5 Things Entrepreneurs Should Focus On Today To Get The Right Valuation Investors share their thoughts on learnings from the current economic turmoil for founders and the things they should focus on

The investment ecosystem in India has been evolving continuously and today there is a drastic behavioral shift in how investors are approaching their investment decisions, brought in by the global downturn-led funding winter. There is a shift back from nonfinancial metrics in deciding valuation, like the number of subscribers, conversion rates, user retention rates, etc to financial metrics such as revenue figure, and sales figure that now determines valuation. This has led to founders reevaluating their thought processes and the way they operate.

We asked investors to share five things startup founders focus on today to get the right valuation for their company.

Unit economics

Investors are today asking startups to go back to basics and focus on unit economics. They are more keen than ever on backing plays that demonstrate profitable unit economics at a meaningful scale. "Evaluating the viability of the unit economics, including customer acquisition costs and lifetime value, helps us assess the startup's profitability potential. Additionally, determining the market size and growth potential confirms whether the opportunity is compelling for both founders and investors - is there potential for this to be a large one-of-a-kind business?" said Sonal Saldanha, VP, Investments, 3one4 Capital.

Profitability

Companies today have to showcase solid revenue growth and profitability in terms of numbers. Entrepreneurs who have built successful businesses say that it's time startups focused on long-term sustainability over short-term growth. "While investors continue to seek innovation, disruption, and traction, an important change has been the shift in focus from hyper-growth to profitability. Startups can now be expected to leave behind the "growth at all costs" attitude," said Ankur Bansal, co-founder and director, BlackSoil Capital.

Compliance practices and firm ESG principles

Since the recent slew of frauds in the Indian startup ecosystem, compliance and proper financial reporting have become pertinent. Investors are today cautious about whether profitable growth is also supported by impeccable compliance practices. "Prioritizing ESG principles is becoming increasingly important. Demonstrating a commitment to social responsibility and ethical practices not only aligns with modern values but also attracts investors who prioritize ESG considerations," said Bansal. These demonstrate the company's efforts to operate responsibly and contribute positively to the society and environment.

"Some entrepreneurs may misrepresent these numbers to show their companies in the best possible light operationally and financially. A typical example of this is consumer startups showcasing their Gross Merchandise Value (GMV), which is, in fact, the value of goods transacting on the marketplace, as their earned revenues," said Aparna Pittie, principal, Artha India Ventures, in an earlier interview.

Building a solid team

The most important factor continues to be the people. Betting on a founder and a leadership team with passion and knowledge never goes out of style for investors. That's why it is important for founders to first build a solid team. Experts say that this will also be instrumental in determining the performance of the company in turbulent times like we are going through now. "Understanding the founding team's motivation, expertise, track record and compatibility is essential. But assessing the founding team goes beyond their qualifications and expertise. Investing in teams that share our values and with whom we can form a cohesive relationship enhances the likelihood of success," said Saldanha.

Frugality and agility

Lastly, if there is one thing that the pandemic and its economic repercussions have taught us is how frugality and agility should be prioritized at all times. Amit Lakhotia, founder and CEO, Park+ believes that to a certain extent, even though it is going to get tougher in the coming months to raise funding or scale, businesses that are frugal, agile and are building robust businesses anchored by realistic valuations will be able to raise money, with relative ease.