In recent times, there is a noticeable shift in the investment landscape for Indian startups. Investors, both domestic and international, are taking a closer look at the valuations of big startups in India. This re-evaluation comes as the market experiences increased scrutiny, growing concerns about inflated valuations, and a focus on sustainable growth. 

Why the investors are re-correcting their valuations?

Evolving Investor Sentiment

Investors are now adopting a more cautious approach when it comes to assessing the valuations of prominent startups. The exuberance that once surrounded massive funding rounds and soaring valuations is giving way to a more sober perspective. Investors are now emphasizing profitability, scalability, and long-term sustainability rather than solely focusing on user growth and market share.

Market Correction and Global Trends

The reevaluation of valuations is not unique to the Indian startup ecosystem but is part of a broader global trend. Recent market corrections and high-profile instances of startups failing to live up to their valuations have caused investors to adopt a more pragmatic outlook. This shift is reflected in the Indian context, as investors recalibrate their expectations and place greater importance on financial viability and business fundamentals.

Concerns Over Inflated Valuations

Over the past few years, there has been a notable increase in startup valuations, sometimes exceeding what many consider rational or justified. Such inflated valuations can create challenges in terms of achieving profitability and sustainable growth. Investors are becoming more discerning, conducting thorough due diligence, and seeking a clearer understanding of a startup's revenue models, unit economics, and competitive advantage before committing substantial funds.

Investor Sentiment Shifts: Indian Startups Experience Valuation Re-evaluation

Talking to TICE News, Mr. Vikram Ramasubramanian, Partner, Inflection Point Ventures, said, “Investors have recently re-evaluated the valuations of prominent Indian Unicorns like Swiggy, Pine Labs, Pharmeasy, Oyo, Byjus, and Ola, raising concerns about the startup ecosystem's health and credibility. The global economic climate has significantly impacted startups worldwide, including those in India.

In 2021, when capital flowed freely, startups easily obtained high valuations, even in cases where profitability was lacking. Consumer-facing unicorns such as Pharmeasy, Byju's, and Swiggy rode the wave of the Covid boom, leading to skyrocketing valuations. However, as 2022 unfolded, the headiness of the previous year began to fade. Geopolitical tensions and macroeconomic pressures caused a reduction in funds and increased investor focus on profitability and cash conservation.”

Which Startups Faced Significant Valuation Markdown?

In recent times, Startups had a tough time with layoffs and funding crunch. On top of that their valuations too are taking a hit. 

Recently, New York based Neuberger Berman marked down PharmEasy and Pine Labs by 22% and 58% respectively, while Invesco lowered Swiggy's valuation by 33%. Byju's and Ola also experienced significant reductions, with valuations slashed by 48% and 72% respectively. 

On Friday, the US-based Baron Capital has slashed foodtech platform Swiggy’s fair value by another 10 percent, effectively valuing the company at USD 6.5 billion as of March 31, 2023. The US-based fund had cut Swiggy’s fair value by 34 percent as of December 31, 2022.

Baron Capital has estimated the fair value of its stake in Swiggy at USD 45.76 million as of March 31, 2022, according to the investor’s filings with the Securities and Exchange Commission (SEC). Baron Capital holds about 0.7 percent stake in Swiggy, and its fair value estimate implies a USD 6.54 billion valuation for the foodtech unicorn.

P.S. All the figures are in billions

Image Courtesy: bfsi.economictimes.indiatimes.com

Startups Had No Options but To Cut Cost: Expert

Mr Ramasubramanian further said, “Indian startup funding witnessed a decline in 2022, with $25.2 billion raised, marking a ~34% drop from the previous year. The latter half of 2022 saw investments of only around $6.3 billion. According to Inc42, the first four months of 2023 registered a total investment of ~$3.8 billion. This funding crunch is more severe in India than in global trends, resulting in decreased funding rounds and smaller check sizes across all stages. Investors worldwide have become cautious due to market reversals and are increasingly hesitant to fund startups at higher valuations than previous rounds. Consequently, the due diligence process has regained its stringency, leading to longer evaluation periods for deals.

