The Accurate Valuation complication in the Start-up Scenario in India
The start-up ecosystem in India is growing and that is good news. The technology or technology enabled start-ups are mushrooming, so are the number of VC firms and fund raising events. A successful closure in most cases runs for a month, where the process to reach an almost accurate valuation is lengthy.
The money available to invest is surplus and the number of quality start-ups are very less, for a large market like India. So, entrepreneurs have a larger chance to engage with multiple VC firms and secure multiple term-sheets1. This is where the problem begins. The multiple term-sheets make them seem invincible, which further drives their pre-money valuation to illogical levels. In my opinion, the prime focus of start-ups should always be on two things viz.
- A.Build a strong product and solve an existing problem in a large or niche market, and make a substantial quantifiable contribution to the market. The money will follow.
- B.Take an educated decision in picking the VC – They should consider a VC round as a combination of investment i.e. validation of their idea and a mentorship engagement which is more valuable than money.
The cartoon strip posted above depicts the current scenario in the Indian start-up – venture capital relationship.
Term Sheet: A non-binding agreement setting forth the basic terms and conditions under which an investment will be made. A term sheet serves as a template to develop more detailed legal documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.