FOMO among VCs driving startups’ valuation to stratospheric level: KM Birla

Is FOMO among investors driving the Indian startup ecosystem to a bubble valuation? The recent statement of Kumar Mangalam Birla sounds more of a warning than his views. He also gave a few invaluable suggestions to Indian entrepreneurs that are riding high on skyrocketing valuation of their startups.

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There could be no better time than now to jump on the startup bandwagon. Time and again multiple renowned voices have testified the claim and this time the encouragement is coming from none other than Kumar Mangalam Birla, chairman of Aditya Birla Group, estimated worth $50 billion.

On Friday, Birla stated the startup market was flooded with capital and it was an ideal time to be an entrepreneur.

Birla’s view came as a part of the letter reflecting on the past year. Birla also stated that everyone, from public markets to angel investors, was lining up for great ideas that entrepreneurs may have.

This statement follows a strong performance of Indian startups in 2021 when nearly 1,400 startups raised a record $42 billion in nearly 1,650 deals. It was the year when the highest 42 new unicorns had been created. The year 2022 started with a bang as already 4 new unicorns have been created and over $4 billion was invested in the startup ecosystem in January alone.

Birla’s statement came with a few stern warnings as well. He cautioned that the competition among the investment community led by fear of missing out (FOMO) are the main reasons behind the skyrocketing valuations of many fledgling businesses to stratospheric heights.

He also dragged attention to the fact that besides focusing on valuation startups must closely monitor key financial metrics that will generate tangible profits. Birla also stated that future trends and behavior would be guided by parameters such as healthy cash flows, gross margins, and healthy cash flow.

Birla is not the only one who has been ringing the warning bells for startup entrepreneurs. Uday Kotak, vice-chairman and Managing director of Kotak Bank, is also vocal about a few factors that would impact the investment scenario in India.

The rising interest rate was another cause of concern for Uday Kotak who warned startups entrepreneurs to have a strategy in place to deal with that as well.

He said that “Cindrella Times won’t last forever” once the risk pricing factor has been accounted for in startup valuations.

Srikanth Meenakshi (PrimeInvestor’s founder partner), had previously echoed this sentiment. Taking a jibe at a few startup entrepreneurs who tried to take advantage of positive sentiments of the market towards startup IPOs but failed measurably, Srikanth said that the primary purpose of any IPO was to raise capital at the time of listing. While most of these tech companies were able to get the capital they needed from the IPO they were unable to control the market share price, and failed to depict the path to profitability.

This statement is made as a number of high-ticket startups have yet to chart a clear path to profitability despite raising large amounts of money from the primary market. The Paytm IPO fiasco which resulted in billions of dollars going down the drain, and continues to struggle with more challenges ahead has shaken the confidence of investors.

The stock price of Zomato and Nykaa – the two listed startups – has tanked below the listing price within just a few months of listing.

The story of other startups is no different either. The stock price of auto classifieds platform CarTrade has fallen more than 50% since listing in August. Citigroup Global market has warned investors that they may not able to recover the losses even after a year.

All these developments have apparently killed the excitements of investors towards startups IPO, destroying long-term hopes for the startup.

Birla, in his Annual Reflections 2021-22, expressed his views on the market opportunity in coming years and dubbed the next decade as “Capex Mahotsav.”

He also saw the private sector as experiencing a “double-engine growth“, with the traditional and new sectors.

Birla further explained that investors were excited about the growth prospects in both core and sunrise sectors. 

Birla said that, “In my view though, the word sunrise sector applies to the entire landscape in India, which includes both conventional sectors like cement, steel, power and auto and emerging areas like digital and renewables. Both hold the promise of high and sustained growth.”

Birla also added, “the hallmark of a modern business is that it seeks out the brute force capital, combined with smart tech and operations to create new customers needs that they didn’t even know existed.” He illustrated this point by citing the example of hyperlocal deliveries, which have been booming in India.

The 54-year-old Indian business tycoon didn’t forget to thank the healthcare professionals who stood up against the pandemic and made a restless effort to combat the pandemic. He also praised and thanked the municipal staff who maintained civic administrations running during this testing time, the farm and factory workers who kept Kumar Mangalam Birla’s economy chugging, and the delivery partners who worked day and night on bicycles to maintain an uninterrupted supply of essentials.

Birla ended the letter with a popular phrase from the crypto community – WAGMI!, which is an acronym for We are all going to make it!


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