Indian startups may gradually become amenable to the idea of going for down rounds for fund raise rather than no rounds happening, according to analysts tracking the sector.
Down rounds are when startups raise fresh capital at a valuation, which is lower than their last fund raise. These typically follow after flat rounds, where new-age companies raise money at a valuation unchanged from the previous round.
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Indian startups basically do not opt for down rounds because of the negative perception that comes attached to it, according to large venture capital (VC) firms.
“In India, founders are too driven by perception. But down rounds happening is not a worry, the bigger worry is that there are no rounds happening at all. By the end of this year, I will be happy if there a lot of down rounds, which will mean there is at least some money flowing into the ecosystem, because we’re reaching a stage where several companies are looking at closing down,” Anand Lunia, founding partner, India Quotient, which has backed startups like Sharechat and Koo, told FE.
Lunia’s comments come at a time when the total funding into Indian startups reduced by 41% to $24.3 billion in 2022. “When a business is not fundamentally strong, then it will be more averse to a down round. If the fundamentals are strong, founders should be absolutely fine accepting a lower price in one round because in three years, they can scale the business and it will all be good again,” Lunia added.
In fact, large players, like Flipkart, have accepted down rounds. At an industry seminar way back in 2016, Sachin Bansal, co-founder of Flipkart, had said that the company raised around $150 million in 2012 at a valuation of $750 million, down sharply from $1 billion that Flipkart commanded previously. Bansal had added that the company kept delaying the fundraise for a higher valuation which, in hindsight, was a mistake.
Later, at another industry event, Kalyan Krishnamurthy, group CEO, Flipkart, had said that the company raised money at a discount of around 30% in 2016-17, when the funding landscape was tepid. He had added that since Flipkart was able to rebuild its cap table and was able to grow from there, down rounds were not a problem.
In February, when FreshToHome (FTH), a D2C meat startup, raised $104 million from Amazon Smbhav and others, it did not comment on its valuation but Tracxn data now shows that it was at a valuation of around $566 million, which was lower than $604 million when it had over $26 million from Iron Pillar and Raed Ventures in May 2022.
Over the past quarter or so, several large investors have slashed valuations of multiple companies. BlackRock cut Byju’s valuation by nearly half – from $22 billion to around $11.5 billion. Similarly, Invesco, a backer of Swiggy, slashed the food tech firm’s valuation to around $8 billion, from $10.7 billion.
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In the past, even SoftBank sharply lowered IPO-bound Oyo’s valuation to around $2.7 billion from about $10 billion previously. “While most down rounds mean valuations going down temporarily, at times they also have a different structuring. In case a startup is not able to meet certain growth targets or milestones set by investors, by a particular time, then the incoming investors get additional stock to make up for it, lowering the overall stock price,” Ashish Kumar, co-founder at Fundamentum Partnership, said. The firm backs IPO-hopeful PharmEasy and used car platform, Spinny, among others.
“The larger the company, higher the chances of down rounds, especially if they have not raised money in the last 12-18 months. The general guideline is: survive before you optimise, so if companies require money, they should take it at whatever price it is available,” Kumar said, adding that down rounds were most likely in spaces like retail, travel, logistics, SaaS.
“The biggest problem with down rounds is that it damages the morale of employees, especially those who have ESOPs. The moment the leadership team sees their ESOP value coming down, they start leaving the company,” said Mayank Kumar, co-founder of UpGrad.