’To paraphrase Morgan Housel, when it comes to monies, questions like, ‘How can I be less Dumb’, ‘less Greedy’, ‘less Impatient’ counts a lot more than anything else.
Why do majority of Founders, or Investors find it so hard not to follow this maxim? If one just looks at the past 12 months, reality bites – be it from Silicon Valley, or Shanghai or closer to the Indian shores, firms’ valuations have taken a beating in the Publicly traded markets, and in the less transparent private markets. A funding winter now, could perhaps been avoided by a not over-exuberant Spring a few years ago, where Angels, VCs driven by easy-monies, FOMO and high dopamine, wrote checks at ridiculous valuations.
Operating Metrics, and Fundamentals irrespective of Businesses or Business Models, never change and both a Founder’s, and Investor’s focus should be on generating Earnings that can grow at a sustainable level. Now for that to happen, both parties need to understand that the Product/Service has a decent addressable market (PMF), that can feed it revenues, which eventually turn into Earnings. Founders, or Managers cannot run an outfit, where Earnings, get replaced by the next round of Funding, now this is what leads to fancy valuations. Founders need to keep evolving the Product/Service so that it delivers consistent value to the end user, now this ‘Value’ is pretty much what translates into what the Investor is willing to pay for today or in other words a ‘Valuation’. If you are a Founder, make sure that the Investor and you are in sync with long-term goals, and you have the right set of people on your Cap Table, and if you are an Investor, if the firm cannot match your investment goals, then walk away – both would be doing a dis-service to each other, and the system by chasing Shadows.
Focus on Value Creation, and Valuation would follow.
Krishnan S Iyer
Krishnan, an under-graduate of BITS (Pilani), and post-graduate alumnus of MIT-Sloan is a Mentor at NSRCEL. He heads Strategy & Investments in India’s leading Industrial Parks and Warehousing Platforms in addition to being an Investor and Board Member in an NSE/BSE listed Manufacturer, and an Investor/Board Member in Growth Companies.