Moneycontrol Pro Panorama | Narayana Murthy is right about start-up valuations  

Infosys co-founder NR Narayana Murthy (File image: Reuters)

NR Narayana Murthy, the principal founder of Infosys, dubbed new-age investors' practice of boosting a company’s valuations by focusing on revenue growth alone as a Ponzi scheme. As a start-up grows, it does a series of fund-raising activities. Funds are raised at ever-higher valuations despite continuing losses and cash burn at the company. While this exercise enriches early investors, the last one to enter the company is “left holding the tin box”, said Murthy at an industry event. Perhaps he meant a tin cup.

He is spot-on in his observations. It is often the retail and small investors who enter the company in the last leg of the fund-raising, and they face the consequences. This is aptly demonstrated in the initial public offerings (IPOs) of One97 Communications (Paytm), Delhivery, Zomato, PB Fintech, FSN E-Commerce Ventures. The IPOs were sold at premium valuations.

As euphoria about start-ups and new-age companies ebbed, the shares of all these companies dropped below their IPO prices. Most of these companies are yet to turn profitable or generate money on a sustainable basis.

Thankfully, public markets instil accountability and discipline. Rising public scrutiny, higher interest rates and reduced fund flows into start-ups have forced a rethink at the above-mentioned companies. Several companies aim to break even at the operating level in the next one year and have achieved reasonable progress—Zomato, PB Fintech, One97 Communications, to name some.

Yet the companies have much to deliver as we explained in these stories on Zomato, PB Fintech, One97 Communications, Delhivery and FSN E-Commerce Ventures. “What the market likes and rewards is profitability. It has reacted positively, at least in the short term, to Paytm’s (Q3 FY23) numbers. If the company can continue to post strong numbers, money will chase the stock,” Shishir Asthana wrote on One97 Communications. Moreover, slowing growth and competition from deep-pocketed investors pose a different set of challenges for these companies.

While the coming fiscal year numbers from these companies will be closely tracked, observations from successful entrepreneurs such as Murthy bring much needed attention on the valuation of start-ups.

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