He once valued Zomato shares at Rs 42 and now it is over Rs 250. On the surface, this may not impress you, but there is a deeper lesson in his valuation which I will share with you at the end of this article. The man behind this calculation is Aswath Damodaran, a distinguished professor of finance at the Stern School of Business, New York University. His latest book, The Corporate Life Cycle, has been creating a lot of buzz. I am always on the lookout for articles that spark ideas and this book did just that. Though his thoughts revolved around the aging of companies, I believe it contains an important message for all startup entrepreneurs looking to achieve sustainable growth.
Beyond Innovation: The Keys to Startup Success
We’ve all heard the saying, “necessity is the mother of invention.” But in today’s world, innovation is the only true necessity. No one understands this better than entrepreneurs who are constantly solving current and future problems. But have you ever considered that your innovation could eventually become a problem for your startup? Damodaran’s insight is a reminder that innovation alone is not enough for long-term survival.
Why is your startup aging faster than you expected?
Corporate aging vs. startup aging: In The Corporate Life Cycle, Damodaran explains how companies age just like people. Companies that have been around for decades eventually find it harder to innovate and grow, leading to decline and acquisition. Large companies like Philips, Intel, Yahoo, and even Sony have felt this aging process. They didn’t necessarily go bankrupt, but they found it harder and harder to compete with younger, more dynamic companies. And the real twist is that startups are just as susceptible to aging, but much faster.
Take Zomato, for example. A few years ago it was a start-up and today it is a behemoth. But rapid growth can also mean accelerating ageing. What is the lesson? Startups need to carefully manage their growth and expansion to slow down the ageing process. Or they may need to pivot into complementary areas with a brighter future like Ola, which transformed from a cab-hailing service into an Ola Electric (electric vehicles) and battery manufacturing company. The faster you grow, the faster you age and the harder it becomes to survive in the competitive landscape.
How can you extend the life cycle of your startup?
Startups extend midlife! There is no miracle cream to prevent aging, for humans or companies. But good habits can extend midlife. The same is true for startups. Damodaran gives the example of companies like Apple and Microsoft, which have stayed young through continuous innovation. Apple’s introduction of the iPhone and Microsoft’s foray into AI are good examples. These companies have reinvented themselves and emerged younger than ever before.
Family-owned businesses often achieve this through diversification. They maintain a portfolio that includes both established cash cows and fast-growing ventures. Similarly, successful startups must innovate and explore new markets or invest in promising startups that offer strategic value. This diversification helps them balance the risks of obsolescence with the promise of growth.
Identifying the startup lifecycle stage
It can be difficult to figure out exactly where your startup is in its life cycle. This is subjective and depends on several factors. Are you in a growth phase or plateau? Are you profitable or burning through cash? And more importantly, how do you perceive the competition and business potential over the next five years?
Globally, the life cycle of a startup is typically 5 years. If you can make it through that, there is a good chance it will be sustainable. One rule of thumb is to look at the profit margins. Experts suggest that if a startup is making 25% profits, it is probably in the mid-stage. If it is below 10%, it is still young and has room to grow. Recognizing this stage is important in planning your next move.
The Life Cycle of a Company: A Guide for Startup Entrepreneurs
Valuation-based exit or IPO: which is best? The startup journey is often driven by the goal of creating a sustainable business followed by a profitable exit. But when should you exit? The right time is when you realize that your startup’s life cycle may not be long or that your business model has limited scalability. Many entrepreneurs choose to merge, acquire, or exit at this point, which is usually a wise decision. You’ve completed your startup’s life cycle and can move on.
On the other hand, startups with a sustainable model may choose to raise further rounds of funding, aiming to become a unicorn before going public. An IPO would allow them to obtain more capital to expand their business, extend their lifecycle, and eventually join the ranks of larger companies. Entrepreneurs should carefully evaluate their options, especially as larger companies are investing in startups through family offices and corporate venture funds. Sometimes it is better to take a stable path rather than venturing into risky and unknown territory.
And finally, Zomato’s rating is…
So why did Damodaran value Zomato at Rs 42 just before it went public? The truth is, no expert or investor can perfectly value a startup. No one really understands your future plans, your vision for growth, and how you will navigate the startup lifecycle. That is something only you can assess. So, take in as many opinions and advice as you can. But trust your instincts. At the end of your startup journey, you will want to have an exciting story to tell, not necessarily a long one.
