valuation of about Rs 40 crores under this method.
With any comparison model, one needs to factor in ratios or multipliers for anything that is a differentiating factor. Examples would be proprietary technologies, intangibles, industry penetration, locational advantages etc. Depending on the same, the multiplier may be adjusted.
4. Scorecard Valuation Method
The Scorecard Method is another option for pre-revenue businesses. It also works by comparing the start-up to others that are already funded but with added criteria.
First, we find the average pre-money valuation of comparable companies. Then, we consider how the business stacks up according to the following qualities.
· Strength of the team: 0-30%
· Size of the opportunity: 0-25%
· Product or service: 0-15%
· Competitive environment: 0-10%
· Marketing, sales channels, and partnerships: 0-10%
· Need for additional investment: 0-5%
· Others: 0-5%
Then we assign each quality a comparison percentage. Essentially, it can be on par (100%), below average (<100%), or above average (>100%) for each quality compared to competitors/ industry. For example, the marketing team a 150% score because it is fully trained and has tested a customer base which has positively responded. You’d multiply 10% by 150% to get a factor of .15.
This exercise is undertaken for each start-up quality and the sum of all factors is computed. Finally, that sum is multiplied by the average valuation in the business sector to get pre-revenue valuation.
5. First Chicago Method
This method combines a Discounted Cash Flow approach and market approach to give a fair estimate of start-up value. It works out
• Worst-case scenario
• Normal case scenario
• Best-case scenario
Valuation is done for each of these situations and finally multiplied with a probability factor to arrive at a weighted average value.
6. Venture Capital Method
As the name suggests, this method has been made famous by venture capital firms. Such investors seek a return equal to some multiple of their initial investment or will seek to achieve a specific internal rate of return based upon the level of risk they perceive in the venture.
The method incorporates this understanding and uses the relevant time frame in discounting a future value attributable to the firm.
The post-money value is calculated by discounting the rate that represents an investor’s expected or required rate of return.
The investor seeks a return based on some multiple of their initial investment. For example, the investor may seek a return of 10x, 20x, 30x, etc., their original investment at the time of exit.
Rising above numbers – The Story
An article about valuation about start-ups cannot be complete without understanding the importance of storytelling in valuation journey.
Professor Aswath Damodaran, widely regarded as the Dean of valuation, puts forth “If all you have are numbers on a spreadsheet, you don’t have valuation, you just have a collection of numbers.”
Let us attempt to understand the importance of stories in valuation by way of an example of valuing the shares of Rolex. We will attempt to value Rolex in three scenarios and the reader may assume the role of an investor on the verge of making an investment decision.
Scenario 1 – The earnings of Rolex are slated to grow at 9.5% for the next 8 years before dropping down to the GDP growth rate; the Operating Profit Margin will be 43%, the Net Profit Margin will be 16% and it will be able to generate Rs 2.54 for every rupee invested in the business.
Scenario 2 – Rolex is a manufacturer of luxury watches that can charge astronomically high prices for its watches, earn huge profit margins due to scarcity of luxury watches available to an exclusive club of wealthy individuals.
Scenario 3 – Due to the need to maintain its exclusivity, the revenues of Rolex will grow at a low rate of 9.5% for the next 5 years. The same need for exclusivity also allows Rolex to earn an above-average operating margin and maintain stable earnings over time because the client base of Rolex is relatively unaffected by the highs and lows of the economy.
As the reader would notice, Scenario 1 deals exclusively with the numbers whereas scenario 2 deals with the story. Scenario 1 will not inspire an investor but scenario 2 will not help the investor reach a conclusion either.
It is only in scenario 3 where the value of the business is derived by tying the numbers to the story of the company. Here, the numbers get a backing and are easier to understand for the potential investor. Merging story-telling with the numbers is the real hallmark of a good valuation.
Prof. Aswath Damodaran has laid down a brief five-step process for integrating story into numbers. The same is explained below:
Valuation of start-ups – A cocktail
Nobody knows what the future holds and valuers are not astrologers, though their success is largely measured by how well they can predict the future.
It is said that valuation by itself is a combination of science and art. The author has a unique take – valuation is a scientific art. It is an art constructed by the valuer yet there is a definite method in the madness. The sanctity of a valuation is preserved by being able to back up the numbers using logical numbers, narratives and assumptions.
New age start-ups are disruptors in their own right and a necessary tool for global innovation and progress. By their very nature, start-ups disrupt set processes and industries in order to add value. In that process, they transcend traditional indicators of success like revenues, profitability, asset size etc. Accordingly, it is no lean feat to uncover the true value of a start-up.
While the traditional methods fall short, there is no dearth of new innovative methods used to value start-ups based on their value drivers. However, valuation of a start-up is much more than application of methods – it is about understanding the story of the future trajectory and being able to communicate that narrative using tangible numbers.
