- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
How Cash Reserves Link To Startup Valuations
𝐒𝐭𝐚𝐫𝐭𝐮𝐩 𝐯𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧𝐬 𝐡𝐚𝐯𝐞 𝐭𝐚𝐤𝐞𝐧 𝐚 𝐡𝐢𝐭. Some attribute it to rising geopolitical tensions, while others attribute it to higher inflation. As a result, investors are no longer interested in funding capital at steep valuations. Thus, startups need to reduce their growth and focus on their profitability.
In my view, 𝐭𝐡𝐞𝐫𝐞 𝐜𝐨𝐦𝐞𝐬 𝐚 𝐩𝐞𝐫𝐢𝐨𝐝 𝐟𝐨𝐫 𝐞𝐯𝐞𝐫𝐲 𝐠𝐫𝐨𝐰𝐭𝐡 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 𝐭𝐨 𝐦𝐚𝐤𝐞 𝐚 𝐭𝐫𝐚𝐝𝐞-𝐨𝐟𝐟 𝐛𝐞𝐭𝐰𝐞𝐞𝐧 𝐠𝐫𝐨𝐰𝐭𝐡 𝐚𝐧𝐝 𝐩𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲. When markets are good, firms increase value by increasing growth at high risk, as markets give importance to development and become indifferent to risk. However, as things change, markets provide credit to companies taking less risk and focusing on stability than growth.
One of the reasons Amazon is a great company is because it raised capital just before the dot com bust and kept the cash reserves to ride past the crisis and not spend the cash for growth. Thus, 𝐦𝐚𝐧𝐲 𝐨𝐟 𝐢𝐭𝐬 𝐩𝐞𝐞𝐫𝐬/𝐜𝐨𝐦𝐩𝐞𝐭𝐢𝐭𝐨𝐫𝐬 𝐜𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐬𝐮𝐫𝐯𝐢𝐯𝐞 𝐩𝐨𝐬𝐭 𝐝𝐨𝐭 𝐜𝐨𝐦 𝐜𝐫𝐢𝐬𝐢𝐬, 𝐚𝐧𝐝 𝐀𝐦𝐚𝐳𝐨𝐧 𝐜𝐚𝐦𝐞 𝐨𝐮𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐜𝐫𝐢𝐬𝐢𝐬 𝐟𝐚𝐫 𝐬𝐭𝐫𝐨𝐧𝐠𝐞𝐫.
Zomato, they have 𝟕𝟒 𝐛𝐢𝐥𝐥𝐢𝐨𝐧 𝐢𝐧 𝐜𝐚𝐬𝐡 𝐚𝐧𝐝 𝐡𝐚𝐯𝐞 𝐚 𝐧𝐞𝐠𝐚𝐭𝐢𝐯𝐞 𝐄𝐁𝐈𝐓 𝐨𝐟 𝟏𝟕 𝐛𝐢𝐥𝐥𝐢𝐨𝐧.
𝐏𝐚𝐲𝐭𝐦 𝐡𝐚𝐬 𝟐𝟓 𝐛𝐢𝐥𝐥𝐢𝐨𝐧 𝐢𝐧 𝐜𝐚𝐬𝐡 𝐚𝐧𝐝 𝐚 𝐧𝐞𝐠𝐚𝐭𝐢𝐯𝐞 𝐄𝐁𝐈𝐓 𝐨𝐟 𝟐𝟐 𝐛𝐢𝐥𝐥𝐢𝐨𝐧.
Thus, compared to Zomato, Paytm needs to focus on margins. However, if Paytm continues to focus on growth at the expense of margins, it needs to raise additional capital from markets that would come at a very high cost, further reducing its value.
Thus, in my view, 𝐙𝐨𝐦𝐚𝐭𝐨 𝐡𝐚𝐬 𝐚 𝐛𝐞𝐭𝐭𝐞𝐫 𝐜𝐡𝐚𝐧𝐜𝐞 𝐭𝐨 𝐜𝐨𝐦𝐞 𝐨𝐮𝐭 𝐨𝐟 𝐭𝐡𝐢𝐬 𝐦𝐚𝐫𝐤𝐞𝐭 𝐜𝐨𝐫𝐫𝐞𝐜𝐭𝐢𝐨𝐧 𝐭𝐡𝐚𝐧 𝐏𝐚𝐲𝐭𝐦.