Time to Hit the Reset Button on Valuation for Indian Start-ups Raising Follow On Capital

12:23 AM Suvir Sujan 0 Comments

"Good Company, Bad Investment" is an often used phrase when discussing some of the follow on financing rounds for many of the funded start-ups in India.  Over the past several years, start-ups were aggressively funded by Hedge Funds, Venture Capital Firms and Strategics.  Many of these companies tried to aggressively build product and market themselves with little regard for unit economics or even a business model.  Some of these companies have arguably built a decent product, good brand recognition and customer loyalty. What could have been achieved with $1 was achieved with $5 as capital was cheap and quick.  And companies that would typically be at a Series A or B stage valuation with a strong differentiated product with early traction, are at valuations that are typically what a later stage company would command with business model in place, revenues growing rapidly and a path to profits.  We have seen several companies with revenues under $5m being valued at the last round at $50m+ and in some cases over $100m. The reason for this is that the company raised a lot of capital in quick succession over a short period and raised $10-20m rounds at an inflated valuations because capital was available.

Today when I speak to many of these entrepreneurs, I hear that they are working on reducing burn, focusing on revenues and unit economics, but rarely do I hear the openness to recapitalise the company at fair valuations even it  means that some of the earlier investors and founders may have to take the hit to accommodate new capital at fair valuations.  In some cases, the earlier investors are happy to continue to bridge the company at the inflated valuations in the hope that the company will grow into the valuation.  Time will tell how this strategy plays out.  In other cases where external capital in important for survival or to maintain the competitive edge in the market,  the sooner the entrepreneur and shareholders realise that the best way forward is to do a hard reset on valuation and attract further capital, the better it is for all. Companies can lose momentum or lose favour with investors quickly. We have seen a recent case of Ola where they recently raised monies at a reset valuation. It was a smart move on their part.  Hope more entrepreneurs press the valuation reset button in time. One step back to take three steps forward. At the end, what is important is to build a great business which will eventually yield returns for all.

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