A Flipkart investor reduced its valuation from $15 billion in June 2015 to $11 billion at the end of February 2016. I suggested that this near-30% markdown is modest for a high-beta private company considering Nasdaq has been down about 10% since then and Chinese equivalent JD.com has been down 30%. Then I went on to predict that this is the beginning of a slide that will continue until Flipkart’s valuation equals invested capital, currently $3.2 billion. Here is the basis for the prediction.

JD.com had revenue of ~$27 billion in 2015 (estimate, Q4 financials not posted) at an operating loss of 1.5% and the market values it at 1.25x of revenue. US equivalent Amazon posted $107 billion at an operating profit of 2% and the market values it at 2.5x of revenue. Despite JD.com’s 60% year-on-year revenue growth compared with Amazon’s 20%, the public markets seem to be rewarding operating profits more. Then again, the Chinese consumption growth is tapering off and the US is a mature market, while India’s growth has just begun.

Flipkart’s 2015 revenue probably ranged from $2 billion to $5 billion depending on who you ask and what they are answering. As a private company, there are several ways to obfuscate revenue, what with non-standard maximum retail prices, accounting of discounts, contrived marketplace models with key sellers owned by the same parent, high-return nature of cash-on-delivery payments, and so on. Flipkart’s operating losses will range from 20% to 40% depending on who you ask and what they are answering. There are even more ways to obfuscate that, what with accounting for ageing inventory, returned inventory, chargebacks, warehouse rentals, cost of operations personnel, cost of handling cash on delivery, pilferages and leakages. With 200-250% revenue growth and 20-40% operating losses, even at a reduced $11 billion, a multiple of 3-5x seems high.

If Flipkart and other e-commerce firms are indeed secure about the India growth story, the time to bring operating losses to zero has arrived. When that happens, it is anyone’s guess what the real revenues will correct to. India is a cost-sensitive market and a majority of products sold are traded. Traded products, which are generally available through offline markets, do not provide the same margin control as the exclusive ones or private labels. If the Indian consumer’s cost sensitivity does not kill revenues, the unviability of selling a large number of traded products currently constituting revenues certainly will.

Therefore, if Flipkart and other e-commerce firms in India were to bring operating losses to zero this year, I would be generous to estimate that the revenues will remain flat compared to 2015. If Indian e-commerce unicorns were offered a deal where they could maintain 2015 revenues while hitting break-even in 2016, I think they will take it in a heartbeat.

Now let us look at the funding scenario. Tiger Global Management bought over $1 billion of Amazon shares a quarter ago. Since June 2015, Amazon has grown by 50% in market capitalization, while JD.com and now Flipkart are down 30%. Amazon has the luxury of free cash flow, as is the outcome of a true e-commerce business, growing revenues while breaking even operationally. This free cash flow can keep funding Amazon’s Indian subsidiary for several more billions. Meanwhile, Flipkart needs its investors to dig deep in times of illiquidity so they can continue losing money per transaction and keep on the path of fake growth prescribed under their parents’ ambitions of e-commerce imperialism. If anything, JD.com’s Nasdaq IPO in the summer of 2014 makes Flipkart overdue by over a year now. Forgive me for suggesting that if you believe the hyper-funding party is still on, you are hung-over and the couch you are on belongs to the stranger who just left for work.

Lastly, late-stage investors in high-valuation unicorns like Flipkart protected their capital through a superior class of liquidation preference, thus making it debt. This debt is attractive for Flipkart because of the growing number of rupees it can buy, and for the funds because of the low interest rates and upside on alternatives. As the valuation starts dropping, investors will start losing sleep and begin to focus on protecting their money versus complete world domination. One would hope that when that happens, there is enough there and Flipkart can turn around and deliver that value. So yes, I believe the slide continues until valuation equals invested capital. That too is not going to be easy. It would require a turnaround, shedding old habits and building a valuable e-commerce business.

Kashyap Deorah is the author of The Golden Tap: The Inside Story of Hyper-Funded Indian Startups. He is an entrepreneur and investor who shuttles between India and Silicon Valley. He tweets at @righthalf

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