There is always complain that good companies are too expensive

At 2018 PE-VC Summit, Raj Dugar, Managing Partner, Asia of Eight Roads, said at a panel discussion that there are three permanent complaints from VC firms:

  1. Company valuations are too high;
  2. There is too much money for too few good companies;
  3. Talented founders are difficult to find

In fact, the first two are the same. Valuations go up when the supply of capital is bigger than demand. It seems that in places like India and Indonesia, the boom of venture capital exceeds that of good startups.

Too expensive? Too cheap?

Some of my colleagues were at the World Internet Conference at Wuzhen last year, they were asked by quite a number of investors from China: “how should I value companies operating in India and Indonesia?” Valuing them based on Chinese standards (US$X per DAU, for example) would often result in price inflation; however, what should be the alternative (read: accurate) benchmark?

A few of our VC friends from India are also perplexed: “how should we align the valuation that we feel comfortable versus what the Chinese investors are giving to the companies?”

No doubt, for VCs, the million billion dollar question has always been: How much should the company be valued?

Business valuation: a multi-billion dollar industry (literally)

Valuation is a set of expectations about how the company will do in the future, based on its current state and trajectory. Valuation essentially indicates the worth of the business .

If you have been to business school, you will study different methods of valuation, from Discounted Cash Flow (DCF) to comparable company analysis.

Well, one of the biggest pitfalls of business school is … nobody in the real world really uses DCF, especially when you do venture investment. And, especially especially in the early stage.

PEs and also some VCs, with quite a bit of effort (sometimes outsourced) would go into valuing companies.

However, just as stock prices – while in the long-term you can claim some long-term ‘intrinsic value’, in the short-term… valuation is always just a matter of supply and demand

While unicorns have proliferated in China, in most markets (even relatively in China) it is still scarce. How often do the likes Go-Jek, Grab, and Lazada emerge in the market? Having become giants in only a few years, these companies are now regional and global leaders in their respective fields. 

Valuation is in the eye of the beholder

As long as you believe the future of the sector, whether the current valuation is overpriced or not is a non-factor. The true concern is whether the valuation will continue to grow and if there is good exit potential.

You are not a good investor if you do not understand this.

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.

 

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