Overvalued startups and why it’s actually not awesome to have such startups
Disclaimer: this is my very opinion of overvalued startups in general.
Startups getting more than $1 billion in valuation is not new in our startup world. It means you have reached the ultimate goal of getting a big status in this community and the startup is now known as a unicorn. It was coined by venture capitalist Aileen Lee in 2013.
Let’s jump right into why overvalued startups are not awesome at all. There are so many case studies that we can take a look at. Some exist and are surviving beyond an IPO, some have gone through a roller coaster ride, some have shown some positive progress and some have outright failed miserably.
WeWork and Uber are prime examples of overvalued startups with a lot of buzz and we all know how it went with WeWork. I just wonder how a real estate company could be valued at about $47 billion. Uber is lucky enough to survive but only time will tell.
Startups starting popping everywhere in the last decade. Having a startup in the early 2000s could have been quite bizarre than it is the norm of 2020. Having a startup is not looked down upon but encouraged very well, not just by friends and family, also there’s someone that comes knocking your door. VCs (Venture Capital).
VCs are amazing fund raising agents. They really do seek out for the real value in your startup and give you real cash in order for you to reach great lengths of revenue and reach profitability ultimately. I certainly have no issues with VCs, in fact I really appreciate them investing in startups and giving them a life that they wouldn’t have been able to achieve easily without them. I only have an issue on how startups are valued.
What is the basis of getting a billion dollar valuation? Is having millions of users using your service/product enough? Or just just having a plan of conquer leads to achieving such valuation? Is there a necessity to have proper cash flows? Do we need to achieve profitability ASAP to achieve those valuations? These questions bug me a lot.
A typical company’s valuation happens through the means of their profit and loss statements, balance sheets, assets ownership, bank statements, clientele and anything else that can be considered of some value. Using these documentations, it gives a good picture of how a company should be valued. However, for a startup it is not easy, they don’t have enough cash flows, capital or enough certainty compared to their established counterparts. Hence, it becomes difficult to value them and to put a price on them.
So how do they get valued? Simple, value on how do they intend to operate in future, look at the global outreach they’re probably wanting to acquire and voila! Startups are valued. Actually I’m giving a very basic type of illustration and possibly what some may consider happens in startups valuation. But honestly, there are a lot of factors that play in startups valuation. I didn’t dwell into them to keep it simple.
Overvalued startups are bad for a lot of people. People who work in that environment, the founders themselves, VCs as well and the general public when the company goes public. Startups should be valued in accordance to what they have done and what they are currently doing. Startups that do continuous loss shall not be priced so heavily and shall drop valuation from time to time whenever losses occur.
They shall not be appraised for being a loss making company for 10 years because it is totally ridiculous for them to carry such value when it makes losses close to losing every dollar for a dollar made. It does not make sense financially and markets have started to realise that. I hope that startups do survive and that more startups be created as it pushes a lot of people to the max in terms of creativity, utilising their skills and learning new skills while at it. Startups are the future of this generation and they should be valued reasonably to not give false hopes to people who work on it for a living. That’s my take.
