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The Valuation Game

What drives business is revenues but its lifeline is profits

Sunday November 20, 2016,

2 min Read

A majority of the “budding entrepreneurs” are attracted to the exponential growth in valuations witnessed by some of the startups, famously called “Unicorns”. Every day you hear or read about a startup being able to raise millions of dollars and their valuation has skyrocketed to a new level. The fortunate or unfortunate part of the game is that few of them would not have even started their business operations, a majority of them would be in deep losses and also a majority of them would be buying customers.

Let’s understand the above scenario by taking an example of eCommerce industry. Customers are flocking their portals to buy smartphones, televisions and other electronic gadgets. Customers are buying from the portals as they offer discounted rates, wide range, easy returns and so on. However, the biggest reason for high sales of electronic goods is discounting or buying the customer. Companies continue to fund these sales as they need a large customer base and turnover value which will attract the venture capital companies to invest in them.

The eCommerce chieftains and venture capitalists believe that it is a new age business which will grow in future and become self-reliant. They feel that over a period of time customers will become mature and give preference to what they have to offer as bouquet rather than the only the price. They feel convenience will become important than price. Their forecast is either they will replace retail or become a big alternative to them. However, you need to understand that these ventures become profitable after a long gap of time and they need a constant supply of money to fund the operations.

In the above case lack of differentiation can be disastrous as the product one eCommerce site is selling is no different from the other. You survive till you have money in the bank to burn on discounts, advertisements and so on. A new player with bigger bank balance can change the dynamics in no time.

What drives business is revenues but its lifeline is profits.

Saurabh Leekha

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