The Flipkart markdown effect

It is no secret now—though many in the ecosystem continue to deny it—that the slowdown in India’s venture capital market is real


Photo: Reuters
Photo: Reuters

Last Friday, Morgan Stanley Institutional Fund Trust, a mutual fund and minority stakeholder in Flipkart, marked down the value of its stake in the Bengaluru-based e-commerce company by 27%. That effectively brings down Flipkart’s valuation to $11 billion from the $15.2 billion it claimed when it last raised capital.

The Morgan Stanley markdown isn’t surprising. Two weeks ago, when I was in Bengaluru, Flipkart dominated nearly every conversation. Folks in the start-up ecosystem—venture capitalists, angel investors and entrepreneurs—had begun to place bets on how much its valuation could slide this year. The estimates swung wildly between $10 billion and $5 billion. The bets were only half in jest. They underline the stress that many of those folks themselves are currently facing on valuations.

This year, very few companies, if any, will be able to muster a mark-up on their current valuations when they go out to raise their next round of capital. In fact, whether in Bengaluru or Mumbai or Gurgaon, entrepreneurs and investors alike are becoming less and less fussy about valuations as long as they can find the money. That itself is becoming difficult in the wake of the ongoing slowdown in the start-up funding market.

Take the two big funding deals announced this week. Mumbai-based Hopscotch, an e-tailer of kids’ and baby products, has just raised $13 million in a Series C round. The company’s statement on Monday said that the round was led by Facebook co-founder Eduardo Saverin, who had also led its Series B round in January last year. The statement doesn’t mention any other investor participating in the latest round.

Hopscotch, incidentally, was in the market to raise a much larger round, somewhere in the region of $30-35 million. Several people familiar with the deal say that the company had been pitching the Series C round to multiple venture capital firms and a couple of hedge funds for well over six months. It was unable to meet that target despite the presence of multiple existing investors such as Rise Capital, Jabbar Internet Group, LionRock Capital and Saverin.

The other company that raised money this week is Bengaluru-based managed home rentals marketplace Nestaway. It has, according to reports, raised an undisclosed sum from Tata Sons chairman emeritus Ratan Tata in what appears to be a bridge round. Nestaway had last raised $12 million in a second round of funding in July from Flipkart and Tiger Global Management. The first round came in March last year when IDG Ventures India and a bunch of angel investors, including InMobi founder Naveen Tewari, pumped in $1.25 million. Like Hopscotch, Nestaway has also been in the market for funds for a while.

Nestaway is one of 50-odd companies that Tiger Global, the New York-based hedge fund which invests in start-ups from a separate venture capital fund, has backed in India. The firm, according to unconfirmed reports, is currently reviewing its India start-up portfolio and has slowed down fresh capital commitments, especially big-ticket ones.

Getting Ratan Tata, who is more of a strategic investor rather than a financial one, on board may be designed to give Nestaway some leverage in terms of branding, even valuation, in a choppy fund-raising environment.

Whether Hopscotch and Nestaway have taken a beating on their valuations in their latest rounds is not yet known. However, even if they have, they would be among the smarter companies out there. As one venture capitalist I chatted with in Bengaluru remarked, “It’s better to close a down round than no round.”

Down rounds, where a company is compelled to mark down its valuation to raise fresh capital, are becoming more and more common around the start-up ecosystem. Smaller companies may take some comfort from the fact that even Flipkart’s next round, reported at $1.4 billion, could well be a down round. The Morgan Stanley markdown makes that almost certain.

It is no secret now—though many in the ecosystem continue to deny there’s a slowdown or a valuation bubble for that matter—that the slowdown in India’s venture capital market is real. A recent report released by the Emerging Markets Private Equity Association, which represents more than 300 venture capital and private equity firms globally, shows that compared to the third quarter of 2015, the volume of venture capital deals in India declined by 14% in the fourth quarter.

The good news is that the prevailing slowdown is more a manifestation of an interim correction rather than a full-blown bust of the kind that we saw in 2000-01. Venture capitalists are still closing seed and Series A deals with enthusiasm and as valuations in later-stage companies correct, the Series B and C rounds will also come back.

Until then though, it may be prudent for founders out there to take the lower end of the bet on Flipkart’s valuation and readjust their expectations.

Snigdha Sengupta is the founder of StartupCentral, a digital news and analytics platform focused on venture capital. She also periodically contributes stories on venture capital and private equity to Mint.

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