Mumbai: India’s e-commerce and consumer technology start-ups, many of which have raised funds at lofty valuation in recent months, may be collectively overvalued, says Aswath Damodaran, an authority on corporate finance and valuations.
While he would not hazard a guess about valuation of individual companies, taken together, the size of the macro story may not justify the micro-valuations, said Damodaran, a professor of finance at the Stern School of Business, New York University.
“I do believe that collectively, the markets that are being used to justify these valuations (online advertising in particular) are not big enough to justify the prices being paid, which I guess is a backhanded way of saying that the stocks are collectively overpriced,” he said in an interview.
Damodaran was in India to conduct a corporate finance and business valuation workshop on 10-11 August for VCCircle Network, a media and publishing company.
According to data from CB Insights, a venture capital database backed by the National Science Foundation, Indian e-commerce and consumer technology firms have raised $3.5 billion from January to June this year.
A number of these firms have seen their valuations rise with each subsequent funding round.
For instance, the valuation of e-commerce marketplaceFlipkart’s is likely to have increased to about $15 billion from less than $2 billion at the beginning of 2014. Snapdealmay be valued at $5 billion from less than $1 billion 18 months ago, according to a 11 August Mint report.
While some firms in these segments will indeed become very valuable, the challenge investors face is in determining which will be those companies, said Damodaran.
According to him, venture capital (VC) investors need to ask four questions when looking to infuse money in one of these companies: Do start-ups have a plan that goes beyond users/downloads and considers how to make money? How does the company plan to deal with failure? How does it plan to deal with success? How easily imitated is the company’s basic business model or product?