By Surekha Pendse
Valuation seems to be the key word for all startups.
Hungry for funding, startups are on a constant lookout for valuation and desperate to scale the Everest, i.e. get the highest possible valuation.
The other day, a friend of mine was completely stressed out and seemed not to enjoy the alumni college meet. After chatting with him, I found that the stress was all because his startup had been devalued recently. I asked him if he was earning money and making profits and he said he was. His answer made me ponder: Is profitability not the key to any business or is valuations of startups the only benchmark.
Being old school and having worked with many corporate, I always thought that profitability and bottom-line are the most important criteria for any business to be called a success. But in the startup era, it seems, the profitability factor has been downgraded and valuation factor has gained supremacy.
But is that a perception or a reality?
It is both, when we study the premise.
Valuation is nothing but a growth trajectory of the startup. Doing a PESTLE analysis or SWOT analysis, we can understand at what value the company will grow. For growth, there are many factors that are vital. It is like a ‘what-if’ analysis in Excel. It is therefore necessary to understand that valuation is hypothetical and will be put to test only with time.
But why is valuation so important?
Valuation gives the startup the facility to grow, by means of funding, which it would not be able to do at all, at times, if it did not receive the necessary financial support. Let us take a simple example of an e-commerce site (one of the trending startup concepts). The person has created the necessary site and the process and done beta testing of the concept. When such a startup is evaluated and comes up trumps in the evaluation, then they can spread wings to grow. The scale is mostly 10X and this scale is possible only with valuation and funding.
But what about profitability, you may ask.
The valuation stems from profitability and though it is confusing and skewed, the profitability factor should be on the startups’ vital list. Any investor who will fund you is looking for profitability. He is calculating when he will be able to earn the money back that he has ploughed into your business.
Profitability gives you leverage when you go for funding or valuation. Profitability also gives you a choice with investors. It also gives you a choice not to go in for a funding round and wait it out for a period and work it on your own. Profitability gives the competence for control and choices that you can exercise at will.
Growth and profitability are both important and so make profitability your master and valuation your friend to ride the startup wave.
Surekha Pendse is a marketing and process enthusiast who loves working, reading, music and the internet, not necessarily in that order. She is a Welingkar’s Institute of Management alumni. Based in Mumbai, Surekha is a management consultant improving process in operations, marketing and social media marketing with more than two decades of experience to back it. You can get in touch with her at firstname.lastname@example.org