on Startup Valuations

For SaaS or PaaS startups, valuation is often considered as combination of art and science. In case of B2B SaaS companies, financial metrics make more sense since the target market and pricing strategy has to be defined, which is not always the case with B2C companies, especially social companies such as whatsapp, instagram, facebook. In such cases, valuation is often based on “eyeballs”- number of users acquired by platform.

In the event of valuation, startup can be roughly categorised in two categories. First is the seed stage, second is the growth stage. Each phase implies different ways of valuation.

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Passion and Pragmatism

In the world of startups, passion is considered as the most important quality of founders. I wondered for long time, why passion is so important? Why can’t someone be just good at what they do and figure out the rest? I thought the most important thing was to earn money. Coming from India where most of the business is software services, I saw making money is essentially putting more people on the project. Where does passion come in into this situation? Can you really be passionate about increasing the team size? Hire more people? Without understanding what their roles and functions are? That did not make much sense to me. So I dug deep, If companies in India are founded by the sole purpose of making money, why on earth someone would care if you are passionate about it or not? After coming to Silicon Valley I noticed many people talking their jaws off about passion. Any random act of writing code is coupled with passion, even if a programmer writes a program that adds two integers and nothing else, he must have done it passion. Now this situation was even more mysterious and confusing for me.

I could not see the any reasoning in putting passion first for literaly everything. I thought of it as another Silicon Valley idiosyncrasy. Afterwards, I got the opportunity to meet folks who are doing startups on a regular basis. Without a doubt, these guys were extremely passionate about their products. Everyone of them was so convinced that their product is going to change the world, they forgot the simple fact that 90% of companies in silicon valley fail. Now things got even more interesting at this point. Everyone is passionate, everyone loves their product, then why people can’t build great companies? If everyone loves their product so much and everyone here is passionate about their product, why can’t everyone succeed? Isn’t passion the most important thing? I tried to understand this reasoning for a while. One answer that might be probable is, if the company failed, founders were not passionate enough. This sounds like pure bullshit to me, I feel passion is binary, either you are passionate about something or you are not. End of story.

Bewildered with this situation, I started thinking that there must be some parameter I am missing. Continuing my search on how to build great companies, I came across the concept of lean startup. The principles on which lean startup focus on reflect one simple fact - Practicality. This struck me as the most important aspect in day to day happenings in life. Pragmatism is probably the most desired skill, one has to be practical in his personal and professional life. Similarly, in startups it is important to focus on what is right more than on what you’re passionate about, and practicality is a tool to get there. It is extremely common to be passionate about the wrong idea, and lean startup methodologies teach us how to practically determine vital components of starting a company and shaping ideas. However, pragmatism alone is not sufficient. Pragmatism fails to be the fuel that will drive founder’s vision. It is extremely hard to start and build a company from idea. And passion is the thing that will keep you going. Coupled with passion, pragmatism can make a huge impact.