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?

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.

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?

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.

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.

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.

.

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.

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.

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.

Hmm. I mean, not many people would, right?

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.

So how do you do that?

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.

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?

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.

Do you have any examples of, of,
of a time you've seen that happen?

Not one or two, I mean,
many, many examples. I mean,

every company that's out there
right now, every company,

not one company pick a company, you
know, that recently raised capital.

So, you know, any company that
recently raised capital their,

valuation for what they raise money
for versus their accounting versus

their valuation. If
they're looking for a bank,

loan is going to be very different.

Yeah. That makes sense. All right. So
let's talk about the founder of a startup.

Are there ways that they can help maximize
the values they're going through all

this process that we've
been talking about so far?

No, isn't that a million dollar question?
Isn't that the question you want?

Really the answer to that, how do I

maximize the value of my company?

It's kind of like going to the doctor
and asking, Hey, how do I get taller?

Or how do I, you know, head
back on my blood pressure?

so this is what you do.

There are two ways you can value
maximize the value of your company.

One is you want recurring cash flow.

You want recurring cash flow.
You want stable cash flow.

so what does that mean?

You want to be in a
business where the same

customer is writing. You checks
weekly, monthly, quarterly,

yearly.

You don't want to be in a business
where you have to go out and find

a new customer on a
daily basis. That's one,

two, you want to run your business
almost like it's on autopilot.

So you want to use technology quite a bit.

You want to have layers of management
so that things are done without you

getting involved on a day to the basis.

now how do you do that now
as a founder or a bus as a

business owner, you could say that no
things won't happen without me. Well,

that might be true, but you

might not be able to get a hundred
percent to autopilot, but how about 20%?

How about 30%? How about
50% start somewhere,

start pushing technology in your business,

wherever you can or start
delegating wherever you can.

And eventually you will
go from 10% to 20% to 30%.

Don't just start off by saying that, Hey,

my business can't function without
me. That's not going to work.

So few things.

Yeah. That makes sense. So, as
you know, as they're doing that,

doing the suggestions you just made,

and then they start meeting with
different venture capitalists,,

trying to work on the
funding that they need.

Are there certain questions that they
should be asking as they're going through

that process?

Yeah. Plus question, you should
be asking a venture capitalist,

why should I take your money? How are
you going to help me besides money?

Right? I mean, there are many
people who can write a big check.

That's not a big deal, but how will you
help me? How will taking your money?

Help me. That's a good question to ask,

how will you mentor me? How will
you bring in more customers?

How will you help me grow my
company instead of just money?

And two, just ask them,

what will it take for you to give
me a double valuation next time

around?

So if my valuation is a hundred million
dollars and I just raised 5 million from

one person, ask them,

what will you be looking
for to give me a 200,

200 million valuation? They know
they want to tell you, ask them.

So as we wrap up our
conversation, I, I can't help,

but wonder what the, how the
market has changed, you know,

in the midst of COVID and
everything that's happening.

And as we've come out of the pandemic
and, wars happening around the world,

what do you think the market and startups
are going to look like? You know,

as we go five, 10 years into the future.

Raising

capital will be,
relatively straightforward.

People are going to be
using more things like

crowdfunding and crowdsourcing and
going to a big sharp venture capitalist,

kind of like what's happened to the
publication world, right? You can,

self-publish a book through Amazon,

but you could also go to one of the
big boys in publication like Simon and

Schuster or John Wiley are one of
those. So depending on what you want,

I think more avenues of,
bootstrapping are going to open up.

This has been Count Me In IMA's podcast,

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perspectives of thought leaders from the

accounting and finance profession.
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