Amrita Arora

S143F0005

Article Summary

While searching about forecasting, I came across a McKinsey article titled, Better Forecasting
for Large Capital Projects by Bent Flyvbjerg, Massimo Garbuio, and Dan Lovallo.
This article talks about the reasons for forecasting error in large capital investments and how they
can be handled. According to the authors, the overestimation or underestimation of cost and
benefits of such capital projects is mainly due to two factors:

Psychological biases can create cognitive delusion

Forecasting is usually based on the inside view of the one who does forecasting. This
inside view can lead to two cognitive delusions:
1. The planning fallacy i.e. the tendency to underestimate costs or being overly
optimistic. This leads to overlooking the potential for mistakes and miscalculation
2. Anchoring and adjustment i.e. being influenced by the initial plan, which never

sufficiently adjusts to the reality of the projects performance

Misplaced incentives encourage strategic manipulation
The problem arises when the biases of project champions are strong enough or their
incentives misdirected enough that they act, deliberately and strategically, to bring about
financial or political outcomes different from those preferred by the people they represent
or work for.

The solutions to such a problem are transparency and incentives. The decision makers must
acknowledge that analysts and project champions are often overly optimistic. Companies should
offer incentives that decrease the likelihood of strategic misrepresentation of costs, time frames,
and benefits by increasing transparency and encouraging project champions to provide more
accurate forecasts.
This article has helped me understand the mistakes done during forecasting for large capital
projects.

Amrita Arora
S143F0005
Article Summary

While searching about the valuation of e- commerce startups in India, I came across an article by
Pooja Sarkar on www.livemint.com, titled E-commerce start-ups collectively overvalued:
Aswath Damodaran.
This article I based on an interview with, renowned valuation expert, Aswath Damodaran on the
topic.
According to data from CB Insights, a venture capital database backed by the National Science
Foundation, Indian e-commerce and consumer technology firms have raised $3.5 billion from
January to June this year.
At a time, when such huge values are being paid for ecommerce startups, questions are being
raised that are these values just or sustainable? According to Damodaran , the answer to these
questions is a big NO. According to him, these startups today are overvalued. The reasons for
this collective overvaluation is that the markets which are being used as a base for these
valuations like online advertising are not big enough to justify the prices being paid.
Damodaran suggests, that VCs should ask following questions before investing:
1. Do start-ups have a plan that goes beyond users/downloads and considers how to make
money?
2. How does the company plan to deal with failure?
3. How does it plan to deal with success?
4. How easily imitated is the companys basic business model or product?
Also, according to him, the disinvestments by Indian Government is also misleading this trend.
This article has helped me gain an insight towards the reality of e commerce startup valuations.

Amrita Arora
S143F0005
Article Summary
While searching about business valuation methods, I came across a Forbes article titled, The Art
& Science of Valuation: 10 Factors That Affect Your Firm's Value by Abe Grover.
The author has identified ten major factors that need to be considered while valuing a firm. They
are:
1. Fulfillment economics
2. Expansion or contraction in the retailers gross margin
3. Reputation with customers
4. Growth rates associated with revenue, EBTIDA and gross margin
5. Percentage of revenue derived from 1st party sales
6. Amount of recurring revenue in both 1st and 3rd party sales
7. Percentage of revenue derived from sales in 3rd party marketplaces
8. Closeness to the customer
9. Customer acquisition cost, lifetime value, and market share

10. Marketability
Valuation as a science uses comparable valuation and DCF valuation methods. Both
these methods are also explained in detail in the article. The author has specifically
explained the Guideline Public and Private Company Multiples and Guideline Public
Company method.
This article has helped me have a crisp view of valuation methods and factors that
are important for valuation.

Amrita Arora
S143F0005
HastKala India