A good valuation of a start-up is a cocktail of the story and the numbers which can help the investors make informed decisions to navigate the uncertainty of the future.
We would love to hear from you. Do reach out to us at contact@vprpca.com
A question I get asked quite a few times – how do you boost your confidence?
Having been a national-level public speaker, I can share a bit about my experience with gaining confidence to address thousands of humans at once.
First things first, confidence is intrinsic. It is within you.
Others may give you motivation and assurances, but confidence essentially comes from within. Not from your Dad. Not from your better half. But from within.
The beautiful corollary is that confidence cannot be shattered by external forces too.
Read that again.
We have heard so many people say that their confidence got shattered by “not landing that dream job” or “failing that exam” etc. But that is an incorrect analysis. Confidence is entirely an emotion inside you.
With that clarity, we come to the question – How to boost confidence?
The answer is simple and plain (so simple that most people will ignore this).
Practice.
Practice!
Practice!!!
When I gave my first speech at a national level, it was to a crowd of 2000 CA Students. Mind you, CA students have boring lives already. They don’t take shit from public speakers.
I remember I had prepared the entire speech well.
But my legs were still shaking.
I did manage to deliver the speech well because I had felt confident beforehand.
Next speech was in Kolkata. I realised my legs weren’t shaking anymore.
When I stepped off, I wasn’t sweating profusely like last time.
It got better.
By the 6th time, I was extremely comfortable on stage addressing a crowd of 3000+ students.
By the 7th time, I was effortlessly controlling the atmosphere in the podium.
That is the simple key to boosting confidence – PRACTICE.
You are scared of that upcoming exam? Take a mock test.
Scared of that job interview tomorrow? Practice in the mirror.
Scared of talking with unknown CXO level people? Practice with strangers in your building.
There is a lot of buzz around “tokenisation” nowadays.
The word sounds complex but let us decode it in simple terms. A final verdict awaits you at the end.
The way we pay money through credit or debit cards on Amazon, Flipkart, Uber, Zomato etc, will not be the same anymore.
Current scenario
When we enter the card details for the first time, the website gives us an option to save the card details (Card number, name, expiry) for ease of future use.
Let’s face it, we all check that box for convenience. No one wants to enter the 16 digit card number and details again.
What is the need for change?
The card details are stored with the merchants and this leads to an issue – in case hackers steal your data (and data leaks are alarmingly increasing nowadays), your data is at risk.
Your money is not really at risk – the hackers cannot directly steal money from your cards since your CVV (Card Verification Value) pin is not stored in the data.
But even the details of your cards pose as a privacy threat and can be misused in combination with other data.
Welcome to tokenization!
The Reserve Bank of India brought in CoF (card on file) tokenization guidelines that mandate replacing actual card data with encrypted digital tokens to facilitate and authenticate transactions.
Tokenisation is nothing but replacement of actual card details with an alternate code called the “token”, which shall be unique for a combination of card and token requestor.
A tokenised card transaction is considered safer as the actual card details are not shared with the merchant during transaction processing.
Now what?
You would no longer need to (or allowed to) save the 16-digit card number and the card expiry date on the merchant website.
On the backend, the card’s CVV number will no longer be required for digital payments making the entire system safe and secure.
If you choose not to opt for tokenisation, you will have to manually enter your card details every time you transact.
How does card tokenization work?
On the end-user front, nothing changes. Users need to enter their card details and opt for tokenization while making online transactions at the check-out window of the shopping portal.
However, merchants will now need to forward the token to respective banks or the card networks. A token is produced and sent back to your merchant, which then, at that point, saves it for the end-customer. As customers, we don’t have to recall the token as the experience is not going to change for you while making digital payments.
Is the tokenization service free?
Tokenization is absolutely free for users, who can tokenize any number of cards. However, only domestic cards fall under the current guidelines.
Tokenization is not applicable to international cards as of now.
How will it benefit users?
Customers need safety and security at any place they shop. In this time where digital fraud presents dangers all through the economy, building trust and connection with clients starts with keeping their payment and other individual information safe.
Tokenization shields businesses from the negative financial impact of data theft as even if there is a breach, the merchant would not have important data that can be stolen.
Tokenization can’t shield your business from an information and data breach—yet it can diminish the bad outcomes of any possible breach.
When will it come into effect?
This was initially slated to come into effect from 1 January 2022. However, the payment systems are not yet geared to accept tokens. Hence, the Reserve Bank of India has extended the date to 1 July 2022.
Final verdict
Whenever a new compliance is mandated, we fear a new headache.
But this is an exception to the rule.
The tokenization will only make it easier for end-users to transact online. No need to remember those CVVs.
There is no effort from end users for tokenization except that we need to do it for the first time. Thereafter, the token will transact automatically.
As with any new rule, the effectiveness lies in its implementation.
We can hope that tokenization will be a smooth ride and make online transactions safer, faster and reliable.
