Startup Valuation

Why do you see startups getting acquired at crazy valuations?

Recently, I read a news about Byju’s offer to purchase an online ed-tech startup Whitehat Jr at an all cash deal of $300 million dollars.

Then I read about Whitehat Jr. It is an education platform that focuses on teaching coding to kids. As per the available details online, they are currently serving 4 lakh students online. They have been scouting the market for a $50 million fund raise at a $350 million valuation. They had previously raised a $10 million in September 2019 at a $30 million valuation.

So within a period of 8 months, it grew from a valuation of $30 million to $300 million. Good for them.

Why would anyone acquire a startup at a huge valuation? That too at an all cash deal. I tried to get my head around this and I could think of the following reasons :

  1. The value of new customers(i.e.students) getting on boarded into Byju’s from Whitehat and LTV(Lifetime value) of customers is taken into account for the valuation.
  2. The synergy that can be achieved by Byju’s by acquiring Whitehat.
  3. A new line for business i.e. into teaching coding for Byju’s with a ready made tech platform.
  4. Common investors between Byju’s and Whitehat — I think the most important one – Owl Ventures, an education focused fund which had invested in Byju’s and Whitehat Jr.

It is pretty common in the VC industry where these kind of consolidations happens where in a cash-rich startup (‘Acquirer’) is made to acquire other startups (‘Acquired’) in order to show growth. It is a win-win situation for everyone.

The Acquirer raises funds from its investors to do acquisitions in order to grow at a faster rate. The Acquirer would be able to consolidate its position in the market and fuel faster growth.

The Investors of the acquiring startup have the satisfaction of acquiring a few millions worth of a startup.

The Investors and the Founders of the acquired startup get an all cash exit.

This is totally a private transaction and all parties of the deal are fine about it. They know the takeaways of each parties in this deal. So, what is wrong in it?

As far as I am concerned, there is nothing wrong in it. It is like a baton (startup) being passed from one investor and to another investor with values inflated at each level till the baton (startup) becomes valueless and written off in the books of the final investor.

I am not sure whether it is healthy or not, where an investment is artificially inflated and being acquired by everyone. In the VC industry, you buy and sell these overvalued startups. This is the way the industry operates. As a VC investor, it is just that you don’t end up being the final investor who had to write it off.

P.S. Byju’s is in talks to acquire Doubtnut, an edtech platform for a valuation of $150 million. Common investors between Byju’s and Doubtnut are Omdiyar Networks and Tencent (Just saying!!)


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