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  • Karina Li
    • Jul 1
    • 2 min read

The Impact of Overvalued Startups

A startup is a young company that creates a unique product or service, building on ideas different from existing businesses. When the startup opens itself up to public investment, for instance, selling a share in the ownership of a company on the stock market (Baldridge, 2024). At this point, the valuation will determine the price for the company's acquisition. A startup’s valuation is particularly tricky to decide on due to its lack of historical financial information and its tendency to operate in rapidly changing marketplaces, creating uncertainty surrounding its future performance (Mcclure, 2023). 



Impact of Overvalued Startups


The constant need to outperform to compete with industry giants can cause startups to develop unsustainable business models. This is because startups aim for rapid growth whilst enhancing products and expanding customer bases. 


When the public's attention is concentrated on the brief success of a particular startup, this can cause missed opportunities for investments in other startups. A false high valuation is usually caused by unsustainable business practices, which allow the company to do well, but only temporarily. This creates a false sense of success, which, when used as a standard for other startups to compete with, can cause other startups to also resort to unsustainable business practices, where uncalculated risks are taken to outperform their competitors.

Unsustainable business practices have especially detrimental effects on employees. Internal pressure rises to obtain a high valuation surrounding the need to meet a specific target. A focus on increasing the company’s profits and valuation at the expense of employee wellbeing, including long working hours and disregarding employees’ work-life balance, can have devastating effects on employees' morale. When startups face bankruptcy as a result of unsustainable business practices, employees will lose their jobs. The employees’ fates all lie in the hands of their employers.   


Moreover, overvaluation can distort market dynamics, making it difficult for startups to sustain their growth once the “bubble bursts”(Girls Into VC, 2023). Therefore, stocks of overvalued companies often see a correction in price. For the economy, after the haze of overconfidence surrounding the false success of a startup disperses, whether investors earn or lose money will depend on whether they sold their shares before the companies’ prices decreased. This can have devastating effects on the investors if they can’t predict the company’s downfall. 


Some may argue that high valuations, as a measure of potential, attract more investment from venture capitalists and angel investors (early-stage investors), providing easy access to critical funding. Startups' high valuations tend to benefit businesses and the economy within the short term; however, the resulting volatility from excessive valuations not backed by the companies’ actual deliverables will create more long-term issues for investors and the economy.


A fair and sustainable valuation is critical, and we need all stakeholders, including all professional financial market participants, to act responsibly when determining startup valuations.


Reference List


Baldridge, R. (2024). What Is A Startup? The Ultimate Guide. Forbes. [online] 8 May. Available at: https://www.forbes.com/advisor/business/what-is-a-startup/ [Accessed 20 May 2024].



McClure, B. (2023). Valuing Startup Ventures. [online] Investopedia. Available at: https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp [Accessed 20 May 2024].


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