28 Sep 2014

The Game of Valuations

“A 7-billion dollar company which is yet to make profits”, how strange does that sound at the first place?  A mere online book store in 2007 to a billion dollar company, little did the world know that the next Indian Alibaba was in the making. By now you might have guessed what I am talking about! “Yes its Flipkart”, the new sensation in the Indian e-commerce sector. 

Its way of handling logistics, its loss-leader strategy and its smart inventory management made it popular in no time. The Bansal duos from IIT-D indeed are doing a great job.  Flipkart is today considered to be valued between $5 billion to $7 Billion. In a span of 3 years there has been a drastic change in the whole equation, from $1 billion to $7 billion a 5x-7x growth in valuation. This is not just amazing it’s incredible!  The recent acquisition of Myntra and a rapid spree of funding -  Flipkart has certainly taken it to new levels. 

 Image Source - www.dazeinfo.com

 But as they say, the higher you go, the deadlier the consequences of a fall. The question today is, how long can a company survive on valuations alone?  No doubt that VC, PE funding is critical towards growth of a startup, but can overdoing it cause harm? It looks easy to see an entrepreneur in his early 20s with a smart idea and backing of capital funding becoming a millionaire in no time, but a sneak peek into historical data can be alarming. A research taken up by Shikhar Ghosh a lecturer at Harvard Business School says “about 75% of VC backed firms do not return investors”. 

But yes, we can be always optimistic and consider Flipkart to be in the other quarter (the rest 25%). Facebook was once considered as a business model which would never actually make money, but is now known to be among one of the greatest companies in the world. Founded in 2004, Facebook did not really have a proper revenue model in place for quite some time, but investors were pretty hopeful and did pour in a lot of money and faith into the business. It saw  profits in early 2008, four long years after being founded. Flipkart - the King of Indian dot com ventures - apparently is growing at a similar pace. Interestingly, some of the investors like Tiger Global, Naspers, and ICONIQ who invested in Facebook are also investors in Flipkart, clearly proving that investors are pretty hopeful about Flipkart being the next revolution in Indian or perhaps world e-commerce space.

Funding can be like runways, its important for startups to have a long runway.  It’s quite evident that startups do run without any earnings for the first few years of  establishment and this is when funding provides a runway to cover these firms, by providing capital to make the right investments in Infrastructure and Human Resource.  Having said that, profits too are a very crucial part of any business,  something that cannot be ignored for long. It’s a fact that today many Indian startups are surviving on Valuations alone. Flipkart might already seem to be “Too big to fail” but then thats what the Lehman’s were known for as well. 

This Article is written by Prakash Philip Zacharia (PGDM 2013-15)

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