“Most company valuations are arbitrary: A debate on the recent trends in valuation of companies.”

This was the topic of a brief but most interesting session at TiE Chennai’s annual conference last week.

In a gathering of entrepreneurs and investors, if you expected both the participants – one an investor who backs entrepreneurs at the early stage and the other an investment banker who helps entrepreneurs raise money – to speak the same language, you were in for a big surprise.

Mahesh Murthy, founder of early-stage investment firm Seedfund, surprisingly speaking for the motion, was emphatic that valuation was a simple reflection of the sentiments out in the market. “There is nothing rational. It is quite arbitrary. People out there have to justify it either way,” he argued.

If you get high valuations, you have to give higher returns to the investors and most valuations have to be higher than the previous round of fund-raising. Valuations depended on how much you were going to invest and were driven by how much stake was being taken. “They are not justifiable by anybody except by investment bankers who have to justify their fees,” he said. It was a game that had to be played. The subject you really had to study if you wanted to understand valuation was psychology, Mahesh said and argued that there was chaos and unpredictability all around and how a company was valued depended entirely on who had the upper hand.

Countering him, K Ramakrishnan, Executive Director and Head – Investment Banking, Spark Capital Advisors, said for close to two-and-a-half decades as an investment banker he had been called upon to represent the case of an entrepreneur in front of an investor. Valuation, as in the case of beauty, lies in the eye of the beholder, and if you are not able to comprehend it, you cannot dismiss it as arbitrary.

Valuation included elements of science, logic, a bit of arbitrariness, it was specific to a given situation and was circumstantial. It depended on revenues, profitability, growth, passion of the entrepreneur and uniqueness of the idea or the business model. There was a dope of irrationality too, but as long as it only remained a dope, it was fine, he argued.

Quite often, Ramakrishnan argued, the science behind the valuation of an enterprise was not fully explained and because of the information asymmetry, there was a doubt.

At the end of this close to 10-minute debate, the nearly 1,000-strong gathering was asked to vote. Any guesses for who won? The one who spoke in favour of the motion, by an overwhelming majority.

Mahesh Murthy of Seedfund got nearly 70 per cent of the votes polled!

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