Why Are Startup Valuations So High? The Case of Zomato and Growth-Driven Valuations
Startup valuations often spark debates. “Mind-numbing,” “unrealistic,” and “without any base” are common reactions in social circles and among traditional business owners. But as a corporate finance professional, let me break it down—and I’ll use Zomato, one of India’s most celebrated unicorns, to explain why these valuations make sense.
1. The Scale of Growth Opportunity
Startups like Zomato operate in markets with huge untapped potential. When Zomato started as a food delivery platform, it wasn’t just about delivering meals—it was about reshaping an entire ecosystem. It leveraged the rapid rise of internet penetration, smartphone adoption, and changing consumer habits.
Example: Zomato went from being a simple restaurant directory in 2008 to one of the most recognized food delivery platforms globally by 2021. The growth potential in such markets justifies the premium valuation.
Compare this to traditional brick-and-mortar businesses—expanding a physical store network or logistics-heavy operation is capital-intensive and time-consuming. A single Zomato app update could scale to millions of users overnight.
2. Scalability vs. Physical Constraints
Startups in the tech and platform space often have near zero marginal costs for scaling. Zomato doesn’t need to build physical restaurants or own delivery vehicles. Instead, it uses technology to connect consumers and service providers seamlessly.
• A brick-and-mortar business expanding to new cities would need real estate, infrastructure, and people. Startups scale much faster because their operating model is designed for exponential growth, not linear expansion.
3. Growth Trajectory Justifies Valuation Multiples
When Zomato raised $250 million in 2021 at a valuation of $5.4 billion, critics questioned whether it was sustainable. But look at what the investors saw:
- A company operating in a global food delivery market projected to grow to $320 billion by 2029.
- Rapid adoption and dominance in key markets like India.
- A vision to monetize beyond food delivery with cloud kitchens, dining services, and hyperlocal ads.
Investors don’t pay for what a startup is today—they pay for what it could become tomorrow.
4. Differences in Valuation Models
Traditional businesses are often valued using metrics like EBITDA multiples, discounted cash flows, or tangible asset value. Startups, on the other hand, are valued based on:
- Market potential
- Customer acquisition growth
- Network effects and brand value
- Future cash flow generation
Zomato’s IPO, valued at over $8 billion, reflected its dominance in the food-tech sector and its ability to sustain high growth.
5. A Balanced Perspective for Businesses
It’s natural for business owners to wonder why their profitable company with steady revenues doesn’t get the same valuation multiples as startups. The key lies in growth expectations and scalability:
- A brick-and-mortar business may offer stable returns but lacks the explosive growth potential and scalability that startups provide.
- Startups like Zomato attract high valuations because they disrupt markets, operate asset-light models, and promise massive future revenues.
Final Thought
Startup valuations aren’t just numbers—they’re reflections of bold visions and untapped opportunities. They reward innovation, scalability, and risk-taking. While every business deserves its value, comparing traditional models to startups often misses the fundamental differences in growth trajectories.
Understanding these nuances isn’t always easy, but examples like Zomato help illustrate the logic behind high valuations in the startup ecosystem. It’s less about where a company stands today and more about the journey it’s set to take tomorrow.