Two sides of valuation markdowns of startups: Indian landscape

The valuation markdowns often result from market fluctuations, increased competition, or internal struggles. Image: Shutterstock

Valuation markdowns have become a frequent topic of discussion in the Indian startup ecosystem. While these markdowns are often seen as negative events, it is important to acknowledge that they have two sides. Let us explore the dual perspectives surrounding valuation markdowns of startups in India, shedding light on the challenges they pose and the opportunities they can create. By examining examples from the Indian and global startup scene, we can comprehensively understand the implications and consequences of valuation markdowns.

Unicorns like Gupshup, BYJU's, Meesho, Eruditus, Swiggy, Pharmeasy, Pine Labs, Ola and OYO are experiencing valuation markdowns. Investors such as Softbank (Japan), Prosus (Netherlands), Blackrock, Janus Henderson (UK – US), Invesco (US), Baron Capital (US), Vanguard Group (US) and Neuberger Berman (US) had marked down their holdings in these unicorns. In the past, several prominent Indian unicorns, including Flipkart, Ola, Paytm, Zomato, and Snapdeal, had experienced valuation markdowns. Investors like Softbank (Japan), Vanguard Group (US), Morgan Stanley (US), T. Rowe Price (US), and Fidelity Investments (US) had marked down their holdings in these unicorns. Factors contributing to these markdowns included increased competition, regulatory challenges, profitability concerns, and evolving market dynamics. The reductions resulted in decreased valuations of these companies by mutual funds and major investors.

The Dark Side: Challenges and concerns

The valuation markdowns often result from market fluctuations, increased competition, or internal struggles. Some key challenges include fundraising hurdles, reputational impact and employee retention. Startups encounter difficulties in raising funds from investors. Lower valuations make it harder to attract new investors or secure follow-on funding rounds. Valuation markdowns also tarnish a startup's reputation, leading to concerns among existing and potential customers, partners, and employees. It raises several questions about the company's long-term viability and stability. Valuation markdowns impact employee morale and retention. The perceived decrease in the value of stock options or equity grants demotivates employees, leading to talent attrition.

The Bright Side: Opportunities and potential

While valuation markdowns bring short-term challenges, they serve as a reality check and catalyst for positive startup changes. Some key opportunities include strategic focus, cost optimisation and investor reassessment. Startups are forced to re-evaluate their strategies and operations. It compels them to focus on essential aspects such as revenue generation, profitability, and sustainable growth. Startups often prioritise cost optimisation, trimming unnecessary expenses, and streamlining operations. This results in improved efficiency and better financial discipline. In many cases, valuation markdowns attract investors who see the potential for long-term value. These investors understand that a reduction does not necessarily reflect the true potential of a startup and can invest at a more favourable valuation.

Also read: Hoopla and Hubris: Why Indian startups are coming undone

Used cases of Indian startups who challenged valuation markdown:

We all know the journey of Grofers to Blinkit. But in 2016, Grofers' valuation was marked down by investors, including SoftBank and Tiger Global (US). This markdown prompted Grofers to rethink its business model and prioritise sustainable growth. Similarly, when Flipkart faced significant valuation markdowns, it continued to innovate and strengthen its market position. Eventually, in 2018, Walmart acquired a majority stake in Flipkart, valuing the company at $20.8 billion. This acquisition demonstrated that despite the valuation markdowns, Flipkart's long-term potential and value were recognised by one of the world's largest retail giants. In 2019, OYO, the hospitality startup, faced significant valuation markdowns by SoftBank. It was one of its major investors, marking down its valuation by over 50 percent. While this markdown created challenges for OYO, it also led to a strategic restructuring and focus on profitability.

Used cases of global startups who challenged valuation markdown:

Uber faced valuation markdowns in 2017 by mutual funds, including Fidelity Investments, which reduced the value of their holdings by approximately 15 percent. The markdowns were attributed to issues such as regulatory hurdles, controversies surrounding the company's culture, and ongoing losses. In 2017, Snapchat experienced valuation markdowns by several mutual funds. This came after disappointing financial performance and concerns over competition from Instagram, among other factors. Fidelity Investments marked down its stake by around 25 percent, and other investors followed suit. In 2019, WeWork experienced a significant valuation markdown. The company's initial public offering (IPO) was postponed due to concerns over its business model, governance practices, and mounting losses. As a result, its valuation plummeted from a peak estimate of $47 billion to below $10 billion. Still, all three startups overcame the markdown situation effectively.

Lessons for startups

The Indian ecosystem needs to understand that markdowns are not the end but an opportunity for startups to emerge stronger and more resilient. The valuation markdowns of startups have two sides: the challenges they pose and the opportunities they present. While markdowns bring short-term hurdles such as fundraising difficulties and reputational impact, they also act as catalysts for strategic focus, cost optimisation, and investor reassessment. By acknowledging both aspects, startups can and should learn to navigate the challenges and seize the opportunities presented by valuation markdowns.

Surbhi Rathod is an Academic Associate at the Indian School of Business (ISB).

[This article has been reproduced with permission from the Indian School of Business, India]