The downside of chasing higher valuations

07 Mar 2023

We celebrate valuations, but the more I speak to founders, the more I’m convinced high valuations are detrimental. Higher valuations are mostly a result of overstating the size of the opportunity. Of course, there are outliers, but they are the exception, not the rule. Getting investors on board is like getting married: setting wrong expectations before the marriage leads to disappointments and conflicts and doesn’t usually end well.
It hurts to see businesses that would’ve otherwise done well struggling because they raised money at unrealistic valuations. Higher valuations force you to spend more, hire more & take random bets. Founders end up losing interest if the assumptions about the total addressable market (TAM) don’t materialize, and growing fast enough to justify the valuations isn’t possible.

Unreasonable TAM assumptions are a larger problem in India because the revenue opportunity other than lending is limited to the top 2 crore Indians (~1.5% of India). And lending is crowded.

So yeah, lower valuations & raising only what is required counterintuitively, I think, will help founders focus & increase the odds of building a successful sustainable business.

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