The Indian startup landscape has been in a state of flux recently, as global asset managers are drastically reducing their valuations of prominent Indian startups. This trend is highlighted by write-downs of up to 50% for renowned startups like Byju’s and Swiggy, according to U.S. securities filings. These valuation adjustments shed light on the evolving fortunes of Indian startups, which experienced a surge in 2021 and early 2022, resulting in the creation of over 60 “unicorns” valued at over $1 billion. Major asset managers like Invesco and BlackRock have reported significant reductions in the valuations of startups like Byju’s and Swiggy, with Byju’s valuation dropping from $22 billion to $11.5 billion and Swiggy’s from $10.7 billion to $5.5 billion. Vanguard reduced ride-hailing startup Ola’s valuation by about 35% to $4.8 billion, while financial services startup Pine Labs had its valuation cut 40% to $3.1 billion by Neuberger Berman. Janus Henderson has reduced the valuation of its health care startup PharmEasy to $2.8 billion. This shift reflects changing fortunes after a surge in 2021 and early 2022 that led to the creation of over 60 “unicorns,” startups valued at over $1 billion. Investors like Softbank (Japan), Vanguard Group (US), Morgan Stanley (US), T. Rowe Price (US), and Fidelity Investments (US) had marked down their holdings in these unicorns like like Gupshup, BYJU’s, Meesho, Eruditus, Swiggy, Pharmeasy, Pine Labs, Ola and OYO. However, these markdowns also set the stage for potential down rounds, where financing occurs at lower valuations than previous rounds.
This situation has led to shifts within the startup realm. Venture capital firm Athera Venture Partners’ Managing Director, Rutvik Doshi, highlighted that while startups are focusing on cost-cutting and maintaining their operations, the eventual need to raise funds might lead to down rounds. This valuation downturn has intensified challenges for Indian startups. Many have been compelled to implement layoffs, reduce marketing expenditures, and revise their consumer discount strategies to conserve capital. The initial optimism driven by a burgeoning middle class and favorable comparisons to China’s tech crackdown has now encountered a more sobering reality.
Data from Tracxn indicates a remarkable increase in median valuations for different funding rounds. Flush with funds, startups engaged in extensive marketing initiatives, such as sponsoring cricket events. However, as funding prospects dwindle, startups are scaling back on discounts and even closing certain business lines.
Valuation markdowns prompt companies to adopt various strategies to preserve capital, including decreasing marketing budgets, offering fewer customer acquisition discounts, and implementing more substantial workforce reductions. They also intensify the focus on achieving sustainable profitability and growth to restore their valuation. When companies face significant funding challenges, markdowns may push them towards exploring options like debt financing.
Markdown like these can also imply companies may have to protect its investors from the dilution of their ownership in a company which subsequently raises funds when its overall valuation dips. This is known as anti-dilution protection mechanism. In simple terms, an anti-dilution right protects investors from the dilution of their ownership in a company which subsequently raises funds when its overall valuation dips. For example, an investor Mr. A has invested Rs. 10 million in ABC Ltd. for 10% of the stake. After a valuation markdown, ABC Ltd. is valued at Rs. 90 million. The company decides to raise Rs.10 million as additional capital. Mr. A’s share in company now reduces to 9%. The company compensates this 1% to Mr. A through various methods for determining anti-dilution adjustments- Full Ratchet Anti-Dilution Protection, Broad-Based Weighted Average Anti-Dilution Protection and Narrow-Based Weighted Average Anti-Dilution Protection which will be discussed in the next article.
While these markdowns are perceived as setbacks, they also present opportunities. Valuation markdowns serve as a reality check, prompting startups to recalibrate strategies for sustainable growth. The focus shifts to revenue generation, profitability, and efficient growth. Consequently, startups streamline operations and optimize costs. Moreover, valuation markdowns attract investors who recognize long-term value despite short-term challenges, allowing them to invest at favorable valuations.
Past experiences offer valuable insights. Notable Indian startups such as Grofers, Flipkart, and OYO have faced valuation markdowns and emerged stronger. Grofers’ markdown prompted a business model overhaul, and Flipkart’s challenges culminated in a transformative acquisition by Walmart. Internationally, companies like Uber, Snapchat, and WeWork have overcome markdowns effectively, demonstrating the potential to rebound from such situations.
However, Indian startups face unique challenges due to their reliance on foreign capital. This, coupled with global factors like high rates and inflation, has resulted in a more severe squeeze compared to their global peers. In light of this, Indian startups are likely to experience a further funding crunch. The $2 billion raised in the first quarter of 2023 is significantly lower than the previous year, with projections suggesting total funding for the year may not exceed $10 billion, a stark contrast to the $30 billion raised in 2021 and $20 billion in 2022. This slowdown has implications for both startups and the broader economy, possibly affecting economic growth and the job market.
Nonetheless, there is a silver lining. This phase of recalibration could lead to industry consolidation, wherein companies that have hit a growth plateau may seek mergers and acquisitions to secure a sustainable future. SoftBank’s decision to halt new investments in India reflects a wait for further valuations corrections, indicating an opportunity for well-timed consolidations.
In conclusion, while valuation markdowns bring immediate challenges, they also catalyze positive change. They prompt startups to reevaluate and optimize, ensuring sustainable growth. Investors recognizing long-term potential can seize the opportunity to invest at favorable terms. The Indian startup ecosystem must acknowledge that markdowns are not insurmountable barriers but rather pivotal moments that demand resilience and adaptability.
(This article is written by Anusha S, Audit Executive at RVKS and Associates)