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...