In response to the new reality and the need for cash conservation, the Indian ecosystem has been compelled to take measures such as scaling back operations and cutting costs. Unfortunately, this has resulted in over 20,000 layoffs in 2022 and an additional 6,000 in the year-to-date period of 2023. These markdowns underscore the cautious approach and recalibration of investor sentiment in the startup ecosystem. Investors now prioritize unit economics, profitability, sustainable growth, and solid business models over exuberant expansion. Startups face scrutiny regarding their ability to generate sustainable revenues and achieve profitability,” the Bengaluru based Venture Capitalist expressed.

Lower Valuations ≠ Lack of Credibility

Lower valuations of startups in recent times have sparked discussions and raised concerns among investors and industry observers. However, it is essential to understand that these revised valuations do not necessarily indicate a lack of credibility or the failure of the companies involved. Instead, they reflect a more realistic market assessment, aligning expectations with the current economic climate and investor sentiment.

Mr Vikram Ramasubramanian believes that, “One significant issue is the emphasis on valuations rather than value addition. The previous surge in valuations for unicorns was driven by the pursuit of scale, innovation, and rapid expansion, often at the expense of solid unit economics. Some startups focused on becoming unicorns through astronomical valuations, even if their financials remained in the red. This approach disregarded fundamental business principles and profitability, creating an unsustainable bubble. The ecosystem witnessed a rush to achieve high valuations, neglecting the importance of building a strong foundation. Consequently, several unicorns like Hike, Quikr, Shopclues, Snapdeal, Blinkit, and Paytm Mall lost their unicorn status.”

“SoftBank founder Masayoshi Son, a significant investor in India, warned of a prolonged funding winter as some unicorn founders hesitated to accept lower valuations. The situation is unlikely to improve soon, with India's most valuable startup, Byju's, postponing its plans to go public this year. Similarly, Oyo, once valued at $10 billion, plans to list early next year with a reduced valuation of $2.7 billion from its largest backer. This outlook suggests ongoing challenges for Indian startups in raising capital and achieving higher valuations. SoftBank has also marked down the fair market values of over 280 portfolio companies worldwide.

The decline in valuations for startups, including Unicorns, stems from market corrections, increased scrutiny, economic conditions, and performance metrics. This shift reflects a more prudent approach by investors, promoting sustainable business models within the startup ecosystem. While declining valuations raise questions about startup credibility, they do not represent a blanket indictment of the entire ecosystem. Startups with strong fundamentals and viable business models will continue to drive innovation, attract investment, and ensure the long-term vitality of the startup ecosystem,” he opines.

Why it is important to differentiate between Valuation Adjustment and Overall Credibility Adjustment?

The expert says, “While declining valuations may raise concerns, it is crucial to differentiate between valuation adjustments and the overall credibility of the startup ecosystem. Lower valuations do not necessarily indicate a lack of credibility but rather a more realistic market assessment. Successful startups with strong fundamentals and a solid value proposition will continue to attract investments and thrive, even with valuation adjustments. In response to challenging economic conditions, startups are adapting their strategies to weather the storm. They are focusing on optimizing operations, exploring consolidation and partnerships, and streamlining costs to ensure long-term viability. While valuation cuts and economic challenges raise concerns about financial health and sustainability, it is crucial to evaluate each company individually. Some startups may be better equipped to navigate turbulent economic conditions by leveraging their market position, customer base, or innovative solutions to emerge stronger."

Revisiting Startup Valuations: Investors Embrace Prudent Approach in India

The re-evaluation of valuations for big startups in India reflects a maturing investor landscape and a growing focus on sustainable growth. While it may result in increased scrutiny and more demanding investment criteria, this shift ultimately benefits the ecosystem by promoting financial prudence and long-term viability. Startups that can adapt to this changing landscape by emphasizing profitability and sustainability are likely to emerge as winners in the evolving Indian startup ecosystem.