India’s biggest startups like Zomato and Flipkart are finally getting the bitter taste of devaluation. This is forcing to-be entrepreneurs to ponder on what exactly is happening to Indian unicorns that is causing this devaluation. This devaluation is also raising questions on the claims made by the e-commerce giants of India. Devaluation of startups is not just restricted to India. Major companies like Dropbox, Twitter and Linkedln have seen a drop in their share prices varying from 10-25%. On the global scale, this phenomenon has hit major companies even multi-billion dollar company like Snapchat.
With the entrepreneurship boom in India, the last few years have witnessed a surplus sum of VC money flooding the Indian markets. This money geared several Indian startups marking them as Unicorn – startups that are valued over $1 billion. However, as these companies are looking for expansion their losses are increasing along with their expansion thereby leading to this devaluation.
Recently, HSBC Securities and Capital Markets (India) slashed the value of Zomato by 50% reducing their valuation from a massive $1 billion to $500 million. The report which covers Info Edge which holds nearly 50% stake in Zomato states, “Zomato is present in 23 markets so early on and none is profitable, which implies that to address both the investments in the last-mile delivery and losses in international operations, fund raising will be a continuous phenomenon, suggesting current valuations don’t make much sense.” This note clearly suggests that unless Zomato steps-up its last-mile delivery model, it will struggle in maintaining its market share, especially when Swiggy is giving stiff competition to Zomato in the last-mile delivery space. Swiggy is a very active startup in the last-minute delivery zone and it has been receiving funds regularly, thus making it difficult for Zomato to lead in this space.
Earlier this year Flipkart, that holds 45% shares of Indian e-commerce market had a drop in its value by 27%. This happened after Morgan Stanley marked down its investment in the eight year old venture. Flipkart’s net worth reduced to $11 billion from $15.2 billion. This mark down by Morgan Stanley who is one of the most bullish investors in Flipkart may dampen Flipkart’s on-going fund raising plans. This down valuations can affect Flipkart’s growth in the country especially, when it has to compete with Amazon.
These down valuations don’t just have some impacts on the startups itself! It is going to affect the entire startup ecosystem of India.
Valuations without actual growth
The major reason for the devaluation is that till now the startups have had sky-rocketing valuations in the absence of generation of revenue and a proper profit-generating revenue model. Flipkart, India’s biggest e-commerce venture works on deep discounting model. This discount led model isn’t viable for investors. Until companies start working on generating revenue and part ways with this discounting model, the devaluation will continue. After all the investors too need to ensure that they are going to get back their money.
Focus on Innovation and Customers
Indian startups are lacking in the field of innovation and customer experience. India’s major startups are just copied models of successful startups from the west. These copied models gain funds as the VCs find it easier and comfortable to invest in ventures whose strategic success rates are higher. Copycat models can work in the European and Chinese market however its difficult for copied models to succeed in India. The problem is – India’s economy model differs from that of the Western countries. Indian startups can’t exactly follow the west’s model for success, thereby success and revenue has not yet reached Indian startups.
Another problem is these replicas of the West’s startups suck in all the funds. Thus, the startups that may have a solid unique idea ends up without funds. This correction in valuation of startups may be a step ahead in aiding to these problems.
“VCs are long known to not keep all their eggs in one basket, but there is no denying that for a long time money was flowing down a few sectors that looked more favourable and a lot of good startups might have lost their chances due to this.”
-Paula Mariwala, Executive Director, VC firm Seedfund
Job Fear
A major problem that will arise now is firing. Whenever it becomes difficult for any venture to raise funds, the first move it makes to cut down costs is firing its employees. Reduction in job offers was already paving its way. Most startups will now have lesser funds some of them might shut down thus reducing job opportunities and slacking down the present employees.
Impact on other startups
Devaluation may lead a few large and mid-sized companies to their death-beds. Flipkart and Zomato will now struggle to raise funds as compared to its preferred valuations. However, this devaluation may result in dragging down companies with similar working models too. If startups with similar working models start generating profits by changing their models to ones with a regular revenue generation they will definitely get funded. Startups now will have to be realistic about their valuations.
Recently, Snapdeal had closed a $200 million financing round, majority of which came from secondary transaction, pushing up the company’s valuation from $4.8 billion to $6.5 billion in August, 2015. From starting of 2014 to the mid of last year India’s e-commerce players have raised heavy rounds of capital investments as the scale of their business grew exponentially. However, the scenario has changed in the past few months the investors are now raising question related to these soaring valuations and they want companies to now focus on precisely improving unit economics.
