redBus and Valuation musings

redBus, the ticket booking business, headquartered in Bengaluru and funded by VCs in this city, is to be acquired by the South Africa-based multinational media group, Nasper, according to some media reports. 

Many points are being raised on whether the founders (Phani et. al) and other stakeholders should remain invested instead of exiting. One never knows, what could happen if they wait. Yes, there could be a possibility of a higher exit at a greater value, but there is also a possibility of a value fall. It is for the promoters and other key stakeholders to think through options and take a call on what they should do. In India, today, many VCs are sitting on investments which they are unable to exit. So any exit has its own positive energy that it generates and contributes to this eco-system.

In the coming days we may get more information on what drove the valuation for the company. Was it the potential earning, or expected revenue streams or the large existing customer base? Was it also related to some synergy with other business interests of the group? Was it the expertise in technology and ability to provide solutions for emerging economies? Was it some other intangible asset? Or a combination of these? Or something else?

In the initial days of the company being set up, there were many who wondered whether a company selling bus tickets could justify such an investment value from VCs and angel investors. Now while some persons question the value from Nasper’s view point, there are others questioning the exit/divestment value from the perspective of founders and investors.

What could be some parameters that may drive valuation for an unlisted company in India? Some quick points to trigger thinking:

  • Deal related
    • Nature of transaction i.e investment, divestment, M&A , JV or partnership etc.
    • Whether angel investor or VC or strategic investor
    • Whether first round or later round of investment
    • Whether family and friends or other
    • Amount of money required
    • Stage of company – early stage, mezzanine stage (pre-IPO), later stage (IPO)
  • Business related
    • Key management: Performance, expertise, team diversity and capability etc.
    • Historical performance
    • Future projections, pipeline
    • Quality of revenue; historical, and pipeline
    • Assets, tangible and intangible
    • Liabilities in financial statements, potential liabilities and off Balance Sheet items
    • Cash flows expected and tracked alongside revenues expected
    • Project, product, USP
    • Industry scenario, global and local
    • Country scenario
    • Market, opportunity, growth expected, barriers to competition
  • And..
    • Strategic requirements and need for transaction
    • Demand  / supply position
    • Flavour of the season

Valuation is calculated based on a financial model. While building the financial model, different scenarios would be thought through and a value range arrived at. These would typically, set the boundaries for negotiation. Further, deal issues would be set out, these would include non-financial parameters and items considered non-negotiable. All the above points and much more would be considered and factored while preparing the business model and funding plan and in looking at alternate scenarios.

So if you are looking for investment or exit/divestment, the redBus story should give you some points to trigger thinking.

Anjana Vivek
About Anjana Vivek 45 Articles

Anjana Vivek, Director, VentureBean Consulting Private Limited, is a consultant, teacher, writer; CA & visiting faculty at IIM(B). Her specialties are business models, funding strategy, entrepreneurship, M&A and valuation.