Game Of Valuations: Challenges & Opportunities for Indian Startups

Valuation corrections are not uncommon in the startup ecosystem, and experts believe that India is no exception. While the Indian economy is performing relatively well compared to others globally, startups are finding it challenging to justify their high valuations. However, due to their growth phase and positive trends, startups are expected to recover better than other markets.

Talking to TICE News, Mr Anil Joshi, Managing Partner, Unicorn India Ventures says, “The valuation correction has happened across the world hence India can also remain untouched. Though Indian economy compared to others in the world is doing better, it is difficult for startups to justify high valuation. While the valuation has got impacted but by nature startups are in growth phase and are showing positive trend, which will certainly help in recovery compared to other market.” 

The Sinking Valuations!

India's renowned startups, including Swiggy, Ola, Byju's, and Oyo, are facing setbacks as their investors adjust their lofty valuations. The industry leaders are worried about the sustainability of startups' hefty valuations and whether they can maintain their momentum post the pandemic lockdown.

Swiggy, backed by Invesco, experienced a significant valuation reduction from USD 10.7 billion to USD 5.5 billion in April 2023, as per a media report quoting Invesco's US Securities and Exchange Commission (SEC) filings. Edtech giant Byju's has also been scrutinized for its high marketing expenses despite mounting losses. BlackRock recently slashed Byju's valuation by almost half, from USD 22 billion to USD 11.5 billion. Janus Henderson, a US investor, also halved the valuation of online pharmacy company PharmEasy to USD 2.8 billion. SoftBank Group Corp adjusted the valuation of Oyo Hotels by over 20%, bringing it to around USD 6.5 billion. Additionally, Vanguard reduced Ola's valuation by 35% to USD 4.8 billion from its peak value of USD 7.4 billion.

“The correction in valuation will certainly impact startups’ ability to raise fresh capital at higher valuation than last round, which may impact growth temporarily, however considering the measures taken by most of the startups like downsizing, working on unit economy, cutting the loses, improvising on margins, will soon make them attractive as this are all long-term investment. Overall, there will be short term impact which will see the corrections are performance improves,” Mr Anil Joshi adds.

The Ripple Effect: How Valuation Corrections Impact Startups' IPO Ambitions?

These companies often allocate substantial marketing budgets to gain visibility and market share, so downfall in their valuations will have an impact on other sectors too. With the adjustments in valuations, startups may need to reassess their marketing strategies, leading to potential cutbacks in advertising budgets. 

The valuation cut downs will also adversely impact the startups planning to get listed on the bourses and will also make the listed startups suffer the jitter.

The recent corrections in startup valuations can have a significant impact on their IPO plans. When startups plan to go public, their valuations play a crucial role in determining investor interest and the pricing of their shares. A high valuation before the correction may have created expectations of substantial returns for early investors and employees, potentially impacting the IPO pricing.

The valuation cut-downs can lead to several consequences for IPO plans. Firstly, a reduced valuation may affect the perceived value of the company, potentially resulting in lower investor confidence and demand for shares during the IPO. This can lead to challenges in achieving the desired IPO pricing and raising the intended amount of capital.

Secondly, the correction in valuations may also affect the perception of the company's growth prospects and financial stability. Investors, including institutional investors and retail shareholders, closely evaluate a company's valuation as an indicator of its potential for future growth and profitability. A significant valuation correction may raise questions about the company's ability to sustain its growth trajectory and generate returns for investors.

Furthermore, the correction in valuations can impact the company's ability to attract new investors or secure additional funding. If the startup had planned to raise capital through private placements or pre-IPO funding rounds, the lower valuation may deter potential investors and affect the startup's financial position.

The renowned Venture Capitalist, Mr Joshi opines, “The economy down turn including inflationary trend world over has taken toll on listed stocks. While listed stocks which are more liquid in nature and tradable have taken the hit, it is unlikely the unlisted stocks which more illiquid and non-tradeable can stay intact. It is natural that the investors are making necessary provision on stock price correction considering global downturn. The startups or unlisted stocks which are in growth phase but in negative will find it difficult to sustain high valuation, hence correction was necessitated and the reason we are seeing cutting down of valuation for startups world over.”

In the wake of valuation corrections, is there a room for recovery for startups?

While the current valuation corrections present challenges for startups, there is also room for recovery. Startups are inherently in a growth phase, and their positive trends can aid their revival. As the market stabilizes and startups demonstrate their ability to generate revenues that align with their valuations, investor confidence may be restored.

Furthermore, startups' resilience and adaptability have been evident throughout the pandemic, and they can leverage these traits to navigate the valuation correction phase. By focusing on sustainable growth, optimizing marketing strategies, and demonstrating their long-term potential, startups can regain investor trust and support.

The correction in startup valuations serves as a reminder of the importance of rational assessment and alignment of valuations with actual financial performance. It is a part of the natural course of the business cycle and offers an opportunity for startups to recalibrate their strategies and emerge stronger in the long run.

Mr Anil Joshi expresses that, “The valuation correction is universal that doesn’t mean that the asset class is a question mark. This is not happening first time and neither it will be last time. Sooner or later the positive trend will start and all startups will see renewed interest from investor. However, for that to happen the startups need to not only survive but also perform in positive direction. The good startups will keep attracting investors attention and keep going, just that they need to survive this phase and things will start looking good once economy revives.”

Are Lofty Valuations of Startups Sustainable?

The recent valuation corrections faced by Indian startups have raised concerns about the sustainability of their lofty valuations. However, experts believe that this correction is not unique to India and is part of the natural business cycle. Despite the challenges, startups are in a growth phase and show positive trends, which can aid their recovery compared to other markets. 

Smart Business Moves - Need of the hour!

Startups need to focus on sustainable growth, optimize their marketing strategies, and demonstrate their long-term potential to regain investor trust. The correction in valuations serves as a reminder of the importance of rational assessment and alignment with financial performance. Ultimately, as the economy revives, startups are expected to attract renewed investor interest and emerge stronger.

It is also important to note that IPO plans should not solely depend on valuations. Other factors, such as market conditions, industry trends, company fundamentals, and investor sentiment, also play critical roles in determining the success of an IPO. Startups can mitigate the impact of valuation corrections on their IPO plans by focusing on improving their financial performance, demonstrating sustainable growth, and communicating their long-term potential to investors.

Overall, while valuation corrections can pose challenges for startups planning to go public, it is possible for companies to adapt their strategies, recalibrate their valuations, and regain investor confidence. With a resilient approach, startups can navigate the valuation correction phase and position themselves for a successful IPO when market conditions and investor sentiment are favorable.