Reaching a higher valuation is good for entrepreneurs, companies, shareholders and management. However, should it be the end game, or along with this, are there other relevant and essential key business sustainability drivers that these must consider?
Focus only on higher valuations is becoming a familiar scene with capital markets potential and entry of private equity, be it a startup or companies with a proven track record. These are getting lost in this maze of valuation. This obsession with the valuation is indeed risky and fraught with dangers. In these dangerous pursuits, they ignore the fundamentals of prudence and go astray from the exact path of sense. It is common to see young entrepreneurs in startup modes mesmerised by these assumptions. Before these could even achieve the fundamental milestones in the process of enterprise building, they set their eye on valuation. Valuation is the only milestone that ignores all other market landmarks and the industry sensitivity, execution, team building, and resource planning. Unfortunately, the business plan and all the different assumptions therein are tweaked to meet this valuation goal. Here, these adopt blitzscaling to achieve a callous approach to basics.
Initially, investors in the avatar of private equity would eye this approach as the primary lever. Often these would set valuation as the sole criteria for their basis of investment, but it is now free. It pains me these days to see how many businesses are over-possessed with this valuation game. For instance, in the case of young entrepreneurs in startup modes. How many of these waking with a dream of a new business idea tagged along with a flimsy valuation? These overtures often undermine all the fundamentals keeping aside business execution strategy or its commercial viability. I often see very viable businesses with excellent potential engaging in this reckless game. What matters is the business’s success or the thrill of raising equity, achieving valuation irrespective of its end game.
A reasonable business valuation needs much more comprehensive prerequisites and those owing to its core goals, especially in the case of an entrepreneur with proven track record. They must not give up the zeal that has brought him so far but meet his goal of business growth and sustainability by retaining his core understanding and practices that brought them early success. Often these get worn out with the pressure of raising resources and managing a business with limited resources and give up on these new tactics. I always maintain that the entrepreneur must not give us his usual self-character in this new pursuit. Growth capital or seeking partners to boost businesses must be done based on sound principles, keeping the original entrepreneurs and their core character in the centre stage. I often see these investors take a backstage with new kids on the block in their future role in companies or, at times, dazed by monies in their packet or future valuations, they give up on their core involvements. The new investors must only intervene where needed, keeping the founding partners on the hook in context to their needed engagement to steer the business. Sound entrepreneurs must maintain their holistic objectives to raise the necessary resources or seek partnerships. Even if it is a startup venture, it must have a robust business plan backed by due diligence on solid market indicators, business intelligence, and the promoter’s maturity on execution strategy of both business and people about their capability to raise the necessitated financial resources.
In the case of existing businesses with past track records, any valuation must have a reference on its past track record and the scalability of that business with its given business dynamics. A proven track record in this context is an indicator, and a business’s scalability will depend on the market, resources and specific industry indicators besides the robustness of its financials. In reality, entrepreneurs are often overwhelmed by valuation numbers, changing their usual course of doing business, which may have been their core strength. All valuations coming their way may have a poor basis as they may be embroiled with risks.
In the capital market, the news goes around, and sometimes these are just rumours, often with no fundamentals. Therefore, achieving a higher valuation in one or a few cases is not the hallmark of the company’s actual performance. If it is a startup or a developmental enterprise with future potential, then the established norms based on global best practices should determine its valuation.
In reality, with the startup boom, what is happening is sad. It is contrary to the latter mentioned as how to play the valuation game. It precedes everything that is needed to start a viable venture.
In essence, even the ability to raise monies based on higher valuations or, for that matter, the valuation itself must be different from the reason to undermine the business fundamentals. All must concentrate on principles of prudence, not the valuation itself. It is just a number unless the intention is pure exit mode. However, in the case of exit mode too, the exiting party must have an ethical responsibility to the business to owe to its success.