Indian startup valuations rebound on path to profit, better macros

After a string of valuation markdowns among Indian startups earlier this year, US-based investor Fidelity, last month, became the first foreign investor to mark up the valuation of a startup.

The firm increased the face value of its investment in e-commerce firm Meesho in its books by 14.3 per cent to $43.24 million as of July, bringing the company's valuation to around $5.04 billion.

A few days before that, US-headquartered asset management firm Baron Capital marked up the value of its stake in food delivery platform Swiggy by 33.9 per cent from 31 March to $8.54 billion. It had also raised the value of its investment in another of its portfolio companies, Pine Labs, a fintech platform, to $4.92 billion as of 30 June, up 10 per cent from a quarter ago.

The mark-ups, coupled with a few big-ticket fundraises recently – including Zepto and Perfios, among others, have sent a cheer across the Indian startup ecosystem.

But are the tides finally turning for India's startups?

“The mark-ups will continue as the positive macro factors overlap with the opportunities available for startups,” says Ninad Karpe, Founder and Partner, 100X.VC – an early-stage investment firm.

The recovering valuations, he says, will lead to enhanced optimism among investors about funding startups. “More money flow will fund an increasing number of startups and lead to a cascading positive impact,” Karpe adds.

What is driving the mark-ups?

But what is fuelling these mark-ups? Profitability and improved unit economics are the only answers.

“Path to profitability is giving confidence to investors on the sustainability of startups and is one of the main reasons, in addition to macroeconomic factors, that is driving mark-ups,” says Sandeep Patil, Partner, Head of Asia, QED Investors – a global fintech-focused venture capital (VC) firm.

Meesho, in July, became the first horizontal e-commerce marketplace in India to turn profitable at the consolidated profit after tax (PAT) level.

Dhiresh Bansal, the company’s chief financial officer, attributed the milestone to a sharp increase in the company’s order volumes – which grew 43 per cent – and revenues – which surged 54 per cent, coupled with various cost-cutting measures.

Bansal said revenue grew by 54 per cent over the past 12 months, propelled by a substantial increase in order volumes and monetisation rate. "Meesho recorded $400 million in revenue from January to June 2023," said Bansal.

Meesho is, however, not the only one cutting costs. 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 also introduced a Rs 2 platform fee for all its users.

This led to its food delivery business turning profitable in the March quarter of FY23 (Q4 FY23) after considering corporate costs and excluding employee stock options (ESOP). The company's monthly cash burn also came down to $20 million from about $45-50 million that it was losing each month during its peak in 2021.

Likewise, Pine Labs is also optimistic about its growth prospects.

“We will want to continue to grow at about 40 per cent on the revenue side, higher on the Ebitda side, on a year-on-year basis. We got nearly Rs 1,600 crore of net revenue in our business in 2022-23. I don’t see any issues for growth in 2023-24 either,” B Amrish Rau, Chief Executive Officer of Pine Labs, told Business Standard in May.

Meesho, Pine Labs and Swiggy declined to comment on queries sent to them.

This shift of focus towards profitability hints at changing priorities among Indian founders. Over the last few quarters, investors say that their conversations with founders have graduated from being “valuation-centric” to talking more “foundationally” about the businesses they are building.

“We're witnessing a pivot from flash-in-the-pan metrics to core concerns – business strategy, solid operating models, and the path to real profitability. It's not just a phase; it's a sign of a maturing ecosystem where startups are focusing on long-term value rather than short-term hype,” says Manu Rikhye, Partner, Merak Ventures – an early-stage investment firm.

Funding pangs

The mark-ups also come at a time when the startup world is going through a funding slowdown. After an influx of investments during the pandemic, where startups managed to raise huge funding rounds at inflated valuations, investors have now become more cautious with their bets as they expect nascent companies to showcase healthy margins, spurring a sector-wide push for profitability.

In 2021, funding reached an all-time high of $44.3 billion, after which, due to macroeconomic uncertainty, investments fell by almost 39 per cent the next year to $27.1 billion, according to data from Tracxn — a market intelligence platform.

This trend continued into 2023, where Indian startups have raised just $5.5 billion in the first half (H1) of the year, a 72 per cent year-on-year decline. As a result, many foreign investors ended up slashing valuations of large startups that were burning cash earlier this year.

Valuation cuts

The month of May this year saw a plethora of valuation cuts by foreign investors, as Indian startups continued to burn cash. Valuation multiples, at the time, had fallen by as much as 60 per cent, according to industry estimates.

US investment firm Invesco, a prominent backer of Swiggy, on May 8 slashed the food aggregator’s valuation for the second time to $5.5 billion – an almost 49 per cent mark down, after reducing it to $8 billion in October last year. Vanguard Group, another US-based investor, marked down the valuation of ANI Technologies, the parent company of ride-hailing mobility firm Ola, by about 35 per cent to $4.8 billion a day later.

During the same month, Neuberger Berman, a New York-based investment firm, has marked down the valuations of two of its major Indian portfolio companies, PharmEasy – by 21 per cent to $4.4 billion, and Pine Labs – by 38 per cent to $3.1 billion.

Fidelity had also, at the time, marked down Meesho’s valuation by 9.7 per cent to $4.4 billion as of March 31.

There are, however, many lessons to be learnt from the so-called funding winter, both for investors and founders.

“For the good founders, the behaviours and habits inculcated in this ‘winter’ will be enduring. They will pursue high-quality repeatable highly-organic revenue growth and hold a high bar for productivity of their teams, quality of recruitment and cost efficiency in general,” says QED’s Patil.

Valuation markups so far:

·        On August 31, US-based investor Fidelity increased the face value of its investment in Meesho by 14.3 per cent to $43.24 million as of July, bringing the company's valuation to around $5.04 billion.

·       US-headquartered asset management firm Baron Capital, on August 28, marked up the value of its stake in Swiggy by 33.9 per cent from 31 March to $8.54 billion.

·        It also raised the value of its investment in Pine Labs to $4.92 billion as of 30 June, up 10 per cent from a quarter ago.

Major valuation cuts in 2023:

·        US investment firm Invesco, on May 8, slashed Swiggy’s valuation for the second time to $5.5 billion – an almost 49 per cent mark down, after reducing it to $8 billion in October last year. 

·        On May 12, Neuberger Berman, a New York-based investment firm, marked down the valuations of two of its major Indian portfolio companies, PharmEasy – by 21 per cent to $4.4 billion, and Pine Labs – by 38 per cent to $3.1 billion.

·        Fidelity, on May 30, marked down Meesho’s valuation by 9.7 per cent to $4.4 billion as of March 31.

·        Vanguard Group, another US-based investor, on August 1, marked down the valuation of ANI Technologies, the parent company of ride-hailing mobility firm Ola, by about 35 per cent to $4.8 billion.