Flipkart, which is considered as one of the best examples of the success of the Indian startup industry in the 21st century world, has suffered a major setback when Morgaon Stanley trimmed down its valuation by USD 4 billion. This setback has not only got the ecommerce startup’s management thinking but has also sent the entire Indian startup industry into a tizzy.
July 29, 2014 was the magnificent date on which Flipkart did the unthinkable. The Indian startup raised a whopping $1 billion in capital, drawing a valuation of $7 billion to its kitty, which was a first for any Indian based tech startup back then. It is safe to say that it was Flipkart which set the ball rolling for Indian startups in the international arena. Soon, the startup found its way to the top tier of privately held internet ventures globally, with names like Uber, Airbnb and Dropbox.
But, a latest piece of news by a tech portal has everyone in the Indian startup industry very disappointed and anxious. According to the article, the Bangalore based startup has reportedly lost around 27% of its present $15-billion valuation. This figure is according to the filings made by a mutual fund managed by one of Flipkart’s investors, Morgan Stanley.
Ever since the news came out last Friday, the entire startup industry in India is contemplating how does this effect the other fishes in the sea. According to various experts, the effects can be very significant as this is the first time that such a public readjustment has taken place amongst the Indian unicorns (privately held startups valued at $1 billion or more).
Startups with humungous valuations and no revenue model in place could see a correction in the tune of 50 percent on the way ahead.
Having $3.1 billion from myriad investors already in its kitty, the startup is currently vying for funds worth $1 billion. This might be a challenge because of its current $15-billion valuation mark. Founded in the year 2007, the startup is currently facing a lot of tough challenges in a tough competition with Amazon, adjusting to the functioning of a new CEO at this stage and inability to expand through sectors beyond the commerce business verticals. Flipkart recently closed down ‘Nearby’, its grocery delivery app.
What has happened with Flipkart might be something new for the Indian startup industry but it is certainly not a first for the U.S. Startup industry. Several mutual funds in the US, which includes big names such as The Hartford, T Rowe Price and Fidelity have in the past cut the valuations of some of the most promising and famous companies in their portfolios like Dropbox, Snapchat and Zenefits.
Such devaluation usually sets the startups thinking and make them regret accepting the investments from these crossover funds in the first place. Having huge exposure to public and private markets, these cross over funds are largely comprised of hedge funds and mutual funds. In the past few years, these cross over funds have become central to the process of late-stage financing and have escalated the valuations like never before. Venture Capitalists have been somewhere left far behind in the race by these wealthy cross over funds. Though VCs also revalue the companies in their portfolio, but they do so in private.
Most of the VCs generally have a very basic methodology at play. If they assess that the company is valued highly and this is not reflective of their business, they act fast and carry it at some discount. Further, if they feel that the company is probably on the path to failure, they take some markdown and eventually take it to zero when it shuts down. On the other hand, the large mutual funds usually report their investors about mark-to-market valuations on a quarterly basis.
Many industry experts argue that those huge valuations that took place in the past few years were ahead of its time by one or two financing rounds for many of the current Indian unicorns. According to them, with the investors realising this now, Series C and beyond of funding is bound to bear the jolt. There are some more Down rounds sought to happen in the near future. Down runs basically means investors valuing their portfolio companies at less than the previous financing round.
Recent data has revealed that in the recent past, the number of funding rounds, especially falling in the range $15-50-million have taken a serious hit. Further, the time taken to close fund-raises has increased significantly.
The recent Flipkart setback could help in shifting the Indian ecommerce startups focus from discount-driven customer acquisition model to exploring new ways of growth, and open the second innings of the Indian startup industry with a bang.