Case 045Early-stage valuationCore

Price a Series A for Neelkosh Fintech with the VC method: a Rs 2,400 crore exit in seven years, a 12x target, 45% dilution from later rounds, and a Rs 25 crore cheque. What ownership do you need today, and what pre-money does that imply?

The situation

Neelkosh Fintech lends to small shops against their digital payment receipts. Your fund wants to lead its Series A with a Rs 25 crore cheque. The partner's view: if it works, Neelkosh sells or lists for about Rs 2,400 crore in seven years. The fund underwrites Series A deals to a 12x target multipleThe return a fund demands on a single early deal, set high because most deals in the portfolio return little or nothing. It is not a forecast of this deal., and expects later rounds and option pool top-ups to dilute today's stake by 45% in total before exit.

Use the VC method: work backwards from the exit to the ownership needed today and the price that implies. All figures are illustrative.

Your task

What ownership must the fund hold at exit and today, what post-money and pre-money does that imply, and how sensitive is the price to the target multiple and the dilution?

Quick check

What share of Neelkosh must the fund own at exit to make 12x on Rs 25 crore?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The fund needs 12.5% at exit and 22.7% today, which makes Rs 25 crore a post-money of about Rs 110 crore and a pre-money of about Rs 85 crore. Twelve times Rs 25 crore is Rs 300 crore, 12.5% of a Rs 2,400 crore exit; dividing by 0.55 for the 45% of the stake lost to later rounds gives 22.7%. The price moves a lot with the target multiple: at 8x the pre-money would be Rs 140 crore.

Step 1Why work backwards from the exit instead of forwards from today?

A farmer deciding what to pay for a sapling starts from the fruit: how many mangoes, at what price, in how many years, and how many saplings die before then. The sapling's price is whatever makes that sum worth it. The VC method prices a Series A the same way: fix the exit you are underwriting, fix the multiple the fund needs, and the ownership and the price fall out, in that order. Forwards from revenue multiples is how growth rounds are priced; a company with little revenue has nothing to multiply.

The chain: the fund needs Rs 300 crore back, 12 times Rs 25 crore. Of a Rs 2,400 crore exit that is 12.5%. The stake today will be diluted 45% by the time of exit, so today's stake must be 12.5% over 0.55, 22.7%. Rs 25 crore buying 22.7% is a post-money of Rs 110 crore, and taking the cheque out leaves a pre-money of Rs 85 crore.

Start at the exit and walk backwards to the price you can pay todayExit, year 7Rs 2,400 crorewhat you underwriteFund needs 12xRs 300 crore12.5% of the exitBefore dilution22.7% today12.5% / 0.55Post-moneyRs 110 croreRs 25 cr / 22.7%Pre-moneyRs 85 crorepost less the chequeRead it forwards to check:22.7% today, diluted 45% by later rounds, is 12.5% at exit;12.5% of Rs 2,400 crore is Rs 300 crore, and Rs 300 crore on Rs 25 crore is 12x.The same answer as a discount rate:12x in 7 years is 43% a year. Rs 2,400 cr discounted at that rate, then cut by 45% fordilution, is Rs 110 cr of post-money today.The 12x is not a forecast; it is the price of the many Series A companies that return nothing.
Walking back from a Rs 2,400 crore exit, the fund's Rs 300 crore target is 12.5% at exit and 22.7% today after 45% dilution, so Rs 25 crore implies a post-money of Rs 110 crore and a pre-money of Rs 85 crore.
The relationship
Stake today=12×252,400÷(1−0.45)=12.5%0.55≈22.7%Post=250.227≈110Pre=110−25=85\text{Stake today} = \frac{12 \times 25}{2{,}400} \div (1 - 0.45) = \frac{12.5\%}{0.55} \approx 22.7\% \qquad \text{Post} = \frac{25}{0.227} \approx 110 \qquad \text{Pre} = 110 - 25 = 85
12 x 25the Rs 300 crore the fund needs back, Rs crore
2,400exit value underwritten, Rs crore
0.45share of today's stake lost to later rounds and pool top-ups
25the cheque, Rs crore
What it says in wordsThe rupees needed at exit, as a share of the exit, grossed up for dilution, is the stake today; the cheque divided by that stake is the post-money.
Step 2Why 12x, and what does the price do if that changes?

Because most Series A companies return little or nothing, the ones that work must pay for the rest. A 12x target is not a forecast for Neelkosh; it is the multiple that makes a portfolio of such bets return about 3x overall when most of them fail. It is also 43% a year over seven years, which is the discount rate the method is quietly using. Change the target and the price swings: at 8x the fund needs only 15.2% today and can pay a Rs 140 crore pre-money; at 15x it needs 28.4% and can pay only Rs 63 crore.

Target multiplePre-money at 35% dilution, Rs crAt 45%, Rs crAt 55%, Rs cr
8x170140110
10x13110783
12x1058565
15x796347
Pre-money valuations implied by a Rs 2,400 crore exit and a Rs 25 crore cheque. The base case, 12x and 45% dilution, gives Rs 85 crore; a lower target multiple or less dilution raises what the fund can pay, and a 15x target with 55% dilution cuts it to about Rs 47 crore.
Step 3What do you say if the founder wants Rs 120 crore pre-money?

Translate the gap into the exit it implies. At Rs 120 crore pre, Rs 25 crore buys 17.2%, 9.5% after dilution, and 12x needs Rs 300 crore, so the exit would have to be about Rs 3,164 crore rather than Rs 2,400 crore. Either the fund believes in a larger exit, or it accepts a lower multiple, or it holds its price; what it should not do is pay Rs 120 crore and keep underwriting Rs 2,400 crore, because the arithmetic no longer closes. The limitation of the method is that every input is a guess, and the exit value most of all; its value is that it forces the guesses into the open where they can be argued about.

Where candidates lose it

The common loss is stopping at 12.5% and pricing the round on that: Rs 25 crore for 12.5% is a Rs 200 crore post-money, more than double the right answer. The 12.5% is the stake at exit; today's stake must be grossed up for the 45% that later rounds will take.

The second is treating 12x as a prediction and defending it as such. It is a portfolio rule, set by the failure rate, and the right defence is that most Series A deals return nothing.

What the interviewer asks next

  • Later rounds dilute by 60% instead of 45%. What pre-money can the fund pay now?
  • The founder offers a Rs 100 crore pre-money with a 1x participating preference for the fund. Does that close the gap?
  • How would you set the Rs 2,400 crore exit figure, and what would make you cut it?

Company names and figures are illustrative.