In just over a year, the drop in valuation from $22 billion to nearly zero of India’s Byju is a frightening message to the global startup valuation race. It has been aggravated further by the news of a drop in the valuation of India’s startup Koo from $5 billion to zero, as it filed bankruptcy due to not finding additional venture capital (VC) funds to burn. According to Bloomberg, roughly a third of unicorns, Startups with more than $1 billion valuation, faced shrinking valuation in 2023. Once the VC fund stops, cash-guzzling loss-making unicorns will likely face the grim reality of startup investing–valuation collapse.
Fueling startup valuation through creating a market of startup innovations by offering subsidies has been the key focus of VC funding. Hence, VC funds have been pumping tons of money to push premature reinventions of startups to create scale effects for accelerating valuation. Consequentially, startup valuation inflation suffers from growing accumulated losses. Consequentially, once VC funding stops, once highly valued startups face bankruptcy. Hence, due to the collapse of staggering startup valuation once VC funding stops, like an avalanche breakdown, such an approach of increasing startup valuation has started to face its voidness.
Fortunately, there has been an alternative. Instead of offering subsidies to capture the market, startups’ premature products, which are reinventions of mature alternatives, could be improved with a Flow of Ideas. Additional ideas may be leveraged to keep improving the quality and reducing the cost; as a result, with decreasing subsidies or at a profit, they could become eligible to diffuse in the mainstream market. Hence, the importance of intellectual property (IP) strategy has been rising. It’s not about getting a patent for a great idea and seeking legal protection to profit from it. Such an age-old belief no longer works for creating startup success. Instead of a single great idea and its protection, startups need a flow of ideas to fuel the Reinvention waves and win the race. Hence, there has been a need for a startup IP strategy to increase quality and reduce costs systematically.
Characteristics of startups’ products—creating temptation of inflating valuation
Startups are on the mission of reinventing matured products by changing the technology core. They open a new wave of growth by changing the mature technology core with emerging one. For example, Netflix reinvented the video distribution. Consequentially, as reinvented products offer the opportunity of being better and cheaper alternatives, the possibility of rapidly growing startups’ market and increasing their valuation beacons to both startup founders and investors. As a result, the race starts to increase startup valuation through market capturing of premature products through subsidies. Unfortunately, it has been suffering from sustainability issues.
Seven reasons for no-sustaining VC-backed startup valuation
- Primitive emergence of reinventions—starting from online book delivery, ride-sharing, digital cameras, mobile phones, electric vehicles, and autonomous vehicles, all great ideas of reinventing incumbent matured products emerge as inferior alternatives. However, due to their uniqueness, they could take over the existing market and expand further by creating a new market.
- Misleading success in the nonconsumption market—due to uniqueness, a small market may show a willingness to pay for the primitive alternatives. For example, remote villages found initial online book selection and delivery to be a better alternative to driving to towns. Similarly, hotels found video-on-demand in the 1990s attractive to offer pay channel services to the guests. Similarly, busy professionals found the bulky and expensive mobile phones of the 1980s worth paying. Such early success creates misleading perception.
- Rejection by the mainstream market—due to inferior functionality, the mainstream market rejects the initial version of reinventions, despite its uniqueness. For example, professional photographers rejected digital cameras in the 1980s. Similarly, most households rejected online video distribution in the 1990s.
- The temptation of subsidy led to the push for primitive alternatives. Upon seeing success in the nonconsumption market, the temptation of penetration into the mainstream market through subsidies shows up for inflating startup valuation. Hence, venture capitalists have been pushing for many primitive alternatives like electric vehicles, ridesharing, online education, and video learning materials.
- Valuation based on market size and capturing of market share—due to the belief of taking over the mainstream market by pushing inferior reinvented alternatives with subsidies, venture capitalists start relating valuation to the market size of matured products and the success of capturing it with a subsidy-led push of inferior reinventions.
- Accumulating loss along with valuation growth—due to subsidy-led market capturing, both the valuation and accumulated loss keep rising.
- Once VC stops covering loss, startups face bankruptcy—despite a staggering valuation of loss-making startups or unicorns; once VC stops giving additional funds for offering subsidies, startups face bankruptcy, collapsing valuation like an avalanche.
IP strategy for startup valuation—keep increasing the quality and reducing the cost
As explained, despite the success of capturing the market through subsidies, startups have been failing to cut losses and expand the market further simultaneously. The underlying cause has been the initial emergence of reinventions, an inferior alternative. However, some of those reinventions have hidden potential to be better and cheaper alternatives. Consequentially, their market could be expanded at a profit. However, to avail of this opportunity, systematically creating a flow of ideas is needed.
Hence, for sustainable startup valuation, IP strategy is a must. It must focus on developing Economies of Scale effects through advancing products instead of prematurely expanding production and distribution. The IP strategy should also focus on creating Economies of Scope effect by reusing intellectual assets in a family of products. Most importantly, the startup IP strategy must take advantage of creating positive network externality effects, like the way Apple, Facebook, Google, and Microsoft have been leveraging. As the IP strategy focuses on capturing the market through quality improvement and cost reduction through systematic idea flow, unlike the VC funding-led approach, the valuation does not collapse.
As explained, the VC-backed subsidy-led approach of market-capturing of premature reinventions for increasing startup valuation is unsustainable. On the other hand, systematic idea flow for improving the quality and reducing the cost, creating economies of scale, scope, and network effects, offer sustainable alternatives to grow startup valuation. Hence, startup valuation must focus on IP strategy.
