Are Startups Overvalued Given Their High Failure Rate?

Are Startups Overvalued Given Their High Failure Rate?

The valuation of startups around the world has been a point of contention in business sectors for some time, with some arguing that we place too much value on startups. But what does it mean when a company is valued? By definition, valuing a business is the process of estimating its worth. In the business sector, the value of a company is a prediction of their future cash flow. It’s impossible to know for sure how much profit a startup is going to make in five years, so investors essentially gamble their money when they choose to invest. This begs the question: are they overvaluing startups?

Are tech startups overvalued?

The tech startup sector is the most popular startup form around the world. However, this had led to some arguing that investors place too much of their money into companies that in all likelihood won’t go on to succeed. This causes a “tech bubble” that results in investors rushing to exit hastily as startups go under.

Although tech startups have increased in number, there are still significantly more buyers than there are sellers of such companies. There are even fewer startups that have large profit potential. This causes competition between investors, causing buyers to pay more than they would - or should - for startup businesses. However, this does not mean startups can rest on their laurels. No-one wants to buy a failing business, after all!

We are quick to hear about hugely successful startups, but the reality is that many startups ultimately fail within their first few years of business. The world of technology is exciting because we know it can reap huge rewards, but balance and consideration of all factors is needed. Despite these concerns, many startups do go on to outperform the investment made on them. If this wasn’t the case, business investment would have stopped altogether years ago. Investors ultimately pay what they believe a startup is worth, so who are we to say they have overvalued it? Moreover, it must be noted that many startups are, in fact, undervalued. This is arguably more dangerous as startups therefore are not given a fairer opportunity to succeed.

It is the very nature of investment to overvalue startups as in the process of valuing a business you are predicting their future earnings. Overvaluing is not necessarily a bad thing in business. Investors must, of course, take care not to overestimate, but good investors know when to take an educated gamble.

What tech startups are profitable?

The world of tech startups is exciting and has the potential to be very successful. But where should you start? The world of technology is vast and expansive, so we’ve compiled a list of some of the most profitable startups!

●      Web Design

●      Robotics

●      3D Printing

●      App Development

●      EdTech