What exactly is online food review startup Zomato is worth? Or e-tailer Flipkart, its rival Snapdeal or taxi aggregator Olacabs ? We can argue forever, it seems. Privately held startups that use new technology and a combination of youthful talent and aggressive ambition to address a market like India, which is the world’s fastest growing major economy with a mobile phone connection count of one billion already, is a speculator’s delight. Over the past few weeks, some of the hype surrounding such startups have come apart, raising the spectre of a bubble.
At the heart of the issue is what we could call the Unicorn Syndrome – an effort by investors to make people sit up by announcing that the companies they are investing in are worth one billion US dollars or more, never mind their ballooning losses. This is on the assumption that fast growth will give them a market edge. Sadly, the unicorns are named after a mythical creature and valuations can turn as mythical. When optimism gives way to reality checks, heated arguments break out. This week, HSBC’s brokerage raised eyebrows with a report on Internet startups in which it halved Zomato’s estimated valuation to $500 million, and its CEO and co-founder went on to explain painstakingly that the analysts were on unsteady ground. This came after Flipkart was down-valued by some investors. Its co-founder Sachin Bansal bravely described valuations as a “theoretical exercise”. He is quite right. But the hype surrounding startups is such that back-of-the-envelope calculations acquire a dubious legitimacy.
Venture capitalists like to puff up valuations to get more out of the entrepreneurial horses they are betting on while keeping an eye on building up market mood to sell their shares. Most startups in reality face ground-level challenges and competition from both entrenched incumbents and rival startups. Disruptive technologies win in the long run, but short-term financial numbers or individual fortunes are not easy to predict. However, downward valuations must not be seen as signs of a bubble, especially when some of them are built on game-changing ideas that reshape industries and benefit consumers.