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<\/i>Nishant\nSharma, Bloomberg Quint<\/i><\/p>\n <\/i>Nishant\nSharma, Bloomberg Quint<\/i><\/p>\n
New Delhi, 2 December 2016<\/i><\/p>\n
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In\nits ever biggest markdown of the Indian e-commerce company, a mutual\nfund managed by Morgan Stanley slashed Flipkart’s valuation by 38\npercent on Tuesday. With this, the valuation of the country’s most\nvaluable internet company stood at at $5.54 billion – the lowest since\nSeptember 2014.
But Flipkart is not alone. Japanese investment\ngiant Softbank earlier this month, announced a 58.1 billion yen ($513\nmillion) investment loss in two of its biggest investments in India –\ncab-hailing firm Ola (ANI Technologies Pvt. Ltd) and e-commerce\nmarketplace Snapdeal (Jasper Infotech Pvt. Ltd).
This comes at a time when these companies are looking to raise additional funding.
Reality Check<\/span>
The\ncountry’s top startup evangelists and investors are not too worried\nthough. Investors BloombergQuint spoke to said that a markdown in\nvaluation is a much-needed market correction which will bring maturity\nin the Indian startup ecosystem that saw euphoric valuations over the\nlast two years.
“This is nothing but a natural cycle that is\nbound to happen”, said Ben Mathias, managing director of Vertex\nVentures in a telephonic interview. Vertex Ventures is the venture\ncapital arm of Singapore state investment firm Temasek Holdings. “Last\ntwo years, there was a lot of rapture around startups and valuation\nwere driven up because of that. The situation wasn’t limited to India\nbut was also seen in Silicon Valley, China and other markets. What we\nare seeing today is a rationalisation of valuations and expectations. A\nneeded market correction has taken place.” <\/span>
Raising\nheaps of money from late-stage mutual funds and cross-over funds in a\nheated fund raising environment leads to bubble valuations which\nincreases the risk of potential markdowns when the market cools off,\nadded Anshuman Verma, founder and managing director of venture capital\nfirm M1L and a former partner at Accel Partners.
The Indian\nstartup ecosystem was booming till 2015, with venture capital\ninvestments flowing in. Indian startups raised $5.5 billion (Rs 36,000\ncrore) from VC firms and angel investors in 1,096 deals, in 2015 alone,\naccording to data compiled by research firm VCCEdge.
Tough Times Ahead?<\/span>
The\nmarkdowns may cause promoters some pain as they will have to dilute a\nhigher stake to raise funds, but industry experts said that if the\ncompany performs well and is able to meet its targets, lower valuation\nwill not necessarily dent their ability to raise more funds.
“You\ncan’t raise money on valuations alone. There are key metrics like\nprofitability, margins, return rates. All this is what really matters\nand is what investors focus on while making investments,” said Sunil\nRao, Partner, Lightspeed Venture Partners
Mathias of Vertex\nVentures added if a company has reached the target it has set for the\nyear, it shouldn’t worry about raising funds. It can raise money at\nrobust valuations, despite markdowns.
Not everyone shares that view though.
“Trying\nto raise money for your venture post meaningful markdowns is akin to\ntrying to refill and write with a broken (leaking) pen. It is tiring,\nmessy, and irritating to write with such a pen. Isn’t it? Markdowns are\ndemoralisers for companies, and act as leakers.” said Anshuman Verma,\nFounder and Managing Director, M1L
Lessons From Markdowns<\/span>
Verma’s\nadvice to e-commerce entrepreneurs is they should look at markdowns as\na wake-up call. “They should consider markdowns as pointers to\nfundamental problems in the business that must be solved. It should\npush them to become more realistic, pragmatic and action-oriented,” he\nsaid.
According to Devangshu\nDutta, chief executive at management consulting firm Third Eyesight,\nmarkdowns are a sign that investors were far more bullish and\naggressive earlier, a view they no longer hold.<\/span> “If\nthe survival of the company depends on raising funds at lower\nvaluations, one should do that. Survival should take precedence over\nvaluations,” he said.<\/span>
Verma\nsaid that with subsequent markdowns the startup ecosystem will see\nnon-prudent founders and their investors accept the harsh realities of\nthe art of markdowns.
“We will see further humbling of such\nfounders\/investors\/companies. Many from the ecosystem still have not\ncome to terms with the reality of loss-making in late-stage ventures in\nIndia. Few larger internet ventures are not accepting the state of\naffairs as they are, and this could be the starting point of all the\nproblems,” he said.
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