Page 23 - Banking Finance December 2022

ARTICLE

company one of the most valuable companies in the world.
He introduced the world to touch screen mobiles and change
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
One reason why the unicorn culture fascinates businesses
weight in determining whether a startup is a unicorn or not.
and investors alike is because eventually the higher a
In the midst of this race for valuation the actual business
company is valued the richer the investors become. This is
sometimes takes a backseat. Money is pumped into
after all the financial goal of any enterprise and then it works
promotions and discounts to increase the gross merchandise
in a loop as more valuable a firm becomes the more investors
value in the short term. This leads to the companies having
get attracted to it. This principle of valuation however
high valuations together with high losses.
works in contradiction to the principles of traditional finance
largely followed by financial institutions that considers a
Most of the startups that have even got listed are still
consolidated picture of a firm’s financials along with
running into huge losses however their valuations have shot
profitability and other ratios.
up multiple times, of course due to metrics other then
profitability. Recently the founders of one of the startup had
Business Model:
a dispute regarding 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 its worth This explains the importance of the valuation mathematics.
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

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