A recent report by Nasscom and Bain & Company found that the average valuation of Indian startups declined by 48% in the first half of 2023. Companies like Byju’s which were once valued at $22 billion, are now valued at 95% less. In recent months, several high-profile Indian startups have seen their valuations decline sharply. The decline in these startups' valuations is a sign of the changing economic landscape. In this post, Compliance Calendar traces the history of fall in valuations of key startups. In the last section of this post is a simplified guidance note to the valuation process in India.
Valuations are exercises in estimation that are aimed at putting a number to the intrinsic value of the company. It is a time-specific attribute as the value of a business is fixed based on its working capital, cash flows, liquidity, assets and liabilities at a given point in time.
India is home to over 99,000 recognized startups, with over 110 unicorns valued at US $341 billion. In the post-covid recovery phase, in the years 2022 and 2023, several leading startups recorded a slump in their valuations. Some of these are:
While Byju’s became the most valued Indian startup in the year 2022, with a valuation totaling to $22 billion, it has witnessed several cuts in its valuation since then. BlackRock marked it down by almost half, bringing the valuation to $11 billion. Later, Prosus and Baron Capital also reduced their valuations. As of January, 2024, Byju’s has seen a total fall in valuation by 95% to $1 billion.
Losing some of its share to competitor Zomato, Invesco and Baron Capital - key investors in Swiggy, originally valued at over $10 billion, cut down its valuation mid-2023 to almost half - at $5.5 billion.
It was reported that SoftBank cut its valuation of PayTM by 25% in March, 2022. The IPO of PayTM which was floated in 2021 at a valuation upwards of $20 billion, fell sharply soon after. Shares originally valued at $25 per share, fell to a low of $5.58 in 2023.
The valuation of a startup is a complex process that varies by the type of industry and the location. While different methods exist, startup valuations are often more challenging due to the high level of uncertainty and the absence of a well-established financial track record. However, valuation involves assessing various factors to determine the company's worth. As startups begin to climb the growth ladder and go for subsequent funding rounds, each round adds higher valuation to the company and aids in innovation and scaling. Here is a brief roundup of the few methods that are commonly used:
This method projects the future cash flows of the startup and discounts them back to their current value to determine whether the investment is worthwhile. This method requires making assumptions about growth rates of the company, discount rates, the time period and the possible returns. This method can also be used for valuation of a certain project, investment or specific shares in the company.
Uses industry-specific multiples (e.g., Price-to-Earnings ratio) to estimate the startup's value. For instance, the Price to Earnings ratio is a metric of comparing the price of a stock to the company’s earnings. A higher PE ratio means that the company’s stock is overvalued or priced higher than it should be, and the earnings are lower.
This method is ideally suited for risky securities, where the investment is compensated in terms of risk and time value of money. A higher return is marked by a risk premium, for volatile investments.
Market Potential: The size of the target market and the startup's potential for growth significantly impact valuation. Investors look for startups with large addressable markets. For instance, companies like WhatsApp, Zomato and PayTM have been valued highly not because of their profitability, but their subscriber base.
Revenue and Growth: Revenue generation and growth rates are crucial, as several investment decisions are based on projected revenue. Investors often value startups based on their ability to scale and capture market share, even though they may not be profitable in the short run.
Intellectual Property: Unique and protectable intellectual property, such as patents or proprietary technology, can contribute positively to valuation. This is especially important in niche sectors like fin-tech, industrial and manufacturing startups. Acquisition of goodwill is also a significant criteria in determining valuations in case of mergers and acquisitions.
Operational Metrics: Key performance indicators (KPIs) related to user engagement, customer acquisition costs, and retention rates can also impact valuation significantly.
A mark down in valuation of key startups by leaving venture capital funds may not always be bad news. Often, a reduced valuation may jolt startups into focusing on becoming profitable sooner, and make them tread on the path of financial prudence, reducing risk and becoming sustainable.
Enhanced possibilities for mergers and acquisitions - A more conservative valuation can bring a company's valuation in line with its current performance and market conditions. This
can lead to a more realistic assessment of the company's value. Startups with innovative technologies or strategic assets could become attractive acquisition targets, due to their reduced assessed market value. However, they may be acquired at lower premiums.
Creating scope for new investors with greater risk appetite - For new investors, a lower valuation might present an entry point with potential for higher returns in the future. It can be an opportunity for investors seeking to enter the market at a more favorable valuation.
Investor Perception and Existing Investors: A decline in valuation may lead to dissatisfaction among existing investors. They may experience a decrease in the value of their investment, potentially impacting their confidence in the company. For instance, Warren Buffet’s firm Berkshire Hathaway which held a 3% stake in PayTM, exited the PayTM parent company One97 Communications in December, 2023 at a loss of 40%.
Potential Investors: Lower valuations can make it challenging to attract new investors. It might signal concerns about the company's performance or potential for growth.
Access to Capital: A lower valuation can affect the company's ability to raise capital through equity financing. It may result in reduced funding options or higher dilution for existing shareholders. However, investment alternatives such as - Alternate Investment Funds, loans from non-traditional sources such as NBFCs, private investments etc. may be explored, albeit at higher premium and cost.
A fall in the valuation price may not only upset existing investors, it also makes raising money more difficult. The overall impact depends on the specific circumstances of each startup and the reasons behind the valuation decline. Successfully navigating a lower valuation often involves proactive and strategic decision-making, analysis of financial fundamentals and risk assessment. Our experts and in-house Chartered Accountants can help you analyze your startup’s financial records and suggest the best funding options.
At Compliance Calendar, we believe in designing comprehensive solutions to address our client’s unique funding and valuations needs. While our experts can help streamline your startup valuation process, here are a few quick suggestions on keeping your valuations strong
Securing and protecting any intellectual property gives startups a competitive advantage. Access to key designs, patents and trademarks and building a value-driven business around them can not only enhance valuation but also add revenue and recognition to your business. Connect with our experts today to begin the process of protecting your brand name and registering for patent and trademark protection.
Articulating a clear path to profitability, especially in the aftermath of financial crises, supply chain slump due to lockdowns and the Russia-Ukraine war can help add resilience to valuations. Investors want to see a sustainable business model, strategies and a roadmap for achieving profitability. When PayTM’s share value fell by over a fifth, it decided to lay off over 1000 employees as part of cost cutting. It also decided to reduce its small-ticket loan portfolio (of under 50,000 loans), which was significantly more cost-intensive than offering large loans to high-credit worthy merchants.
A startup must always focus on optimizing operational efficiency and take steps towards cost management. Efficient use of resources can contribute positively to valuation. Trimming low priority expenditures, monitoring costs using a data-driven approach while also optimizing customer acquisition costs from various streams could be a helpful exercise in plugging leakages.
After a fall in valuations, companies like Byju’s and Unacademy that were once bleeding cash have started consolidating their business by reducing employee strength and plugging inefficiencies. Consistent and strong revenue growth is a key driver of valuation. Focus on strategies that drive user or customer acquisition.