Startup valuation bubble under scrutiny as expert warns against growth without value

The sharp decline in SpaceX’s share price following its landmark public listing has spurred questions that startup valuations have become detached from business fundamentals.

SpaceX, whose highly anticipated IPO was initially celebrated as one of Wall Street’s biggest technology listings, has since experienced a significant erosion in market value.

The stock has continued trading below its IPO price amid investor concerns over profitability, lofty valuations and broader weakness across high-growth technology stocks.

Austin Okere, founder of CWG Plc, while speaking during an episode of BusinessInsightsWithAO warns that the pursuit of ever-higher valuations without sustainable profitability is contributing to a growing wave of startup failures.

He said the global startup ecosystem has shifted from building businesses that create lasting value to businesses focused primarily on achieving higher valuations through successive fundraising rounds.

He noted that the downturn in highly valued technology companies illustrates the risks of prioritising valuation over sustainable business growth.

“Raising money and then shutting down not too long thereafter. So I see two business types. There is the business of value and there is the business of valuation,” he said.

Okere said traditional businesses were built on a cycle of creating value, generating profits, rewarding shareholders through dividends, and reinvesting earnings to drive long-term expansion.

“Traditionally, companies used to assure their sustainability by creating value, making a profit, paying dividend and reinvesting some of the profit in the business to repeat the cycle of growth,” he stated.

He also noted that a different model has emerged in recent years where startup founders and investors focus on increasing company valuations through repeated fundraising rounds, often with limited visibility into profitability or long-term financial sustainability.

“Many series of fundraisers increase the valuation of the company without very much line of sight to growth or profitability. The company is valued at multiple times what it was before the fundraise,” Okere stated.

He said the valuation-driven model often benefits early investors who exit at higher prices, leaving later-stage investors exposed when companies struggle to generate sustainable returns.

“It’s quite unfortunate because a few latecomers to later valuations are left carrying the can while the early investors cash out,” he said.

While questioning the sustainability of the trend, Okere pointed to the growing number of startup closures globally despite record venture capital funding.

He said more than 3,200 American startups that collectively raised about $27.6 billion shut down after securing funding, while Africa has also witnessed several high-profile startup failures.

Among the companies were WAPI, Hitch, Zazu, Liza Pay and Paxful, alongside several others that have either ceased operations or significantly scaled back their businesses.

“I think that the problem is that we have believed in businesses that can increase in valuation without a line of sight to any concomitant value created,” he added.

Drawing a stark comparison, Okere likened the practice to a Ponzi scheme, arguing that continuous fundraising can temporarily sustain high valuations without creating corresponding economic value.

“That’s like a Ponzi scheme really, these companies go out to raise money and as long as they are raising money, they are increasing valuations, they are becoming unicorns, they are running.”

The global venture capital market is entering a period where investors are placing greater emphasis on profitability, positive cash flow and sustainable unit economics rather than rapid customer acquisition or headline valuations.

The reassessment follows several years of abundant capital that fuelled record startup valuations across sectors including fintech, artificial intelligence and software-as-a-service.

For African startups, the shift has translated into a more challenging fundraising environment thereby forcing founders to prioritise revenue generation, operational efficiency and disciplined growth over expansion financed solely by external capital.

Okere noted that the long-term success of startups will ultimately depend on their ability to create genuine economic value rather than relying on successive funding rounds to justify rising valuations.

“The businesses that endure will be those that solve real problems, generate sustainable revenue and build profitable enterprises not simply those that achieve ever-higher valuations,” he said.