The time is right, they say.
Any one and every one is launching a startup.
In fact, billion-dollar valuations are fast-becoming the norm! Just look at Flipkart and Snapdeal…

Like most of you, we too are bombarded each day by the media focused on the runaway success of startups and entrepreneurs. Any one with half a bright idea seems to want to cash-in. Feeding the frenzy is the (often mistaken) notion that if smart folks (read: VCs) are investing billions of dollars (yes, billions with a B!) in these business enterprises, they must be doing something right.

Well, yes and no.

Let’s take a look at some of the numbers, as reported in a recent article in the Economic Times…

• Flipkart was valued at $1 Bn in Aug 2012, and is valued today at $11 Bn
• Snapdeal was valued at $200 Mn in Jul 2011, and is valued today at $1850 Mn
• Zomato was valued at $2.5 Mn in Jul 2010, and is valued today at $660 Mn

Do you think it is possible for any well-managed company in the ecommerce space to provide an incremental “value” of $10 Bn in just two years?! For those of us in India, that means Rs. 60,000 crores!!! In two years. And, that’s just with one “startup”. (As a reference, currently, the market cap of ACC is jut over half of that.)

Yes, many of these organizations have capable managerial teams, exemplary leadership, and the ability to scale. No doubt about that. But, it may well be a myth for us to assume that these valuations represent the true worth of their business.

Here is what we’ve understood of the Venture Capital business: When a seed fund invests in a new idea, its goal is to take it to the next round of financing (Series A), and make healthy returns on its investment. This story continues in successive rounds of financing, until the logical end is reached – Initial Public Offer (IPO), where folks like you and me literally “buy” into the dream of raking in a small share of the future profits, by buying shares in the company. That’s how the game works. Nothing wrong with that, as long you understand the mechanics.

However, things start falling apart when any one and their cousin imagines overnight success by converting an idea into a “billion dollar firm” within a year. Another fallout is that, inevitably, some businesses miss out on “investor love” and fall by the wayside, despite having a competent team and business model in place. When you think about it, how different is TaxiForSure from Ola Cabs? Or Infibeam from Flipkart? But, now that we know the dozens of zeroes added to their valuations, it’s kinda difficult to see them in the same light as their distant cousins.

Sumanth Raghavendra, Founder, Deck App Technologies sums it up well: “Valuation is ultimately a vanity metric – something startups can brag about, but it is far from a reflection of a company’s true worth.”

Yes, in the short run, customers benefit by the discount mania prevalent on such services, and it is not uncommon for funded startups chasing higher levels of growth to offer their products and services below cost. That means, at a loss. But, Growth can only serve as a substitute for Revenue upto a point.

Ultimately, any organization will need to deliver exceptional value (not valuation) to its customers, to survive, sustain and succeed.

P.S. If you run a fledgling startup, or aspire to do so soon, our advice would be to reign in those zeroes and focus on getting the basics right.