Valuation versus Dilution

Valuation or Dilution - which to pick when you can’t have both?!

Valuation versus dilution, is something all founders spend a lot of time thinking about. Avnish Bajaj,Founder & MD, Matrix Partners India,shares his point of view on how founders should approach this, while in conversation with Salonie Ganju, Marketing lead, Matrix Partners India.

Salonie: Okay so coming to every single founder’s favourite topic which is valuations – how should one think about this especially across different stages, seed, series A, B, and of course at the later stages?

Avnish: Look I don’t know how much value one can add here given there’s a lot of talk about this and we’ve also spoken about it before – but the first thing I want to repeat: it’s not about valuation, it’s about dilution, you cannot manage valuation, but you can manage dilution.

Valuation is notional, dilution is real. The reality is at seed, series A you’re going to get diluted ~20-30% so my view is you build a business plan for 18 – 24 months and raise as much as you can for that dilution. It’s as simple as that

I think it gets more interesting, and where I think Indian founders are not doing as great a job in thinking through – once your business is working, so first let’s finish off if it’s not working -if it’s not working frankly it goes back to the first rule which is to raise whatever you can.

Personally, my advice would be don’t raise if your business is not working, your reputation is at stake, and you don’t want to be in a situation where instead of managing dilution/valuations and you’re managing investors because your business is not doing well.

In my view, one should think very hard about a pivot or doing something else.

I think a point of view that I have is, when the business is working, founders used the same filter of raise as much as you can for 20-30% dilution as an approach and I think it’s tragic because it dilutes them too much.

If your business is working you should start saying I’m going to raise only as much as I can for single digit dilution – 10%, 5%, 6%. Especially if you’re in businesses that are scaling 2-3x yearover year, it could be in financial services or consumer, you can grow that much and raise 5-10% more valuation money again and when you take a blended raise you can raise a lot more for a lot less dilution.

My request and input to the founders is don’t apply this default of 20-30% dilution – ‘let me raise as much as I can’ concept. This only applies when your business isn’t working, which is it’s a seed/series A, a very early stage company and isn’t working, but I see the same approach when businesses are working and where some more thoughtfulness is required and founders should become dilution sensitive and only raise that much capital as they can within that dilution I think that will be overall shareholder value creation for all the existing shareholders as well as for themselves.

For more on valuations & fundraising, go here:https://www.matrixpartners.in/blog/detail/valuations