Loss Making UNICORNS!!!

Valuations are typically function of projected revenue based on assumptions that unit economics will work out once competition is killed. But the problem is, the competition never gets killed. Instead, several other rival survives challenge the existing companies.

In India loss making ventures are getting listed by opting for scale over profit in the short term. These new ventures are in a cash burn stage hoping to drive out the competition. Deep pocket investors are not too worried about the cash burn as they are willing to fund the losses as long as the growth continues. India, the most complex market to do business, is still evolving with new business models such as food delivery, logistics, payment systems, EdTech etc. and in order to drive the valuation, companies are just presenting that they are becoming bigger than before by adding new service lines and hence justifies the VCs the cash burn needed. Ola, Oyo rooms, Paytm, creed, Zomato, flipcart are all doing exactly the same.

One of the reasons these new age startups have a negative EBITA, is that they believe that by operating the way they are now will fundamentally change customers behavior in long run. For example Cred. This fintech company is trying to change the way credit cards are used in India by creating a league of people with a high credit rating thus creating a FOMO among the masses. In order to achieve this ambitious goal, in the last fiscal year, this startup had Rs 378cr expenses compared to just 52L in revenue.

Investors are pricing companies, not valuing them. For now, valuations appear set to continue an upward trajectory and this will go on as long as the super optimistic VC firms are bullish.