Paytm Fiasco

How do startup valuations work?

Start-up Valuations

Price you would need to pay to acquire a startup basis

-Business Moat

-Competitive Advantage

-Earnings & Profitability potential.

Paytm was valued at $19 Billion pre-IPO. We all know what happened post its listing last week. Share price of the company tumbled by almost 40% in within the first week wiping out almost $8 Billion.

Most investors consider the amount of funds raised a prima facie factor in a startup’s value and success story. While it is an important aspect, there are a couple of other things that you may want to look at before investing in an IPO issued by a startup.

Factors like a unique business proposition, strategy to scale are important factors to look at. Zomato has been incurring losses for 4 years before its IPO this year but had an astounding valuation. The issue with tech Cos is always the hype around the rate of change. Changes are implemented but at a much slower than anticipated pace.

Ace investor Rakesh Jhunjhunwala mentioned that it was important for startups to focus on building a business model which produces cash “rather than taking father in law’s money [foreign capital] and deploying $1 billion-$2 billion as it is not capital which built big companies. Who built Zara or who built Walmart? Capital is not so important, it’s the business model”.