The Intricacies of Startup Funding: Do Indian Startups Deserve Such Massive Valuations?

Indian startups like Cred, Delhivery, and Dunzo have managed to raise billions in funding despite generating zero revenue in their early years. This raises the question: why do investors still pour millions into such ventures, given the lack of profitability?

How Do We Know Cred Has Raised 450 Million Dollars?

One might wonder, how do we know that Cred and other startups have raised substantial amounts of money? Unlike well-known companies like Reliance and Adani, which release audited financial statements and balance sheets, startups operate in a much less transparent environment. They are not legally required to disclose their financial information to the public. The sources of this information often come from media reports and statements made by the company's management, which can be questionable.

The Definition of “Raised” in Indian Startups

The term “raised” in the context of Indian startups is often used loosely and can be misleading. Startups often report the amount as soon as a potential investor provides an in-principle approval to invest, without any terms and conditions being fulfilled. This practice is akin to claiming that money is in the bank when in fact the terms may not be met. The actual investment might not materialize, leaving the company with an inflated valuation.

The Example of Cred and the 450 Million Dollar Raise

For instance, a claim that Cred has raised 450 million dollars so far is subject to scrutiny. The media, including reports from the company's management, may have led to this figure. However, how do you trace this back to a solid source? Dozens of bank accounts with impressive balances? Such details are often hard to come by, making the assertion less reliable.

Dynamic Nature of Reported Investments

The term “raised” is often used to inflate the actual investment amount. For example, in the case of Cred, the reported 400 million dollars might include terms such as "Western Collaboration worth 70 million" and "Product Testing Infrastructure worth 55 million." These terms are often inflated to give a false sense of the actual investment and the startup's valuation.

Comparing with US Financial Regulations

In the United States, there are strict laws that mandate the difference between invested capital and provisional investments, along with the publication of both lists simultaneously. This practice ensures that the true value of the investment is transparent. In India, however, there are no such legal requirements, leading to a situation where startups can inflate their valuations.

The True Amount of Investments

Even if a startup claims 400 million dollars worth of investments, the actual liquid amount in their bank account might be significantly lower, often just 20–30 million. This is because the reported amount includes inflated terms that serve to boost the company's perceived value.

The Role of Media and Investor Relationships

The media plays a crucial role in shaping public perception about these startups. Reports of massive funding rounds can create a sense of valor and success, even if the actual situation is less rosy. The trust in the relationship between the investor and the startup is often the driving factor behind large funding rounds.

Conclusion: Transparency and Accountability

The discrepancies between reported funding and actual investments highlight the need for greater transparency and accountability in the startup ecosystem. Investors and the public alike should be wary of inflated claims and demand more robust data and disclosures to ensure that the valuations of startups are accurate and sustainable.

Key Takeaways

Indian startups can inflate their valuations through loose definitions of “raised” and inclusion of inflated terms. No mandatory legal requirements exist in India to define the difference between invested and provisional investments. The media can play a significant role in shaping perceptions, often without thorough verification of startups' financial claims.

By understanding these nuances, stakeholders can make more informed decisions regarding investments and support the growth of startups in a more transparent manner.