Every start-up should be in the business of creating value, not valuation. The latter is temporary and has no foundation. People talk of unicorns (a unicorn is a company that has a valuation of USD one billion) but how many make money? The metric used in valuation, is based on anything but the normal standards of governance and profit. Then one day the bubble bursts.
In the case of Byjus’s, a unicorn and at one time valued at USD 22 billion. They have since defaulted on a loan, in the US. If they defaulted in India it would have been a different story. Both auditors and independent directors resigned and they do not have their financial data ready for the year 21-22, forget that we are in 23-24, so technically 22-23 should be already available. Splurging money on advertisements, you will recall seeing the brand on cricketers will make your brand famous but only if you have customers will you make money. You will wonder what makes a company so valuable when its last declared loss was close to Rs 4000 crore. Why state value in USD but report loss in Rupees, especially when company is based in India.
The foundation of value creation is good governance. This discipline must be practised by every entrepreneur from day one. For this write-up, we will ignore product. We will focus on other aspects. It is always good to be ambitious, but if you bite more than you can chew, as the saying goes, you can get into trouble. If self-financed, it is usually easier to recover if you feel the bite is too big. If you have borrowed, then the problem can escalate pretty fast with interest and repayment snapping at your heels. There used to be a term banks used a lot when financing, ie debt equity ratio (D/E ratio), for normal ventures it was healthy at 3:1 for long gestation projects like power plants it could be a little different. However, with venture capital this ratio has fallen by the wayside or equity is handed out seemingly freely. Borrowing was against an asset base. In the connected world, there does not seem to be any strong asset base, just pipe dreams.
The first lesson would be dream, but keep your feet on the ground. Avoid over-leveraging and try and keep equity to yourself. That way, you have a motivation to create value. If you are thinking, I will exit after two years with ‘X’ times more, creating value is not your cup of tea.
Keeping an account of income and expenditure has to be an ongoing exercise. Today, with accounting packages it is a breeze. But it will not happen unless you make it a habit to pass the entries and take stock regularly. In the old days, to apply for bank loan one needed a balance sheet, and once you had the loan, the banks would insist on stock statements and financial data to keep the loan running. Those who insisted on being undisciplined would be penalised with a higher interest rate. Today, because the valuation is based on ‘kite flying’ these fundamentals are lost with tragic results. Now just imagine a unicorn could not produce its financial statements in time, this is gross mismanagement and not a trait of a valuable company.
It is never too late but now it is reported that the so-called big four consulting companies have started talking about governance issues at start-ups. Revenue recognition and inflating are now on the table. I recall a contractor approaching us for an order wherein he would pay us 100 but we were required to return 20 in cash to him. In cash means the transaction would be off-book. What this meant was we recognised 100 as sales while actually getting only 80. In addition, we would have had to cook the books to ensure we could return 20 in cash. It was in our long-term interests to forgo such business. As you can see, there is a domino effect, staying away from revenues that specifically introduce a poison pill into the operations, is important.
It is easier to take proper decisions if you do not have investors with many times ‘X’ return on their minds breathing down your neck. Slow and steady is not bad, take your time and aim to be a poster boy for a life-time, not a flash-in-the-pan unicorn.
(The writer is Managing Director at GMI Zarhak Moulders Pvt Ltd, and former president of Verna Industries Association, former director of Goa Industrial Development Corporation (GIDC), former chairman of CII Goa)
