At the end of the case, the students should be able to:
Analyze the challenges of valuing a start-up in its early stage of the life cycle.
Assess the external and internal factors that impact start-up valuation.
Analyze why entrepreneurs access and utilize specific capital sources during a firm’s early life cycle stages.
Apply the venture capitalist approach to value a start-up.
Apply the discounted cash flow (DCF) method to value a start-up.
Decide the criteria for accepting or rejecting an investment offer.
TEQ Technologies, a nascent Indian Information Technology (IT) firm with significant growth potential, was founded by Ajay Khavnekar and presented a compelling investment opportunity to Girish Chhabria, a venture capitalist. However, this start-up had its inherent risks. The firm’s core business segments included sales and customization of accounting and Enterprise Resource Planning (ERP) software, customer relationship management solutions and cloud computing services. Girish’s team of analysts conducted a comprehensive analysis that considered industry trends, competitive landscape and financial projections to evaluate the firm from an investment perspective. Using the venture capitalist approach and DCF method, Girish’s team of equity analysts valued TEQ Technologies. The venture capitalist approach used the industry average enterprise value to sales multiple to estimate the firm’s value. The DCF method involved projecting revenue growth, profit margins and capital requirements while accounting for the company’s inherent risk.
Ultimately, the decision rested with Girish, who had to make a choice: invest in TEQ Technologies, take the risk and potentially reap significant rewards or decline the opportunity and forego the potential risk and gains. This case study requires students to use the top-down approach to value the firm. They will apply venture capitalist and DCF methods to determine TEQ Technologies’ fair value and make an informed investment decision.
An instructor can use this case to teach a course on business valuation to postgraduate students undergoing a Management Education Program specializing in finance. The case can be included in the second half of the course after students have learnt about capital budgeting techniques, financial ratios, calculation of capital cost of capital, cost of equity and have knowledge of various business valuation methods. The case serves as an application tool for implementing the learnings covered earlier in the course. Instructors teaching a course on private equity and venture capital or mergers and acquisitions can also use this case to teach equity valuation.
Teaching notes are available for educators only.
CSS 1: Accounting and Finance.
