After life in unicorn-decacorn club, start-ups stare at down rounds

Large Indian start-ups are likely to face down rounds as foreign investors slash valuations of bloated start-ups. Valuation multiples, observe analysts and investors, have dipped by as much as 60 per cent. This trend of a correction in valuation is likely to continue as consolidation in the start-up ecosystem increases amid liquidity crunch.

“We have observed a reduction in valuation multiples by 50-70 per cent in the market,” says Anand Prasanna, managing partner, Iron Pillar, who expects more such instances of valuation corrections shortly.

The start-up world, especially late-stage start-ups, has of late been at the receiving end of valuation cuts by foreign investors.

US investment firm Invesco, which is a prominent backer of online food delivery platform Swiggy, on May 8 slashed the food aggregator’s valuation for the second time to $5.5 billion, after reducing it to $8 billion in October last year. This revised figure, as of January 31, was an almost 49 per cent markdown from the $10.7 billion valuation that Invesco had previously attributed to the start-up.

Its Gurugram-based rival Zomato’s market capitalisation (m-cap) has also dropped close to 40 per cent in 12 months. As of March 31 this year, Zomato’s m-cap was about $5.2 billion.

This trend is not limited to food aggregators. US-based asset manager BlackRock recently cut the valuation of educational technology major Byju’s. Touted as India’s most valuable start-up, Byju’s saw its valuation slashed by nearly half, from $22 billion to $11.5 billion, Business Standard had reported earlier.

Late last year, SoftBank — one of the hospitality and travel technology firm Oyo’s primary backers — also reportedly slashed the company’s valuation by 20 per cent to $2.7 billion on its books.

The firm has since refiled its draft red herring prospectus with the Securities and Exchange Board of India under the confidential pre-filing route, reducing its issue size by half to between $400 billion and $600 billion.

What goes up must come down

After an influx of investments during the pandemic, where start-ups managed to raise huge funding rounds at inflated valuations, investors have now tightened their purse strings as they expect nascent companies to showcase healthy margins.

In 2021, funding reached an all-time high of $44.3 billion across 3,123 deals, according to data from Tracxn — a market intelligence platform.

The next year, however, macroeconomic (macro) uncertainty forced investors to become more cautious, causing a reduction in capital flow and an overall drop in valuations of technology companies across both public and private markets. Start-up funding fell almost 39 per cent year-on-year to $27.1 billion across 2,462 deals in 2022.

This year, start-ups have collectively raised around $4.1 billion so far.

Rajeev Suri, managing partner, Orios Venture Partners, dubs this correction as ‘mean reversion’.

“Things that go up too fast, will tend to revert towards the trend line. This is precisely what we are seeing in the markets now,” he says, on behalf of the Indian Venture and Alternate Capital Association.

But that trend line is moving up steadily, as evidenced by soaring start-up revenues and growth rates.

“Investors are being careful about backing firms that are solely focused on rapid expansion without a clear path to profitability and sustainability," says Neha Singh, co-founder, Tracxn.

“This trend is expected to continue for the near future and we might see more such down rounds in the coming months,” she adds. 

Ashish Sharma, managing partner, InnoVen Capital — a venture debt and lending firm — does not view down rounds as necessarily bad.

“Valuations had run ahead of fundamentals and some correction was warranted,” he says.

“There are some growth/late-stage companies which don’t have the flexibility of delaying their fundraising, given the limited runway. Some of them did a convertible round earlier but will now have to raise at a down round valuation,” adds Sharma.

Valuation markdowns, say analysts, could add to the negative sentiment on the market in the short term, while improving buying opportunities for investors in India. The medium or long-term impact is, however, likely to be minimal.

Increasing consolidation

This comes at a time when the ecosystem is also going through a liquidity crunch. As such, many investors are opting for secondary exits.

The number of merger and acquisition (M&A) deals saw a meteoric rise in 2021 and have maintained their pace since. The lack of funds has forced many fledgling companies to either shut down or be acquired by bigger firms. The year 2022 saw 246 M&A deals, compared with 256 in the previous year, according to Tracxn.

This trend has spilt over into the current year as well, where a total of 49 M&A deals have surfaced in the first quarter of calendar 2023.

Industry watchers have indicated that the start-up ecosystem is likely to see further consolidation as many up-and-coming companies across the board are finding it challenging to raise capital.

Rationalisation

Regardless, as funding slows to a trickle due to macro headwinds, many start-ups across sectors have elected to shift focus away from expansion towards profitability and unit economics in a bid to reduce cash burn. This has manifested through retrenchments as well as an overhaul in cost structures, including in companies that have had their valuations corrected.

Since the beginning of this year, Swiggy has undergone retrenchments by way of 380 layoffs from its 6,000-strong workforce in January, which Chief Executive officer Sriharsha Majety attributed to “over-hiring”, as well as shutting down many of its business verticals, including its meat delivery and premium grocery delivery businesses. The firm has also introduced a Rs 2 platform fee for all its users.

As such, Invesco may mark up Swiggy’s valuation in the following months, as market conditions recover.

In December last year, Oyo downsized 10 per cent of its workforce, laying off 600 of its 3,700-employee base. The firm has since incorporated various cost-cutting measures which, according to Moody’s Investors Service, “has improved its operating performance over the past 12-18 months”.

It expects Oyo to generate positive earnings before interest, tax, depreciation, and amortisation of $50-55 million (Rs 400-450 crore) in 2023-24.

Byju’s is also reportedly in talks to raise a massive $1 billion in fresh funding.

“Owing to the cost of the dollar rising, markets are pivoting towards cash flows and profitability. Start-ups that can show the pathway to profitability are getting the benefit of the doubt. The ones that aren’t able to are facing more pressure,” adds Suri.