Overvaluation can mess it up for startups in the long run: Panellists at TechCircle meet

Valuing a business correctly holds equal importance for the investor as it does for a startup—the short-term win that comes from overvaluation can mess it up for startups in the long term, said panellists at TechCircle Startup 2016 - Delhi Edition.

For instance, India's largest e-commerce platform Flipkart has been struggling with valuation concerns as it got marked down by at least five investors recently. The market—which is facing a funding crunch—is on a correction mode. In order to attain sustainability in the long term, entrepreneurs must be clear about what the business gains or loses while raising funds and arriving at a valuation, they opined.

Participating in a discussion on 'Business Valuations - Key to ensure investments and long-term sustainability, Atul Hegde, co-founder, Rainmaker Ventures Pvt. Ltd, said valuing a company can be really tricky, and since the market is maturing, the expectations are a lot more realistic now compared to last year. "It's a tough balancing act," he said.

But how businesses are valued is one of the most critical questions to answer. "I actually look at the growth stage where we have a lot more intermediation on the businesses when we are valuing them," said Shweta Singh, vice president, Lumis Partners.

Technology-driven logistics firm Truckola, which started operations last year, has just raised a small round of seed investment. Raghav Himatsingka, founder and CEO Truckola, said when it came to valuation, the firm was completely focused on getting more traction. "We didn't really have a valuation figure in our mind, but what we focused on was getting a group of concepts and a business model which makes sense. We said we will identify our clients and have our value proposition. Now when we approach our client with a value proposition, and the packaging is right, our win rate will be close to 100%," he said.

Dhruv Suri, Principal Associate, PSA, said entrepreneurs have realised that the funding environment has changed. "In 2015, valuation was almost negotiation with investors—you would sit down with them and reach at a number and that would be the valuation. Now in 2016, when people are looking to raise money, valuation has become a more subjective area. When entrepreneurs, especially early stage entrepreneurs, present their pitch to investors, they have a clearer idea about valuation," he said.

He said the valuation at which somebody is investing in a company is not the value of that company—it is a value at which somebody wants to dilute the firm.

Sameer Nath, managing partner, Iron Pillar Fund, explained how the 'win' from overvaluation can harm the business. "If you raise a lot of money, one of the important concerns is valuation. But the short term win which comes from overvaluation can mess it up for startups in the long term," he said.

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