Sometime again, I got here throughout a report that India now has greater than 35 unicorn startups, round 11 of which have been added in 2020 alone. Industry consultants have predicted that India could have 100 unicorns by 2025. The focused give attention to unicorns made me marvel the way it has now change into the parameter of success for startups.
There is that this great peer stress amongst startups that if they aren’t raking billions in valuation, their enterprise is a failure. Ironically, these seemingly profitable companies have been constantly reporting losses, a couple of of them have additionally shut down. This is a testomony to the truth that valuations alone can by no means be the parameter on which a enterprise ought to focus.
Valuation vs Value Creation
It doesn’t imply that valuation is with out advantage. Problem is that valuation is commonly confused with worth creation. Valuation is closely depending on market situations. Even mathematically, the identical firm will be valued in another way by two totally different evaluators. It might even have a valuation that’s 4 occasions in an “in” market as in comparison with what it will have been in different circumstances.
Hence, it’s erratic and a extremely deceptive metric.
Valuation ought to result in worth creation. A enterprise creates worth when it is ready to generate regular income, keep secure profitability, create an influence and establishes a mannequin that may be financially viable to final for generations.
Are startups designed to fail as worth creators?
When the target of a startup is simply to make a profitable exit or simply survive within the herd, it fails as worth creators. The journey from being a startup to a matured enterprise is an uphill trek. This is the stage the place post-stage startups lose their focus. Since they aren’t designed to assume institutionally, their focus is on exits, they have been by no means constructed within the first place to maneuver ahead.
How can we measure worth creation – Capturing the worth created
Peter Thiel writes – Even very large companies will be unhealthy companies. Creating worth is just not sufficient – you additionally have to seize among the worth you create.
“For example, US airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21 percent of those revenues as profits—more than 100 times the airline industry’s profit margin that year,” Thiel exemplifies.
If a startup only creates value and does not capture it, it would not survive in the long run. As we can see from the above example, revenue or the number of users are not always quality metrics to measure value creation. Net profit, on the other hand, is a far more reliable parameter.
Innovate – do not replicate
The running trend among Indian startups is to replicate existing business models. Replicating an already successful model does not result in mirroring their success too. The next Zuckerberg will not create a social network, Neither will Google be recreated. Be a Maverick – create something disruptive and new that has a niche of its own.
Economies of Scale
At the organization level, we are huge propagators of economies of scale. Each customer that comes your way is a gold mine. With them, they bring their network. A scalable market, combined with a bankable network is what creates a disruptive but sustainable model. Any business that has created a legacy – Apple. Arguably, being the aptest example has taken advantage of the Network Effect. Nearly 70 Percent of Value in Tech is Driven by Network Effects.
Can your startup raise prices and retain your customers?
The litmus test for any business is whether they are able to raise prices without losing their customers. It indicates whether you have something to offer that your competitors do not. A good business must have the ability to capture value. The test of value capture is pricing power. If you’re deathly afraid to raise prices, you do not have what Thiel would refer to as a ‘monopoly’ — you don’t control your market. Disney found that it could raise those prices a lot and the attendance started right up.
Unlocking value propositions
1. Align key decision-makers by creating financial and non-financial ambitions that assimilate short- and long-term value creation
2. Develop a dynamic business model that creates value across multiple time horizons
3. Align KPI dashboards to measure and empower progress towards goals
4. Encourage long term design thinking within your organization
The Future will belong to Camels – Not Unicorns
Gradually, the markets are now making way for Camels. “Camel” startups are reminders that an developed mannequin exists. These nonetheless obtain fast development, however steadiness it with different aims like managing prices and charging an inexpensive value for services or products. The founders of Camel startups perceive that constructing a profitable enterprise begins with a robust basis that’s constructed to final.
Growth is straightforward to measure. Longevity is just not. It is pointless to succumb to valuation mania. User acquisition, income, projections are all vital however obsessing over it’s not the trajectory of making legacy companies.
The creator, Alok Patnia, is Managing Partner at ProfitBoard Ventures. The views expressed are private
