Bengaluru: Since the start of 2016, Flipkart’s value has been marked down by five of its own investors, mostly mutual funds based in the US. These funds include those run by Morgan Stanley, Fidelity and Valic and have valued the company anywhere between $5 billion and $10 billion.
These markdowns were seen by investors and analysts as a clear indicator that Flipkart’s valuation would slide dramatically from its peak of $15 billion in the following funding round.
Yet, on Monday, Flipkart announced it had secured fresh capital of $1.4 billion at a valuation of $11.6 billion. This implies a pre-money valuation of $10.2 billion, the value of the company excluding the round’s capital infusion.
Before this round, Flipkart had last raised funds in June 2015 when existing investors led by Tiger Global Management pumped $700 million into the company, valuing it at $15 billion.
While $11.6 billion is obviously lower than $15 billion, it’s much, much higher than what private markets estimated and what the valuation markdowns implied.
How did Flipkart bag a higher-than-expected valuation?
Three reasons mostly, according to three people familiar with the matter.
One, most of the investors who had marked down Flipkart’s valuation had limited information rights. When investors buy shares in a company, they negotiate shareholder rights which include rights of information about the company. Some Flipkart investors such as Tiger Global, Accel Partners and Naspers have access to full financial records. Others such as the mutual fund investors have far more limited access to the company’s financials. Consequently, they didn’t have a full picture of the company’s health.
Two, the mutual fund investors owned small stakes in Flipkart. Together, these funds owned less than 10% of Flipkart.
Three, many of the markdowns, with a few exceptions, happened before November, after which Flipkart’s business has picked up significantly.
Other than these reasons, what helped Flipkart’s case is that while expectations on the size of India’s e-commerce sector have significantly reduced from the heady estimates of 2015, it is still considered the last big e-commerce market left.
Flipkart is the only local e-commerce start-up that is seen as serious competition to Amazon India over the long term. And then, there’s the profile of the new investors: it’s hardly a coincidence that all of them—Tencent, eBay and Microsoft—are global rivals of Amazon and Alibaba.
Finally, Flipkart co-founders Sachin Bansal and Binny Bansal have been vindicated in their stance that the valuation markdowns were little more than “theoretical exercises”.
“We’ve not asked them (why they have marked down the valuation). They’re very small investors. It’s a global phenomenon; it’s not specific to Flipkart. The funds have their way of (calculating valuations) which isn’t clear. If in future they markup our valuation by 30%, it’s not like we’re suddenly going to be happy. The way we look at it is that when we raise money, that’s when we get a valuation,” Binny Bansal had said in an interview in May 2016.
“These are theoretical exercises. Any investor who has an opinion on our valuation outside, including those who are already invested in us, they are doing it (markdowns) based on some public information which is accessible to everybody... It’s a very uninformed opinion of somebody. As we’ve always said, valuation is what will happen when a real transaction takes place and not just on paper,” Sachin Bansal said in an interview in December.