From Swiggy to Ola, Indian star unicorns' valuations hit speed bump

Profitability has been the biggest challenge for unicorns. Swiggy reported 500 per cent jump in losses for financial year FY19 at Rs 2,346 crore against FY18, according to data platform Tofler.

The valuations of unicorns such as Swiggy, Oyo, Paytm, and Ola have remained flat even after large fund-raising rounds. It seems the firms are focusing more on building robust unit economies and not following the growth-at-all-costs model, according to analysts and industry executives.

Food delivery platform Swiggy said on Wednesday it had raised $113 million as part of its Series-I funding. Swiggy’s valuation was around $3.3 billion when it raised its previous $1-billion funding in December 2018. According to Paper.vc's calculations, Swiggy's valuation after the latest fund-raising would be around $3.4 billion.

“We are seeing a lag in valuations. There is a greater emphasis at many of these unicorn companies to focus on profitability,” said a person familiar with the development. “The macro-economic environment is certainly a question and large funding rounds would now work on the basis of how the companies would become profitable. In the past, it was more about sector euphoria.”

Profitability has been the biggest challenge for unicorns. Swiggy reported 500 per cent jump in losses for financial year 2018-19 (FY19) at Rs 2,346 crore against FY18, according to data platform Tofler. Though revenue had gone up 183 times to Rs 1,292 crore, total expenses for Fy19 remained high at Rs 3,638 crore. And, this was attributed to a multifold increase in advertising expenses, employee expenses, and delivery costs.

Sriharsha Majety, chief executive, Swiggy, said on Wednesday the firm was laser-focused on continuing to execute on its vision while building a sustainable path to profitability.

 

Digital payments firm PhonePe, which was out in the market for large funding round, is now likely to take more time for the same as its proposal has not evoked much response, sources in the know said. The firm has been in talks with several large global investors to raise up to $1.2 billion. Having grown swiftly since the acquisition of Flipkart by Walmart in 2018, it was looking at a valuation of $10 billion. However, the overall investment environment and other factors have slowed the process.

The fiasco at SoftBank-backed co-working start-up WeWork pushed the firm’s initial public offering (IPO) plans in the US, as investors questioned the $47-billion valuation. Uber’s lukewarm IPO last year also contributed to the lag in valuation trend among the unicorns across the Indian start-up ecosystem.

The WeWork debacle has put pressure on SoftBank portfolio companies to show profitability. One of these is Oyo, whose $10-billion valuation has been the subject of much discussion, given reports of irregular and dubious business practices, and complaints from hotels and customers of non-uniform service. Its aggressive expansion plans into international geographies like the US and Japan have been increasingly getting questioned by the industry.

The Gurugram-based firm reported over 4x increase in revenue for FY19 to $951 million, while consolidated losses widened to $335 million because of expansion to overseas markets.

“The overall theme playing out both globally and in India is for companies, especially market leaders, to have a greater focus on economics and understanding the future value that it will create in the ecosystem,” said Ankur Pahwa, partner and national leader, e-commerce and consumer internet at EY India.

According to Harminder Sahni, managing director of retail consultancy firm Wazir Advisors, the parameters on the basis of which valuations are done are changing. “Growth-at-all-costs model is something people (investors) are not willing to fund. You can’t now say (let me) first become profitable and then you can take me seriously,” Sahni said.

Devangshu Dutta, chief executive of retail consultancy Third Eyesight, said the consumption in the country has slowed down and is also playing a role, especially for consumer-focused companies.

“There is a little bit of conservatism in the spending scenario from the consumer and investor point of view,” said Dutta. “Also macro-economic indicators are getting published more. If there is a crisis of confidence in the consumer, even if you have money in the bank, you would not spend it so easily and that has an impact on the company’s performance and valuations.”