What is startup valuation bubble?

What is Startup Valuation?
Startup Valuation is the process of quantifying the worth of a company.There are various methods that are used for calculating valuation of a Startup or Business.

1. Cost-to-Duplicate

This approach involves calculating how much it would cost to build another company just like it from scratch. The main idea of this approach is to calculate the maximum amount that someone can pay to buy out whole Startup or Company.

2. The Berkus Method
The Berkus Method was created by venture capitalist Dave Berkus to find valuations specifically for pre-revenue startups. The idea is to assign dollar amounts to five key success metrics found in early-stage startups.

The simple formula helps founders and investors avoid faulty valuations based on projected revenues, which few new businesses meet in the expected time period.

Here is the formula:

 

 

 

 

 

For more details click here.

What is valuation bubble?
A bubble is a theoretical economic bubble that occur when startup companies are overvalued by venture capitalists or investors.

 

Let’s talk about Paytm Mall.
Paytm Mall’s valuation in 2020: $3 Billion
Paytm’s valuation in 2022: $13 million (about ₹100 crore)

Paytm Mall had reportedly raised $200 million from Alibaba in 2017 at around $1 billion valuation. Overall, the company is estimated to have raised over $800 million in capital from Alibaba, Ant Financial, SoftBank, and eBay, among others.

Paytm Mall is perfect example of valuation bubble in recent times. Even Paytm’s parent company can also be considered as an example of valuation bubble. The market capitalisation of One97 Communications Ltd., the parent firm of India’s biggest fintech platform Paytm, dipped from $20 Billion private valuation to $16 Billion valuation on listing day itself.