Valuation of a business is a subject that comes up when the business is up for sale or is up for a merger with another business or company. Valuation can be on actual state of the business, which is a fair way of doing the valuation. But with the growth of entrepreneurship globally over the last couple of decades, increase in venture capital funds, the valuation is also done based on future value of the startup or business. This is complicated and tricky, as often things are hyped up, funds that are made available through a VC investment are not efficiently used, the original vision of the founder is side lined, focus falls upon traction and growth without bothering about profitability. More money gets attracted based on the hype generated through traction and user growth. Companies spend more to acquire the user or customer who spends close to nothing on the actual product or service that the company is offering. The whole meaning of valuation is degraded with this kind of investment methodology or strategy.
Getting validation and growing organically slowly leads to true valuation. As opposed to getting the validation for the idea, seeking venture capital funding, and then spending those funds to scale, to show greater traction without any value being added to the business in terms of profitability is not valuation, but is devaluation. Most of the venture capitalists loose majority of their investments and get lucky with a couple of startups that become unicorns via scale and traction without profitability, pushing the valuation up and an ask for more money from interested fresh investors who then take the bite and get stuck, and often those investors are the general public that subscribe to the IPO thus helping the venture capitalists to earn back their investments with handsome returns, and the general public getting stuck with the inflated valuations.
I think technology is also to blame for the hype it generates. Technology is meant to make things easier across the field, and at a reasonable price over a reasonable time. Unfortunately, the costs involved are inflated, leading to external funding requirements, further leading to focusing on scale and user growth over neglect to profitability. Technology is meant to assist businesses in functioning easily, not complicate it. Entrepreneurs need to focus on organic growth and actual valuations to sustain meaning for their work and the word.
