Ep. 184: Bharat Kanodia - “That company is worth what!?” - an insider’s view of business valuations.

Connect with Bharat: https://www.linkedin.com/in/bharat-kanodia-asa/

Tedx - https://youtu.be/zicGCnM8Hag

YouTube channel - https://www.youtube.com/c/whatsitworth

Blog - https://www.inc.com/author/Bharat-Kanodia

Full Episode Transcript:

Adam: (00:06)
Welcome to Count Me In I'm Adam Larson. And today we're exploring the art and science of business valuations with Bharat Kanodia, the founder and chief appraiser at Vatra and Silicone Valley. Bharat has valued over 2000 businesses and unique assets, including Uber, Airbnb, and the Golden Gate Bridge. In our conversation today, he shares his insights on how company founders can seek to maximize their valuations and the key questions to ask venture capitalists before taking their money. It was so exciting to get an insider look at this process that drives so many of the innovations and companies in our lives. So let's get started Bharat. Thank you so much for coming on the podcast today. We really appreciate you taking time out of your busy schedule to meet with us. And today we're going to be talking about valuations and venture capital and all that. So, just to start off, why, do valuations matter to a startup when you're just getting started?

Bharat: (01:10)
Adam, thank you so much for having me. Startups never have a profit and they're lucky if they have a product or customers yet they need to attract investors, employees, and customers. So how do they do that? They do that by using a pie in the sky currency called valuations. And so company raised so and so money at this and this valuations, that's a pie in the sky. That's just, you know, way for them to attract people. That's their marketing almost nowadays.

Adam: (01:50)
So is that actually accurate? Like how, how many times is that valuation actually accurate when you actually find out what the profit of the company over a certain period of time?

Bharat: (02:00)
Well, accuracy used to be absolute back in the day, but now accuracy is measured in shades of gray, if you will. So yeah, I mean, you know, somebody cut a check for that valuation. So who am I to say that number is not accurate? It is accurate, but I would say it is inflated. and the reason it is inflated is because say, if somebody paid, raised $5 million and the evaluation is a hundred million, they paid only a $5 million for a fraction of the company. So they extrapolating that 5 million to a hundred million. Now, if somebody were to buy the entire company, would they pay a hundred million dollars? Probably not. It's kind of like difference between wholesale and retail. If I buy one cup, it's $5. If I buy 50 cups, it might be a dollar a cup.

Adam: (02:57)
That makes sense. So that would be why a lot of valuations that you see, especially like when you hear about 'em on in the news, that would make sense why they're so high. So many times

Bharat: (03:07)
They are high all the time, bebecause plus they also wanna show their employees that, Hey, look, last year, our valuation was 10 million and now it's a hundred million. So we've grown 10 X

Adam: (03:19)
.

Bharat: (03:19)
So you ought to be working harder and doing good things, you know? So this has become their marketing. You know, you never hear in the media that this company was at 10 million last year, and this year they're at 8 million. When was the last time you heard those news? No, never because they don't get traction. They're not sexy. Yeah. They don't get attention. So you only hear all these news and these headlines about these inflated valuations, because it feeds into the whole venture capital ecosystem.

Adam: (03:53)
So I'm a venture capitalist, you know, what should I be looking at before I start investing in a startup that I see, oh, look, this has gotten, you know, this valuation, what else should I be looking at? Besides the valuation.

Bharat: (04:06)
You should be looking at what they're going to do with that money. What have they done with that money? Have they grown that company that much? Or, just simply ask, Hey, why did you receive a, 5 million raise at a hundred million valuation? Explain it to me. Why? You know the question why, you'd be surprised is the most important question that people need to ask the how and the who and the, what, you know, you get lost. The why is the real question? And let people answer that question to you. You know, sometimes they'll explain it to you and sometimes they'll just say, Hey, somebody cut me a check for 5 million at a hundred million valuation. I am not going to say no.

Adam: (04:49)
Hmm. I mean, not many people would, right?

Bharat: (04:52)
Well, sometimes maybe you should, because at each inflection point they will expect you to double the valuation. So the next time you go out and raise capital and you're not able to raise capital at 200 million valuation, you're a loser. So whatever valuation you get this time, make sure you're able to raise, at least double that valuation next time.

Adam: (05:17)
So how do you do that?

Bharat: (05:20)
The biggest way to do that is to make sure your product is getting traction is growth in the product. They don't venture capitalists don't care about profitability or revenue. Anything like that. What they're really caring about is is your product or whatever you are putting out there as a product or a service is that gaining traction. And one of the metrics to measure how it's gaining traction is revenue. It's one of the metrics it's not the only metric the other metric could be. I don't know, traffic or users or what have you, but you have to just make sure whatever product or whatever you're putting out there is gaining traction. And it's doubling in size every year. If it's not doubling in size every year, you got a problem.

Adam: (06:03)
All right. So, you know, your venture capital, your venture capitalist has said, okay, we're going to start. We're going to looking into your start. Investing in this startup. Are there multiple valuations that can happen to see? Hey, like this is where we're at at different times. Is that something that is commonly done?

Bharat: (06:20)
Yeah. Most definitely. For example, this Stein, right? You're looking at the back end of this Stein. I'm looking at the front, right? I've got the logo here in the front. Somebody's looking from this side. Somebody's looking from top. Everybody sees a different perspective of the same time, but it is the same Stein. So everybody, you know, depending on the tax person or the accountant or the insurance or the investor or the employee, everybody has a different perspective off the valuation of the same company and they're not wrong. It's their perception. It's their perspective. but it's the same company. So if the company sold raise capital for, you know, raised $5 million at a hundred million valuation, that is one perspective. That is not the only perspective. That is a perspective. There could be another valuation of say 50 million or 20 million or zero. You know, somebody might say the company is worthless. Who's to say they're all incorrect. I would say they all are correct. Depending on the perspective they have.

Adam: (07:36)
Do you have any examples of, of, of a time you've seen that happen?

Bharat: (07:42)
Not one or two, I mean, many, many examples. I mean, every company that's out there right no...