July 20, 2016 (LBO) – Operational aspects of startup IT companies are more important than discussions over valuation, a venture capital expert said at a forum recently.
“For each of the successes, there are tombstones that you don’t want to talk about,” Nissanka Weerasekera, a well known VC investor tied to Sunshine Holdings and the Abraaj Group, said.
“None of the failures, where we lost a lot of money, has been due to getting the valuation wrong. The failures have always been, without exception, after getting the fundamental operating assumptions wrong.”
Weerasekera explained his thoughts on startup valuation at the SLASSCOM CFO Forum on Tech Valuations.
“When an entrepreneur and an investor get together, and the valuation number is upfront, it’s a diversion. It takes away from the important conversation,” Weerasekera said.
“You get that (operational aspects) out of the way, and then work on valuation.”
Ruwindhu Peiris, the managing director of strategy consulting firm Stax, explained that tech companies may not make profits for several years, and entrepreneurs sometimes give too much away in equity.
Structuring the right shareholder agreement with common stock is one way to retain value for the founding partners, he added.
This way, equity isn’t diluted too much, and contributing partners can look at distributions from common stock, Peiris said. This would be based on performance.
Experts at the event noted that although Sri Lanka’s IT sector has shown rapid growth, some of the benchmarks that VC and high net worth individuals look for, when valuing startup companies, were still not in place.