The life of a startup after a devaluation

The life of a startup after a devaluation

India’s biggest technology startups are finally getting a taste of devaluation. For the last couple of years, India was flooded with venture capital money, which helped several tech companies become unicorns—startups valued at over $1 billion. But now, some of the biggest players in the sector seem to be coming apart at the seams.

troubled_unicorn

Trouble in unicorn land. (Reuters/Kieran Doherty)

 

HSBC cut the valuation of restaurant discovery portal Zomato to $500 million, Indian media reported on May 9. The company had been valued at $1 billion after its eighth round of funding last year.

Earlier this year, Flipkart’s devaluation had already sent shockwaves across the startup ecosystem. In March, investor Morgan Stanley trimmed Flipkart’s valuation by 27% to $11 billion. A month later, another investor, T Rowe Price, cut the value of its holding in the Indian e-commerce firm by 15%.

The Indian startup community must brace itself for more devaluations in the future, industry experts say. “At the time when money was coming into the country, everyone benefited and valuations across sectors shot up. Now, there is a need for correction across the board and I expect more devaluations to happen,” Sanchit Vir Gogia, chief analyst at Delhi-headquartered Greyhound Research, said.

So what happens after a startup’s valuation is lowered?

The direct impact is on the startup itself, which may be forced to go for a down round, where investors purchase stocks at a lower valuation. There are other consequences as well.

We all fall down
Devaluation can have a significant impact on competitors. Following the valuation markdown, Flipkart is obviously struggling to raise funds at its preferred valuation. The development has dragged down competitor Snapdeal, too. According to a report in Mint newspaper, Snapdeal has held talks with several new investors who have refused to invest at its current valuation of $6.5 billion.

“There is a moral impact on the entire category,” Gogia said. “When a company like Flipkart is devalued, everybody is bound to question the valuation of all other players. The general belief would be that if the market leader is under pressure, others are bound to face similar issues too.”

Job loss
As funding becomes hard to come by, it becomes essential for a startup to cut costs, usually by trimming the workforce. For instance, Zenifits, a US-based HR automation startup—devalued 48% by Fidelity Investments in November 2015—said earlier this year that it would layoff 17% of its workforce.
Funding slump has already led to several rounds of layoffs in Indian startups and devaluations may only worsen things.

Back to the basics
Even if employees manage to save their jobs, things may not be the same again. For the last several years, startups have been among the country’s top recruiters—offering massive perks and increments. Devaluations may end such practices.

US-based cloud storage startup Dropbox, which saw a 20% devaluation in March, is reportedly scaling back some fringe benefits of employees. The company will manage to save $38 million per year by doing so.

Consumer & innovation

Deep discounting by Indian e-commerce players may soon become a thing of the past. As companies struggle to survive funding crunch, they may not be able to subsidise buyers on their platforms anymore.
Additionally, startups may be forced to forego investments into innovation in order to have a clearer road to profitability.

“Startup devaluations…can be a blessing in disguise, in the sense that it makes the company leadership take a close hard look at the current monetisation model, re-evaluate any fragilities and make strategic and tactical adjustments accordingly,” Anindya Ghose, director of New York University’s Center for Business Analytics said.

 

[Quartz]

May 11, 2016 / by / in , , , , ,

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