Move over unicorns: what does a $100-billion startup valuation reveal?

A couple of days ago, the Internet was abuzz with a post by Basecamp founder Jason Fried about his take on startup valuation. Interestingly, it was put out as a press release with a eye-popping title 'Basecamp valuation tops $100 billion after bold VC investment'.


A couple of days ago, the Internet was abuzz with a satirical post by Basecamp founder Jason Fried about his take on startup valuation. Interestingly, it was put out as a press release with a eye-popping title 'Basecamp valuation tops $100 billion after bold VC investment'.

While the title itself gives it all away, the amusing post talks about valuation of the company after selling 0.000000001% of the company in exchange for $1. Only, the post originally appeared in 2009 in the official 37Signals blog, which is now Basecamp. Again, as a press release, only to be repurposed this time with 0.000000001% of the company in exchange for $100.

Tech Startups

Image: Reuters

That's not only a $100 billion valuation, but also a hundred fold increase in the unit share price between 2009 and 2015! A key takeaway though, is effectively, anyone could probably do exactly that, and ensure their company is valued at millions or billions of dollars. As expected, this humourous take has got Twitter praising it.

There's also an image clearly mocking the valuation scene further. The caption of the image (lead image) in the post reads, "Proof that Basecamp is now a $100 billion dollar company."

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Image: Reuters

Now, investors and experts are believed to have armies of analysts who work out the whole valuation, this article has a hilarious take on how it is calculated. It jots down a typical formula to calculate how a company is evaluated - '[(Twitter followers x Facebook fans) + (# of employees x 1000)] x (total likes + daily page views) + (monthly burn rate x Google’s stock price)-squared and then doubles if it they’re mobile first or if the CEO has run a business into the ground before.' Further it mockingly points out that “the press eats it up.”

The satire has some food for thought to chew on. Valuation matters to entrepreneurs and one may wonder how people value a company, especially startups! The answer is tricky, but definitely not the hilarious formula stated by Fried. What next you wonder? Well, it's tricky, as we said. The valuation of a startup differs at every stage. However, at the end, it all really 'depends' on many factors without a standard formula. It isn't surprising then, that many regard startup valuation to be an art.

In a report in the Financial Times, Ashish Jain spoke about his friend's new healthcare venture, and how his friend simply calculated the valuation. "He pegged the valuation at Rs 6 crore, considering Rs 2 crore for his IIM-A background, Rs 1 crore for having set up his company, Rs 1 crore for putting in his 15 percent investment into the venture, Rs 1 crore for having developed the product (yet to launch) and Rs 1 crore for initiating contractual agreement with some 20 partner-vendors in South Delhi. Basis this, he has roped in 8-10 investors, giving less than 10 percent equity to them collectively," Jain wrote.

Now, this isn't really surprising. Housing.com was valued insanely at $400 million. That's a little over Rs 2670 crore! But according to BusinessWorld, the valuation of Housing.com has fallen to less than $50 million. That's effectively a 12.5 percent of the initial valuation! And that's not a joke. Housing is also said to have begun laying off employees. These layoffs point towards the impending collapse of the tech bubble. It's believed to have reached the insane valuation only after Softbank invested $100 million in the startup.

If you consider some of the startups such as Zomato that makes it to the elite club of unicorns (with valuation over $1 billion), it's said to be laying off 10 percent of its employees. On the other hand, TinyOwl, considered one of the knights in Food tech has been laying off employees and the count has reportedly crossed 200.

Let's not forget the ugly hostage scenes at the TinyOwl Pune office. It was earlier in February that TinyOwl had raised 100 crore from investors. Flipkart is valued at $16 billion, which is more than established large-cap companies.

A reason why the tongue-in-cheek piece by Fried clearly stresses on how valuation and profitability are unrelated. “Once you have profits, it’s impossible to just make stuff up. That’s why we’re switching to a ‘freeconomics’ model. We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit!," he wrote.

It is not just food tech or real estate tech, it's everywhere. For instance, according to the most recent news report, Xiaomi's $45 billion valuation is now been seen as 'Unfeasible'.

In a Quora thread, John G Herndon, senior level consultant states, "There are many ways to calculate the value of your start-up. Unfortunately, the only truly valid method would involve an analysis of revenue traction over time and overall profitability of the business model. The least reliable is to base a valuation on tangible assets, I would never buy a company or recommend a purchase based on something that could be purchased from secondary market sources at a cheaper value; there is no reason to do otherwise."

Image: Reuters

Image: Reuters

In another thread discussing equity value of a company/business for any investment amount, the StartupGuy Vijay Anand writes, "How much do you require, and what percentage of equity are you willing to give up for it? And have that last bottomline that you'd agree for – in terms of both. If you're doing early stage, don't worry too much about valuation – great valuations at the first or second round usually will come to bite you in the ass later on. Aim for a good valuation – which is usually a by product of getting what you require, for what you are willing to part with."

In a nut shell, the satire raises many questions on obnoxious valuations of companies. It appears to be over valuation of a startup that revolves around hype and survives on VC funding, angel money and so on.  Does it consider profitability? Doesn't look like. It seems to be a bubble – full of air! So, is it time to pop that valuation bubble too? Do share your views in the comments section below.


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