A VC or PE manager will have to be foolish to overvalue a startup. If any thing, there is a strong tendency to undervalue, to get maximum share of the ownership for the least amount of money.
This is a free-est of the free market. As a matter of fact it is a wild wild west. Investor and entrepreneurs go through a lengthy negotiation to come up with a mutually agreeable valuation. Valuation depends on many factor: Quality of the team, size of the market, progress to date, competitive position in the market and how many investors are interested in pursuing the deal. Also, public markets form a backdrop under which the valuations are done.
I find it amusing that SBI wants transparency in the process. None is possible. Authorities have to understand that valuations are negotiated and have nothing to do with the balance sheet of the company. It is like an old Indian saying: "Mian Bibi Razee , to Kya Karega Kazee".
Here is the article
Mumbai: The capital market regulator is taking a close look at how private equityhouses (PE) and venture capital funds (VCF) value the startups and unicorns they bankroll.
A propped-up valuation gives a rosy picture of the portfolio to a fund's investors and paves the way for the fund manager to attract more money from new as well as old investors when it goes for the next round of fund-raising.
Probably driven by complaints from investors and recent reports of opaque accounting of a few unicorns, the Securities & Exchange Board of India (Sebi), in a communication on September 6, asked a large number of funds to disclose their valuation practices and share details like the qualification of the valuer, whether the valuer hired is an associate of the fund or its manager or sponsor, and if there was a significant change in the valuation methodology in the past three years among other things, two persons aware of the matter told ET.
Probably driven by complaints from investors and recent reports of opaque accounting of a few unicorns, the Securities & Exchange Board of India (Sebi), in a communication on September 6, asked a large number of funds to disclose their valuation practices and share details like the qualification of the valuer, whether the valuer hired is an associate of the fund or its manager or sponsor, and if there was a significant change in the valuation methodology in the past three years among other things, two persons aware of the matter told ET.
"Sebi clearly wants to understand the credibility of the valuation exercise undertaken by funds," said Richie Sancheti, founder of the law firm Richie Sancheti Associates. According to Tejesh Chitlangi, senior partner, IC Universal Legal, "While the regulator is trying to get a sense on the performance of the AIFs (alternative investment funds), it may also wish to understand the valuation practices prevalent in the industry as the same may vary across funds in absence of any regulatory prescription.
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