#Start Up Valuations

#byjus Valuation

October 2022 : $22 Billion

May 2023 : $8.2 Billion

While there are many reasons for drastic mark down of valuation in Byjus case, the significant reasons in the mark down of valuation for many start-ups in the recent past are;

1.????Scalability is not equivalent to profitability: Initially when there was lot of optimism about the prospects of start-ups and availability of ample funds for deployment, many VC firms chased the start-ups which has huge addressable market irrespective of commercial feasibility. However in the process they ignored the profitability potential of the business model in the near future. Currently with the scarcity of funds in the market to deploy in start-ups in the back drop of multiple issues that rocked the start ups in the recent past, the Venture capital firms started to focus on those companies which are profitable irrespective of size of the addressable market as long as the size is not too negligible. This brought fewer interested investors to the table for many start ups impacting the valuation they can command compared to the previous rounds of fund raise. This has adversely impacted the bargaining power of the promoters and existing investors to ask for higher valuation over the previous rounds of funding. The options in front of promoters & existing investors is limited either to agree for mark down valuations or stare at immediate collapse due to shortened runway. So many opting to mark down valuation in the hope of catching up valuation in future.

2.????Shift in VC focus from long term to short run : In the beginning of start-up boom, every PE / VC firm wanted to invest in start-ups with an tenure of minimum 8-10 years horizon to exit. They always felt that they have the time to turnaround the story in the long run even if something needs to be revisited in the due course. But as the things moved on catching higher scale, they realized something not making commercial sense with the initial business model to start with will not make sense tomorrow too. While one can make changes to the product mix or offerings during the course, things which need changes in the customer behavior's and demographic need massive investments and it comes with huge uncertainty for business. Many VC firms started realizing this hard truth over the course of investment life cycles in multiple start ups. This evaporated the hopes of continuing the existing operational cash burning model for many start-ups due to shortage of availability of funds if they are not profitable or if they have no visibility to profitability in the immediate fiscal.

3.????Business model assumptions: Many start-ups operated on the premise that the customer behavior will change once they get stickiness to the platform or service offering. So the initial discounts / offers based revenues were expected to continue subsequently also in the absence of those offers. However most customers were solely driven by the offers rather than the stickiness to the platform or service offerings as the similar products are also available outside the platform and are similar to those available on the platform in terms of features or customer delight experience. The visibility to Unit Economics turning positive became too remote given the continued cash burning operational business models. This made many business models to fail without any clue as to how to turnaround the business model if they need to generate revenues profitability without burning any cash further. ?Paid channels of marketing miserably failed to turnaround the platform visitor sales in to high revenues with higher customer conversion ratios over a period of time. The traffic on the platforms just continued to be higher only till the startups spent millions on marketing. The conversion rates from non paid channels were continued to be way too low compared to paid channels even after burning billions of cash for many start ups. Overnight many start up business models became outdated once the availability of funds dried up. All these issues which were revolving around the business model assumptions tied to the funding crashed over a period raising the questions about the viability of business for many start ups if not for all.

4.????Communication is not equivalent to competence: Many of the start-up founders are from global business schools with good networking at HNIs and their families. In the initial days of Start-up boom, raising funds were to a large extent driven by these network connections beyond the business case. Many times, the communication skills of the prospective promoters were wrongly perceived as competency skills and this resulted in to deployment of funds at higher valuations. There are many start-ups which were valued at multi million dollars even before a concept is commercially tested just based on the proposed leadership team. As the time passed over the years, many Investors started realizing the fact that running organizations need lot of expertise and those who initially used to promote the “New age skill set” started to advocate for “Experienced resources”, but by then the damage has already happened to start up world.