Over Valuation: Setting Wrong Expectations To Get Investors Is Detrimental.
It is disheartening for investors in faltering enterprises that raised funds at unsustainable valuation.
If you ask someone in India how to establish an effective business, the two most popular names that will be mentioned are Zoho and Zerodha. Both these companies have set exemplary examples of how to establish and grow bootstrapped businesses. Therefore let us hear the wise advice of Zerodha’s founder, Mr. Nithin Kamath.
Before investing in a firm, one of the primary variables considered by investors is valuation, which takes into consideration both past and prospective business success. But, citing greater valuations by establishing unrealistic growth expectations, according to Zerodha creator and billionaire investor Nithin Kamath, might be damaging. Higher valuation is primarily the result of an overestimation of the extent of the potential that the business can.
What is valuation?
The process of determining the overall economic value of a company and its assets is known as company valuation. During this procedure, all components of a business are reviewed to establish an organization’s or department’s present worth.
Why increasing the valuation of the business is not good?
Getting investors on board is similar to getting married: having unrealistic expectations before the marriage leads to disappointments and disagreements, and it seldom ends well, according to Kamath in a tweet. It is disheartening for investors in faltering enterprises that raised funds at unsustainable valuations. While there are outliers, they are the exception rather than the rule, according to Kamath.
Rising valuations compel businesses to spend more, recruit more, and make risky risks. Founders lose interest in this process if the expectations about the total addressable market (TAM) do not materialize, and growing quickly enough to justify the valuations is not conceivable, according to Kamath.
Unreasonable TAM projections are a bigger challenge in India since income opportunities other than loans are confined to the top 2 crore Indians (1.5% of the population). And lending is competitive, he continued.
According to Kamath, assigning a lower valuation and raising only what is necessary would assist the founders of such firms’ focus and boost the odds of developing a successful sustainable business.
Some IPO tips for accurate valuation of the company.
To accomplish well, produce money with the least amount of instability. Sudden drops frighten regular investors, who panic and exit at lows. Hence, steady compounding over time rather than maximum valuation in the immediate term. It means underselling and overdelivering rather than the other way around, according to Kamath.
He believes that having realistic expectations, being truthful, and not overvaluing are excellent methods to prevent stock price volatility before and after the IPO. Doing this properly may make shareholders feel like owners while also helping to minimize client acquisition expenses, which are the most expensive for B2C enterprises.
The Bengaluru-based billionaire entrepreneur hero, who, along with his brother and trader Nikhil Kamath built Zerodha India’s largest stock broking platform with a lucrative company structure without external funding, claimed that B2C startups globally that have listed in recent years had ignored one of their most valuable assets — the opportunity to turn millions of retail shareholders with social media influence into brand ambassadors.
When an entrepreneur gets funds from VCs and private equity, they are trained to focus on maximizing valuations. This entails crafting a story capable of pricing in the best-case scenario for the company. Yet, what is required to succeed as a publicly traded company is different, according to Kamath.
An example of how the anticipated IPO’s astronomically high valuation sparked criticism.
Previously, direct-to-consumer (D2C) business Mamaearth encountered harsh criticism on social media platforms about its overhyped IPO valuations. People claim that there is a social media spree to derail the IPO. But the experts say it is not. With every passing day and the way people are getting more involved in financial talks, it is very common for every retail investor to get detail about every valuation before they put their hard-earned money in. So, it’s high time companies should stop this act of overvaluation to get the investors and stakeholders on board.
The last line.
Kamath’s remarks come against the backdrop of rising values given by the majority of the loss-making new-age technology enterprises when obtaining cash via an initial public offering. While they were able to attract a large number of investors across all categories, several of the entrepreneurs have failed to get their operations profitable.
Mr. Kamath, a real leader in investing psychology, has permanently transformed the mindset of investors in the market, and people value his judgment and counsel to all informed and beginners for the future.
Edited by Prakriti Arora