Getting to Know Startup Valuation and the Term "Unicorn"

Since more and more Indonesian startups have managed to get funding with fantastic values, the term startup valuation has been discussed by the public. So what exactly is valuation and how do you do the calculations to determine the valuation of a startup?

In short, valuation is the value of a startup. Because generally startups are still classified as semi-enterprises, the valuation value is usually determined based on the agreement between the founder and the investor. No calculations are sacred to determine the valuation.

Generally, investors have benchmarking internal and valuation calculation procedures, starting from the capabilities of the founder/co-founder, the products being marketed, the traction of users to the potential of the product in the future.

On the other hand, valuation also requires proof. When someone asks "what is the value of a particular company?", the answer must reflect what components can be listed in determining that value. Interestingly, startups in Indonesia themselves have a unique process, so one another sometimes has a different approach in calculating valuations. The amount of capital invested, the number of investors, the strength of the product and the credibility of the founder are heavily involved in it.

The easiest valuation calculation can be exemplified by calculating the initial capital and injection of investor funds. For example, a startup has an initial value of Rp. 10 billion, then a venture capital adding Rp 10 billion in funding, means that the startup's valuation will be Rp 20 billion with a 50% stake owned by the venture capital. Usually this calculation will run if the startup is already established and what is produced is clear.

However, in practice it is not that easy to calculate the valuation achievement. Managing Partner of East Ventures Willson Cuaca say:

"To determine the valuation value of a startup is actually very difficult. From the founder's perspective, they feel that what they are doing is very expensive. Meanwhile, from investors, we see that if we enter the current valuation, at what valuation we can exit. So the valuation at the time of investment it is determined by the median value of the expectations of investors and founders."

Willson added that the factors that most influence the valuation of startups themselves are growth rate, at least 30% MoM (Month-on-Month).

Startup valuation calculation

To determine the value of their own valuation, one startup with another startup does have a different approach. There is several things that might affect the startup's valuation. The first is the value determined by the market (generally represented by investors). For example, if an investor says startup X is worth $5 million, then that's a decent value. But sometimes the founder feels that the value should be higher, for example, it turns out that there are assets or strengths of business talents that are calculated to be worth more, but if the startup can't raise money from those assets that are worth the valuation, then the startup must accept the market assessment.

Startups actually have the right to determine their own values. Things that may be shown to refute a valuation that is considered too low can use financial comparisons and projections. Comparisons are usually made by assessing the capability and pace of development of startups playing in the same sector in the same market share. How the product range, user traction to the product variants in it will be an important part of the comparison.

The second is financial projections. It is not easy to ascertain the numbers, but the existing trends and user traction from the previous time should be used as a reference, especially for digital products, so the projection will be easier to analyze based on the marketing efforts that will be applied.

The easiest way to show valuation is none other than showing business profits. Show everyone that the business being run is capable of providing fantastic profits. This is also a challenge for startups, because on average, in the initial phase, the focus of the business will be on user acquisition and market share expansion. For this reason, questions will usually arise which refer to how many years will it take for the business to be profitable? Comparing how many similar companies and their comparison in achieving profit?

Basically, determining the valuation of a startup is indeed an art process. As in a painting, the assessment is sometimes based on points that are difficult to calculate mathematically.

Why can reach unicorn level?

After learning about valuation, most people will talk about unicorns, a "title" given to startups that have a valuation of more than $1 billion. In Indonesia itself, there are not many unicorn startups. One of the frequent expected are Tokopedia, Traveloka, and Go-Jek. On last funding round, Go-Jek managed to freeze the valuation of $ 1,3 billion.

Then the question arises, why did Go-Jek's valuation reach that number? What influences it? To explain this, we tried to discuss with MDI Ventures CEO Nicko Widjaja.

Nicko explained a lot about business dynamics in the on-demand market share and competition in the sector itself. Specifically regarding the discussion of Go-Jek and its unicorn title, Nicko also conveyed how the market view from the eyes of investors gave confidence to increase Go-Jek's valuation itself.

"With Grab raises $600 million in Series F funding (at about the same time as Go-Jek's funding), Go-Jek competes in the market (on-demand local) which is not yet clear who the market leader is. Currently the assessment is driven by market value. Didi has a valuation of $36 billion, Uber $70 billion, and finally Uber China was acquired by Didi."

He continued that at the same time all venture capital supporters invest to find a "killer" for market share in the region. Go-Jek's unique value as the future of its business is the revolution in payment services with Go-Pay. They do not set themselves up as players in the transportation sector, but as a platform that provides various services for daily needs through an on-demand system.

"Being an investor in emerging markets in Southeast Asia means that we invest in ecosystems and infrastructure. Go-Jek has played an important role in building their ecosystem and infrastructure to [cultivate] a digitally literate society," said Nicko.