A value factor is an important means of increasing the value of a company. The goal of top management and business people is to increase profits, which will increase corporate value. If you want to raise your company's worth, you should first understand how investors assess a business, because a company's value is determined by the investor's viewpoint.
An investor may feel that your business is not so promising, so they value your company at $100. In contrast, another investor may feel that your business is up-and-coming and hence value your company at $200. The valuation of a company is not governed by any specific rules. Rather, we derive some market insights about the valuation.
In the expansion of a company, there is a growth stage called the life cycle, and it is vital to adopt suitable actions at each step of the life cycle. In this article, I'll describe what a company's growth life cycle is and what each stage's qualities are.
This is simply an idea stage, in which the entrepreneur or business owner has identified a problem and created a product to address it. This stage marks the beginning of the business life cycle, which is characterized by testing and understanding the product's commercial viability.
For example, stand and pee devices for women were created to address the issue that women have when urinating in public settings. Even if you produce this new product, there are already a lot of similar products on the market, therefore you'll have to spend a lot of money on advertising to get people's attention. Furthermore, even if you begin advertising, it is tough to produce sales right away.
It will eventually gain popularity in the market, and if it fits the wants of customers, demand will rise, and it will sell more and more. The minimal viable product is the product at the start-up stage. During the start-up phase of a company, its products and services are relatively unknown. Costs such as advertising and sales promotion are present.
Business growth is very slow and maintaining the business requires a lot of money. There is no gross or net profit at this stage, the risk is high, the chances of the company failing are high, competitors may come and disrupt the industry, etc. Because nothing is predictable at this point, investors that invest at this time are searching for large returns and will compress your valuation.
When an investor's risk and projected return are both high, they will give your company a low valuation. A company in this stage is called a "venture" and is seeking funding from investors and venture capital to establish a business. Angel investors are the name given to these types of investors.
At this stage, the market and customers have accepted the product, the company begins to earn a small profit, the company obtains its first 1000 customers, and the company's gross profit begins to turn positive. However, net profit remains negative due to the company's investment in marketing, technology, system development, and processes.
Udaan is an example of a company in its early stages of growth. It is a B2B trade platform that connects manufacturers, traders, retailers, and wholesalers under one platform. They provide a platform that simplifies business in India, making B2B commerce convenient and efficient.
At this stage, the product has gained market acceptance, and the company begins to generate initial revenue, which continues to grow year after year. You must increase your market share to prevent competitors from stealing new and existing clients. To avoid a cash shortage, the management system must be strengthened and the financial flow must be reviewed.
Byju and Oyo are two examples of companies at the High Growth stage. Byju's was worth Rs 500 cr two years ago. It earned a revenue of Rs 1500 Cr a year ago. It is likely to deliver anything between Rs 3000 and Rs 3500 Cr this year. Due to high marketing costs, Byju's was a loss-making company last year, but they are projected to turn a profit this year.
Oyo, on the other hand, expands theirs 3X to 4X per year, resulting in a high valuation. Byju's is worth $8 billion and Oyo is worth $10 billion because their value grows year after year and they still have a huge total addressable market.
Once the company has reached its growth stage, it will enter maturity when the business becomes more stable. It is a period in which you can feel a little more freedom in various areas. The company begins to generate a stable income, i.e., revenues from existing streams are stable, while new streams are being developed to boost revenue. Because of innovation, the company is growing. At this moment, what is required is business and productivity enhancement. Google and Facebook are examples of mature growth companies.
At this stage, the company makes consistent earnings year after year, is valued using the P/E ratio, and its P/E varies within a certain range. Earnings and price are exactly proportionate, which means that if earnings rise, so does the price because the P/E ratio remains unchanged.
Reliance Industries Ltd, Infosys, and TCS all have a P/E of 20-30, implying that their profits are valued at 20x - 30x. High-growth companies, such as Byju's, are valued based on their revenue growth rate, whereas stable companies, such as Infosys, are valued based on their profit growth rate.
During the mature period, growth has slowed and profits are flat, but during the decline period, growth is negative and profits are falling. There is a decline in sales and demand during this period. Repayment of debts must be negotiated with financial institutions, businesses must be withdrawn or sold, and businesses need to be radically reformed.
Some reasons for a company's decline include companies in the steel and coal industries declining because their business models were dependent on natural resources, and a company's lack of innovation. It's difficult to put a value on a company that's on the decline. You must establish where your company falls within the first five stages. Start raising your business if it has been stable; else, a new competitor company may enter the market and disrupt it.
As an example, Reliance Industries Ltd became stable. They introduced Reliance Jio and created a new revenue stream. The stages of a company's life cycle do not change naturally. To reach the next stage, you have to work hard every day. When you enter the decline phase, you have to implement aggressive reforms to recover your business.
You should now understand how an investor determines the value of a company. Based on this information you can identify the stage your company is in and accordingly increase its value. In order to find investors for your business, you should register with Venture Uplift. By registering, you can pitch investors. By determining the value of your company, you can get funding and grow your business.
