Entrepreneur's tendencies to falsify valuations

Several businessmen have been mocking the venture capital industry by falsifying their company’s worth to get a sizeable sum out of investors.

How does this pervasive overvaluation come about in the first place? Once you understand it, it’s breathtakingly simple. Venture capital-backed companies are money pits. Even if they manage to become profitable in accounting terms, they almost always need more funding to support their growth, typically every 12 to 24 months. This desperation for money causes them to falsify their company’s valuation to attract investors.

While all of this seems farfetched, it’s very rampant in the business community today. This, however, is not the only factor that results in valuation frauds. The second reason behind this fraud is to get a favourable result by inspiring the potential buyer in a deal of acquisition. Sometimes, the company is about to get financed from financial institutions and they require a certain amount of assets to be held by the company. In this case, the employees may overstate the assets required to fulfil the prerequisite of the funding contract.

All these stunts are against the very ethical foundations of business. If I wanted, I could’ve named several companies who resort to such cheap tricks, but then again I do not need to stoop down to their level.

ABW | www.iamsai.in

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