Startup Funding Is Not Only About Valuation

So far, valuation has been the main reference for venture capitalists in investing in a company. This metric determines the value of a company and how big its business potential is. One of the terminology that is closely associated with valuation is unicorn, pinned on companies with a valuation value of over $1 billion. However, is valuation the only measure of a startup's business growth?

VC Industry or Venture Capital I'm still relatively young in Indonesia and just getting started active in the last decade. Each VC has its own assessment in determining the portfolio. Valuation is very important for this business model to project return ratios (rate of return) their investment. This also makes investors dare to hone the valuation value as high as possible in order to get the maximum profit.

At the end of 2019, we were surprised by the issue of several startups unicorn, such as WeWork, Uber, and OYO which are experiencing business problems. Who would have thought that a company with a high valuation and supported by large investors could stumble into financial problems. It turns out that valuation alone cannot guarantee the continuity of a company's business.

Various issues regarding startup valuations have made the fund injectors nervous. The fact is that startups are not only about valuation. There are a number of factors that have shaped a company to where it is today.

Fundamental value

Before entering the realm of valuation, there are essential roles that exist within the company itself, namely: founder. Before injecting funds into the company, investors must first put their trust in the company founder. When the two have align, only then can enter into the discussion of valuation.

The role of a Founder, who often doubles as a CEO can be likened to a captain who is in charge of determining the direction of the company, but without sufficient capacity he can sink a ship that has been built in such a way.

The positive business climate in Indonesia also plays a role in the development of the startup industry. Five unicorns are proof and show a growing market mature. 

Co-founder and Director of Tokopedia Leontinus Alpha Edison said, "Founder in the last decade should have better quality, supported by internet and mobile penetration that has been built, as well as easier access to funding."

Funding stages

In practice there are several stages in the growth of a startup business. this also affects the company's investment and valuation. Each venture capitalist has its own focus. There is more focus on early stage, others choose to play it safe by investing in later stages.

To DailySocial, Managing Partner of East Ventures Willson Cuaca said, "Each startup stage has different metrics. In the early stages we will monitor user adoption, later will focus more on economic units. There is no single rule that can apply to all."

On the other hand, with the many types of venture capital available, each has its own strategy in filling the portfolio. One of them is from Corporate Venture Capital (CVC), which focuses more on strategy and asset utilization potential.

CEO Telkomsel Mitra Innovation (TMI), owned fund Telkomsel, Andi Kristianto said, "As a corporate venture capital, we focus more on later stages. With so many assets, we hope that this investment can be channeled to all startup verticals that are relevant to core business we."

Investor Strategy

Responding to the issue of WeWork and Uber, Willson did not see this case having a significant impact on conditions in the country. As a venture capitalist, he views that there are indeed values ​​that must be adhered to so that in the future you will not stumble into problems like this.

"We understand that financial discipline is important and we will only provide a valuation that fair to good business models, innovation and value creation," added Willson.

According to DailySocial CEO Rama Mamuaya, the data shows a decline in the number of startups receiving funding. "No longer injecting small amounts of funds in some companies, but invest to a company in large numbers," he said.

This can mean investors are more selective in investing. For large amounts of funding, of course, it is not enough to just look at the valuation. Other metrics are needed to gain the trust of investors, one of which is a quality founder.

"Not only financial gains, but also fundamental values," said Andy.

In the case of WeWork and Uber, when the valuation is already (too) high, there are several strategies that can be a solution. Changing the CEO may be the most feasible solution, but the solution may vary depending on the business model of each company.

Venture capital is a risk-laden business. With various negative issues related to investment, it is natural for investors to be very careful in pouring out funds. The valuation game must still be balanced with a qualified organizational structure and ecosystem.