Value Creation Over Valuation

India’s startup scene has witnessed an undeniable boom, with billion-dollar valuations and “unicorn” statuses becoming all too commonplace. Yet, amidst this celebratory frenzy, a critical question arises: are we focusing too much on valuation and neglecting the fundamental aspect of value creation?

Prioritizing value creation over inflated valuations is crucial for the long-term health and sustainability of the ecosystem. While valuation measures a company’s worth based on its perceived potential, value creation focuses on the tangible benefit it delivers to customers, investors, and all stakeholders.

The obsession with high valuations can be detrimental. Chasing this metric at all costs can lead companies down a dangerous path, prioritizing rapid growth over building a solid foundation. This results in unsustainable practices, compromised quality, and eventually, disillusionment when reality falls short of inflated expectations. As Harvard Business School professor Michael Porter argues, “The goal of any business is to create customers, not stock quotes.”

This “valuation frenzy” creates a disharmony where priorities are skewed. When inflated valuations outpace actual value creation, it’s often a signal for investors to exit. Conversely, when value creation surpasses valuation, it presents an opportunity to build a strong position in a company with solid fundamentals.

The dynamics of value creation differ across industries. Consumer businesses typically see value precede valuation, as customers experience the product’s worth before its market perception catches up. Technology businesses, however, often require substantial upfront investment to build technology and achieve scale, leading to early valuations based on future potential. This necessitates a longer-term perspective, where value creation comes after establishing product-market fit and scaling effectively.

Similarly, early-stage startups may rely on initial valuations to attract funding and build their foundation. However, as they mature, the focus should shift towards demonstrating measurable value creation, which will naturally lead to sustainable and justified valuations.

For investors, partnering with funds, managers, and entrepreneurs who prioritize long-term value creation, while remaining mindful of sensible valuations, is key. This strategic approach fosters sustainable growth and minimizes the risk of investing in inflated bubbles.

Here are some key takeaways for investors and stakeholders in the Indian startup ecosystem:

1. Focus on fundamentals: Look beyond the hype and assess a company’s core business model, customer value proposition, and long-term potential for profitability.
   ¹ Harvard Business Review, 1996
2. Track metrics that matter: Monitor key metrics that demonstrate actual value creation, such as customer acquisition cost, customer lifetime value, sustainable revenue growth, unit economics and profitability.
3. Prioritize sustainable growth: Don’t be swayed by the “get big quick” mentality. Encourage companies to focus on building a solid foundation and achieving organic, sustainable growth.
4. Advocate for responsible valuations: Encourage founders and funds to be realistic about valuations and avoid the temptation to inflate expectations for short-term gains.

By shifting the focus from fleeting valuations to genuine value creation, the Indian startup ecosystem can build a future that is not only exciting but also sustainable and beneficial for all stakeholders. This requires a collective effort from investors, entrepreneurs, and policymakers to prioritize long-term vision over short-term hype, where every “unicorn” is not just a gold rush fallacy, but a symbol of genuine value and lasting success.

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Views expressed on The Economic Times on Feb 23, 2024