Valuation Fluctuations in Large Private Companies is Noise — No need to Panic!
There has been a lot of unnecessary recent negative press and social media chatter around a recent de-valuation in an Indian unicorn by an existing investor in the company. Valuation fluctuations are par for course in large fast growing private technology companies. Let me explain why.
Financial valuations in large fast growth private technology companies is part art and part science. It is generally driven by —
a) The promise of the rapidly changing future financial metrics of a company — Most of these fast growth companies are addressing new markets that have not been addressed before, therefore there are many unknowns at the time of financing — market structures, competitive landscape, etc which are dynamic in nature. As the company evolves and markets mature, more clarity emerges or more opinion forms around future growth potential of the company.
b) Liquidity of large pools of capital — Global environment and financial cycles can affect investor sentiments and large capital flows in private companies, thereby potentially reducing the pool of further capital which could then affect valuations due to pure demand/supply economics
Valuation fluctuations are short term aberrations and don’t really affect the entrepreneur or the investor. Smart entrepreneurs continue to focus on building long term value by focusing on differentiation, scalability and sustainability. They understand these fluctuations in a rapidly changing environment and manage their ambitions, teams and plans accordingly and use it to their advantage to drive efficiencies in their business.
India is going through a digital revolution and companies will continue to thrive and grow given our attractive demographics. Many investors I run into continue to say that “India is one of the few bright investment spots left”. Market leading companies will continue to attract investor interest at premium valuations.
Originally published at indianvc.blogspot.in.