How Do VCs Value Fintech Startups? Check Out Here!

India is one of the rapidly growing fintech market in the world! The Indian fintech industry stood at a market size of $50 billion in 2021 and is all set to touch ~$150 billion by 2025. According to Invest India, the payments landscape in India is expected to reach $100 trillion in transaction volume and $50 billion in terms of revenue by 2030.

In this growth of fintech industry, venture capital (VC) funding serves as a cornerstone for the growth and expansion of startups, fueling innovation and disruption in the financial services industry. However, navigating the intricacies of VC valuation methods is a pivotal challenge for founders seeking investment. In the vibrant landscape of Indian fintech startups in 2024, understanding how VCs assess and determine the worth of these ventures is paramount for sustainable growth and success.

Early Stage Valuation

In the embryonic stages of a fintech startup's journey, valuation is often subjective and contingent upon various factors. Macro-economic conditions, market trends, and the pedigree of founders collectively influence the initial valuation figures. For novice founders in India, pre-seed rounds typically see valuations ranging from Rs 15–20 Cr, while seed rounds command valuations between Rs 25–50 Cr. These valuations are reflective of the potential and promise perceived by investors in the nascent stages of a startup's development.

Revenue-based Valuation

As fintech startups progress and begin to generate revenue, VCs adopt more tangible metrics to evaluate their worth. One common method involves applying a multiple of revenue or assets under management (AUM) to ascertain valuation. This approach considers factors such as revenue growth trajectory, scalability, and capital efficiency. Startups with robust revenue streams and efficient capital utilization often command higher valuations. Typically, early-stage revenue multiples range from 30–40x of the annual revenue, providing a framework for assessing a startup's potential value based on its financial performance.

Calculation for Lending Startups

For fintech startups focused on lending activities, valuation hinges on the net revenue derived from their asset books. This net revenue calculation encompasses the difference between returns on funds and the cost of funds, multiplied by the book size (AUM). For instance, if a startup achieves a return on funds 5% higher than the cost of funds, with a book size of Rs 50 Cr, the resulting net revenue would amount to Rs 2.5 Cr annually. Early-stage valuations for lending startups are often determined by applying a revenue multiple, considering factors such as risk exposure and market demand for lending services.

AUM-based Valuation

Alternatively, fintech valuation can be derived through an AUM multiple, which factors in the total value of assets managed by the startup. In India's fintech landscape of 2024, AUM multiples typically range from 2-4x, providing investors with a benchmark for assessing the intrinsic value of a startup's asset base. This method offers a holistic perspective on the startup's market presence and potential for future growth, beyond just revenue generation.

A recent case study exemplifying the application of these valuation methodologies is Ascend Capital, an EV financing startup that recently secured Rs 50 Cr in Series A funding. With a current AUM of Rs 50 Cr, assuming a dilution between 20–25%, pre-money valuations ranged from Rs 150 Cr to Rs 200 Cr, translating into an AUM multiple between 3x and 4x. This real-world example underscores the significance of valuation methodologies in shaping investment decisions and fostering the growth of fintech startups.

Understanding VC valuation methods is indispensable for fintech startups seeking to attract investment and accelerate their growth trajectory. Whether based on revenue multiples or AUM calculations, these valuation methodologies serve as guiding principles for investors and founders alike, facilitating informed decision-making and fostering a conducive ecosystem for innovation and entrepreneurship in the dynamic realm of Indian fintech startups.

Note: The article is written with some expert insights from the LinkedIn wall of Mr. Pushkar Singh, Co-founder, Termis Capital.

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