I answered a question on Quora that seems to getting several upvotes. So, it is probably something people are finding interesting. I thought of pasting it here.
The question was
I read somewhere that startups in India are more value driven than valuation driven. What are the differences between these two and how does it change the approach of growing the startup?
Here is my answer:
Can be answered better, if we read this in context. But here is my guess. Start-ups can take two approaches to growth.
- Start with no/minimal capital (probably just from founders/family/friends) strive to reach revenue and break even quickly, and grow using the profits. The external investment, if at all, comes at a much later stage. This kind of start-up has to quickly create value for the customers so that they are willing to pay. Hence, possibly the name ‘value-driven’.
- Create a business plan or early prototype, prove its potential to investors, and get funding at a decent or good valuation. These kinds of start-ups have more leeway and can focus on user or revenue growth initially, instead of worrying about profits. The hope it that eventually the market share captured through user/revenue will result in a good IPO, or an acquisition giving a good exit to the investors. The investors are typically betting their money on exit and not profits from the company. Although to maintain the valuation and get an exit, it is assumed that the company has to ultimately become profitable and hugely so.
I don’t think by themselves either of these term represent good or bad side of the fence. There are circumstances in which one motivation is better than the other. For example, a value-driven start-up could not have created a Google or a Facebook. Any earnings for these companies came much later. They sustained because they got investors through valuation.
At the same time, there are businesses that may not have the kind of growth that an external investor will need for an exit. They may still add value and be profitable. So, they would do good to stay value-oriented, rather than running after investments and valuations. Or there could be places, where the investment scene is not that great. Compared to valley, that will probably be the case even in India. In such circumstances, more start-ups will have to look at generating value for customers, and hence revenues and profits quickly, before they run out of their savings.
Valuation-oriented start ups get bad name, because there have been companies/individuals who have run after valuation and managed to get it, but could never justify it through growth, revenues or profitability. But by itself it is not a bad thing. In fact, it is a very good thing as it has given us the world-changing companies.
I added the bit about valuation-oriented start-up getting bad name because another answer had done just that. 🙂 So, I thought I would clarify my opinion on that too.