A prolonged funding winter, coupled with a crash in growth and late-stage deals, may turn out to be a double whammy for unicorns, with investors and analysts warning that many startups could lose their billion-dollar status due to the impending down rounds.
Multiple investment bankers, analysts and venture capital investors that FE spoke with said most unicorn founders prefer to stay away from raising large equity rounds due to unfavourable market conditions, but many who may take the plunge may end up losing their status quo as a billion-dollar firm.
However, this isn’t a recent phenomenon in the Indian startup ecosystem. Several billion-dollar startups have seen their valuation get slashed and burned due to the funding winters and the global tech stock rout. The e-commerce sector saw a massive valuation correction prior to the pandemic, with startups like Snapdeal, Shopclues and Paytm Mall having lost their billion-dollar status due to valuation markdown by their own investors. Besides, consumer internet startups, including Quikr and Hike, also lost their billion-dollar status due to investor markdowns despite raising multi-million-dollar rounds in the past.
A top executive from a consulting firm working with unicorns told FE that valuation correction occurs due to multiple factors, including public market corrections, companies struggling to show profitability, and due to the funding winter as well. Though the past funding winters have affected valuations, CY2022 is considered an extraordinary year with all these three factors expected to play a part in private market corrections.
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“Most big startup investors in India are global tech investors and they usually compare some of the domestic Indian startup valuations with tech stocks in the US, Europe, Chinese and Japanese markets. So, they (the global VCs) will mark down Indian holdings if tech stocks fall, which is a trickle-down effect from public to private markets,” the consultant added.
After SoftBank reported mediocre June quarter results, the Japanese conglomerate marked down fair valuations of more than 280 of its portfolio firms which included mostly private startups. At that time, FE reported that this will set a worrying precedent for Indian fund managers and venture capitalists.
According to a report by private market tracker Venture Intelligence, around seven Indian startups have lost their unicorn status in the last five years. From CY18 to CY22 (to date), around 105 startups had attained the unicorn status in India, but this has now reduced to 84 active unicorns due to various reasons, including seven losing valuations due to investor markdowns and another four getting acquired. Also, around 10 startups were listed in the public markets in the last five years and were excluded from Venture Intelligence’s unicorn tracker list.
Venture capital investors that FE spoke with further pointed out that unicorn founders will avoid raising external equity funding in the current scenario unless their companies have shown positive unit economics or tremendous growth in user base or revenues. The rest may turn to layoffs to increase their runaway or turn to venture debt alternatives for opex spending.
In the VC-funded ecosystem, more than 30 different tech startups, including unicorns such as Byjus, Vedantu, Unacademy, Ola, Cars24, MPL, Innovacer and many others, have resorted to layoffs or restructuring this year. These layoffs have affected more than 15,000 employees to date, according to Inc42’s Indian Startup Layoff Tracker.
Despite these factors, a country’s unicorn generation capacity is still seen as a positive benchmark for both global and domestic investors while also serving as a major decision-making aspect. Pankaj Makkar, managing director at Bertelsmann India Investments (BII) which has multiple unicorns in its portfolio, said the unicorn generation potential of a sector or geography can serve as a soft benchmark for investors. Makkar, however, said down rounds which lead to valuation corrections should not be considered an adverse market impact mostly because various companies in the public markets also see constant corrections which don’t necessarily spook investors or the management.
“One should not read too much about a slight down round of around 10-20% in the private startup market because public stocks on the BSE and the NSE also see correction on a monthly basis. Most of us don’t come to the conclusion that RIL is suddenly a bad company because the market cap has gone down 5-10% in the market. Then why aren’t we giving that same benchmark to private companies?” he added.
Yet Makkar does believe that many Indian unicorns may end up losing their billion-dollar status since many founders won’t have a way out other than doing a down round in a tough funding environment.
“Most startups which are currently valued at more than a billion dollars should not be more in that $800 million or so…In the last two years, we were in a very high valuation environment both globally and domestically. And now due to US tech stock correction, some of that will reflect on the Indian companies and hence, down rounds may happen,” he added.
Rajiv Srivatsa, partner at global early-stage VC firm Antler, said out of the 100 unicorns created in the last few years, only some 70-80 deserve to be in the billion-dollar category. “But I think that unicorn generation eventually has a net positive impact on the ecosystem. Irrespective of the global economic meltdown due to the Russia-Ukraine war and the tech stock correction in the US, India is still seen as a neutral territory for global tech investors. And with the addition of more than 60 unicorns in the last three years, investors expect this to translate into a lot more IPOs in the future,” Srivatsa added.
