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Challenging the validity of business valuation results
Valuations are always used as a “weapon” to attract investors; as much as possible, valuations are made as attractive as possible with a variety of supporting assessment metrics.
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In crisis: Employees arrange fruits and vegetables at the TaniHub distribution center in Kedung Halang, Bogor, West Java, on Aug. 16, 2019. Tanihub recently laid off a number of workers amid global woes in the digital economy. (TaniGroup/Bhisma Adinaya)
W
inter is coming. The subtitle of the Game of Thrones movie series is very appropriate in describing the current condition of the world's digital ecosystem. In fact, I call it no longer winter but frozen. This is evident in the many digital startup companies that have collapsed, even in giant technology companies, such as Facebook, Google and Microsoft, which have laid off their employees in large numbers. This only shows that something is wrong in today's digital climate.
In my search, there were a few Indonesian startup names that went bankrupt and were forced to quit business, such as Fabelio, Airy Room, Stoqo, Qlapa, Sorabel and many others. This list completes the list of global startups that have previously collapsed, such as CommonBond, Reali, Airlift, Volt Bank and so on.
As we know, startups are companies that have just been established, usually using a digital-technology approach in running their business. Each startup has the power to compete and grow, which according to the founder is called a “value proposition”. This value proposition is a "selling tool" to attract investors to want to place their funds in the startup, with the promise of multiple growth in the future.
Startup companies generally need large funds at the beginning of their establishment to carry out their operations, therefore relatively large and sustainable funds are needed. Without these funds, the promise to scale up the value proposition would not be realized. Over time, the startup business model will be tested by market mechanisms (active users, traction, etc.) and available funding “runways”. The test results are the central problem in this paper.
The problem lies in the "selling" of the business model, which the valuers profession justifies by what is called a "financial projection". Very often, projected startup growth results from valuations that miss the real condition. Likewise in conducting business valuations, the value of a startup business that is presented tends to be overstated.
Even JP Morgan, the world's number one investment banker, was also tricked into using the results of this business valuation when it acquired Frank's startup in 2021. JP Morgan felt cheated from the application's user data which was used as the basis for determining the value of Frank's business acquisition.
The valuer profession does have its own assessment standard; in Indonesia it is called the Indonesian Valuation Standard (SPI). SPI is a basic guideline that must be complied with by valuers in conducting a valuation. From the regulatory side, the Financial Services Authority (OJK) has also issued OJK Regulation No. 35 of 2020 concerning valuation and presentation of business valuation reports in the capital market. This regulation specifically applies only to entities listed on the Indonesian capital market. These regulations and standards are sufficient, but why startups that use the output of appraisers keep failing is still a big question mark.
