Investor Winters: Disappointing Unicorn Losses Make Investors Cautious

Why are big investors dumping startups! Is it a sign that the investors are more cautious than ever with their money? This article explores what it means for the future of hot startups facing financial pressures. Read on to find out!

In a shifting landscape marked by rising losses in some of the big startups, major investors are increasingly divesting their shares in high-profile startups like Delhivery, Byju's, Pharmeasy and likes signaling a broader trend of cautious retrenchment within the investment community. Amidst these financial turbulences, Delhivery's persistent deficits have led prominent backers such as CPPIB and Softbank to reduce their stakes, highlighting the pressures and recalibrations faced by even the most celebrated tech ventures. This wave of divestment underscores the critical need for robust financial health and strategic resilience in maintaining investor confidence.

CPPIB's Strategic Move

The Canada Pension Plan Investment Board (CPPIB) is reportedly planning to divest its remaining 3.18% stake in Indian logistics giant Delhivery. This decision comes at a crucial juncture as the Gurugram-based company continues to grapple with substantial losses. The block deal, according to some media report, is expected to raise approximately INR 886 crore, with the floor price set between INR 378 to INR 389 per share.

While the exact size of the share block to be sold by CPPIB remains undisclosed, the issue price has been pegged at INR 2,061 per share. This price point represents a discount of 2% compared to the current market price (CMP) of INR 399.65, as recorded on the National Stock Exchange (NSE) on Tuesday, July 9. This strategic pricing is likely aimed at attracting potential buyers and ensuring the swift execution of the deal.

Prosus Recent Shift in Strategy Amidst Unicorn Losses

In the wake of significant losses in high-profile unicorns, investors are exercising increased caution. Prosus, one of the most active investors in the Indian startup ecosystem, is notably shifting its strategy. After suffering setbacks with its large bets on unicorns, the Dutch investment giant has begun testing the waters in early-stage investing. This year, Prosus marked its first seed-stage investment in India and has also restructured its leadership to better execute these smaller, more cautious investments.

Prosus has invested over $7 billion in Indian startups, including Swiggy, Meesho, Pharmeasy, The Good Glamm Group, and Urban Company. As VCs write a new playbook, Prosus’s shift to early-stage investments and smaller cheque sizes indicates a broader trend of hedging bets between early and late investments in an increasingly volatile market.

Recently, Prosus even wrote off down its entire investment in edtech unicorn Byju's to zero, incurring a loss of $493 million.

CPPIB's Decision: Historical Context and Previous Transactions

As of March 2024, CPPIB held a 5.96% stake in Delhivery, having previously divested a significant portion of its holdings. In a noteworthy transaction, CPPIB sold 2 crore shares valued at over INR 900 crore, with prominent buyers including Fidelity Funds, HSBC, and the Smallcap World Fund. These shares were exchanged at an average price of INR 444.3 per share, with the Smallcap World Fund acquiring a substantial 1.87% stake.

Delhivery, which debuted on the stock market on May 24, 2022, at an initial listing price of INR 495 per share, has seen its shares trade at varying levels since then. Despite the initial premium over its offer price of INR 487 per share, the company has struggled to maintain its financial footing.

Financial Performance and Challenges

Delhivery has reported consecutive losses over the past six years, with particularly significant deficits in FY22 and FY23, amounting to over INR 1,000 crore. The company's consolidated net loss for Q4 FY24 stood at INR 69 crore, underscoring the ongoing financial challenges it faces. These losses have likely influenced CPPIB's decision to exit its investment in the company.

Market Reaction and Future Implications

Following the latest transaction, CPPIB's shareholding in Delhivery will decline to 3.16% from the previous 5.96%, as per March 2024 data from the Bombay Stock Exchange (BSE). The market has already begun to respond, with Delhivery's share price experiencing a slight dip of 0.09% to close at INR 448 on the NSE on Wednesday.

In a broader context, CPPIB's move mirrors similar actions by other major investors. For instance, Japanese conglomerate Softbank also reduced its stake in Delhivery through separate block deals in March and November 2023. These trends suggest a cautious approach by institutional investors amidst Delhivery's ongoing financial turbulence.

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