With valuations dipping, tougher road ahead for top Indian unicorns

By : |November 30, 2016 0

A Morgan Stanley mutual fund has slashed the value of its Flipkart shares by 38 percent pulling the company to its lowest valuation till date- $5.54 billion. Notably, this is the fourth markdown by the mutual fund in the last nine months. Apparently, the markdown comes amid reports of Flipkart considering appointing an investment bank to try and attract new investors to its next round of funding.

But Flipkart isn’t the only Indian unicorn facing the funding crunch. India’s largest ride-hailing service Ola too is reportedly pursuing a new round of funding that would give the company a 40 percent lower valuation than it had a year ago. The company is raising funds at $3 billion valuations, a sharp reduction from the $5 billion figure during a previous financing round in November 2015.

So what does all this mean for the Indian startup industry? Is the party over now?

2016 is turning out to be perhaps the roughest year for India’s young startup ecosystem. Though this funding slowdown is part of a global trend, the fall back home has been harsher than anywhere else in the world. India’s technology startups raised $4.23 billion in the first three-quarters of this year, less than half the total for the same period of 2015, according to researcher Preqin.

And perhaps that is the reason that many Indian consumer Internet start-ups are approaching investment banks for help with fundraising.

Flipkart’s latest markdown by Morgan Stanley comes as the India’s largest online retailer braces for the impact of the demonetization to hit business after having regained momentum during the festival season. Mutual fund investors T Rowe Price, Fidelity and Valic, too, marked down their holdings in Flipkart this year, although none of these pegged the company’s worth below $8.8-9 billion.

Flipkart has so far secured $3.15 billion in 12 rounds of funding. The startup was valued at $15.2 billion when it last raised funds in July 2015.

But how do these markdowns affect Flipkart? If we go by CEO Binny Bansal words then he doesn’t consider these as a significant outlook for the company’s true worth. “Markdowns are a theoretical exercise by small investors. From our perspective, valuation is when we raise money. From our perspective, valuation is when we raise money. When we raise money, our value will be clear in the market,” he had told ET post the first markdown this year.

But surely the circumstances have changed in last nine months. Flipkart is reportedly in talks with Walmart presently for a humongous $1 billion investment and the markdown will surely affect that.

On the other hand, Amazon is also looking to pump additional capital to beef up its India operations in terms of both product and investment. Amazon has committed $5 billion to the Indian market and is outspending Flipkart by 3-4 times by investing aggressively in areas such as video and grocery delivery.

Amazon India has gained significant ground this year, rapidly closing the gap with Flipkart in terms of gross merchandise value (GMV), or gross sales.

Coming to Ola, the fund-raising, if and when it goes through, would be the first ‘down round’ in the country for a unicorn.

It has so far raised $1.23 billion in 8 Rounds from 20 Investors. The local cab-aggregator which still remains the leader in the ride-hailing space with about 60 percent market share, was last valued at $5 billion when it raised $500 million in November 2015.

Though startups are usually reluctant to accept down-rounds because of how it could depress morale and the value of existing investors’ stakes but companies that need capital to continue supporting operations may have little choice in the matter. Ola which is locked in tough battle with arch-rival Uber too has little choice.

Apparently, Ola is still drawing interest from new investors. The existing backer SoftBank Group will reportedly join its upcoming round but won’t lead the fundraising.

Over the last one year, Ola has been expanding its range of services —offering a range of ride options from budget to luxury, subscription deals, and more recently in-cab entertainment.

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