Page 21 - Banking Finance September 2023

ARTICLE

the way we carry and listen to music. This is the nature of
business and especially businesses engaged in technology.
Most of the startups in the recent times have been
technology startups who promote on an idea that may or
may not work.

Most of the time it's the difference of perception regarding
the future path of the company that leads to dispute.
Startups have very little tangible assets and their valuation
is solely based on the assumption that the idea would work.
This makes the debt financing of startups by banks / financial
Institutions a challenging task.

Consensus on Valuation?
What makes the methodology of valuation somewhat
disputed is that the revenue generated has a very significant
and investors alike is because eventually the higher a
weight in determining whether a startup is a unicorn or not.
company is valued the richer the investors become. This is
In the midst of this race for valuation the actual business
after all the financial goal of any enterprise and then it works
sometimes takes a backseat. Money is pumped into
in a loop as more valuable a firm becomes the more investors
promotions and discounts to increase the gross merchandise
get attracted to it. This principle of valuation however
value in the short term. This leads to the companies having
works in contradiction to the principles of traditional finance
high valuations together with high losses. Most of the
largely followed by financial institutions that considers a
startups that have even got listed are still running into huge
consolidated picture of a firm's financials along with
losses however their valuations have shot up multiple times,
profitability and other ratios.
of course due to metrics other then profitability. Recently
the founders of one of the startup had a dispute regarding
Business Model:
the future path of business, which has led to various rumours
of the startup winding up operations. The concept of startups has its own set of critics as well.
The critics argue that in the rush of attaining sky high
This kind of methodology actually runs against the very valuations the companies are running short on foundations
principle of traditional business which is profitability. No which are a necessity in case of long term viability. Another
business could survive running in losses, however in the case section says that this rush for valuations culminates in the
of startups the profitability is looked deep into the future. company being sold to other growing startups in the merger
Startups are all based on a disruptive idea, something that and consolidation process. Many of the young startups
alters the existing business landscape altogether, the more eventually fade away in the process and some of them grow
disruptive the idea the more the risk, more are the chances multitude in valuations.
of the startup scaling billion dollar valuations. One of the
major telecom company offering mobile telephony in India Startup is a high risk business and the promoters are entering
today was called a startup by its promoter considering the an area not much traversed before and thus there is the
disruption it made in the market and the scale at which it urgency to grow and outsmart everyone else in the field.
was launched. Of course no prizes for guessing that it is This explains the importance of the valuation mathematics.
worth a few billion dollars now. This sometimes is the reason for difference of opinion
between founders, investors and financers.
Such valuation metrics often poses problems while
considering debt based financing by financial institutions to Almost all the sectors have had the impact of startups but
such startups. the most prominent and disruptive impact has been in the
fields of mobility, e-commerce, education and banking and
One reason why the unicorn culture fascinates businesses finance and all of these fields have produced one or more

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