Startup valuation bubble 2.0? There might be, if too much capital chases too few startups

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Published: December 21, 2018 4:24:27 PM

The large rounds of capital raised by few startups recently might signal the dawn of another valuation bubble.

What has also caught attention is money flowing into yet-to-be-launched ventures.

Early stage investments – once the darling for investors across sizes to tap ‘innovative’ ideas early on – would have to wait a bit longer for the 2015-16 bubble burst impact to get over. Until that happens, investors are betting their money on handpicked businesses at much higher valuations to justify the future growth of these businesses and eventually return the capital to their limited partners.

For instance, online marketplace Udaan raised $225 million in September this year and catapulted itself to the hallowed unicorn club in just two years. Then there are the likes of health tech startup CureFit, which was launched in 2016 and raised Series C funding worth $120 million in July this year. Further, online car selling marketplace Cars24, launched in 2015, recently raised $50 million at a reported valuation of $250 million. Similarly, social commerce app Meesho raised $50 million earlier this month at a similar valuation.

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However, this mirrors the lofty valuations that were ascribed to multiple startups, even at the early stage of the business, in 2015. This inflated the valuation bubble that later burst and flushed millions of dollars down the drain.

“The recent rounds raised by such companies signals the formation of bubble 2.0 that we had seen in 2015 onward. However, the only difference is that larger cheques of over $50 million are being written now instead of smaller rounds in the previous bubble,” said Sharad Sharma, co-founder at iSPIRT – a think tank for Indian software products industry.

“This might also question the valuation reaching to questionable levels. If this is true then the implosion ahead will be more severe. While the fatalities might be limited but the money lost will be higher than before,” Sharma added.

The situation is akin to 2014-15 when the likes of Flipkart raised $1 billion that resulted in the madness of unbridled capital being deployed in emerging categories such as home services, food delivery etc. However, the question is whether it happens this time as well, with investments going into new opportunities, including vernacular, agritech, blockchain etc.

In a counter view, former Infosys’s chief financial officer, Mohandas Pai believes that investors are trying their luck with such startups to turn unicorn so that they can attract more capital from large funds such as SoftBank Vision Fund.

“I don’t think there is a bubble this time. The valuation seems reasonable because they see these startups as winners in their categories,” said Pai. “For instance, Swiggy raised so much money in last one year because investors saw it to be a winner in the foodtech market which is a winner takes all market.”

What has also caught attention is money flowing into yet-to-be-launched ventures. For instance, fintech startup Cred, launched by Freecharge’s former founder Kunal Shah, that raised $30 million. Similarly, Ashish Kashyap, former head at Ibibo Group, also raised $30 million for his yet-to-launch startup IndWealth.

“Because of their past performance, some entrepreneurs have raised funding. But raising $30 million for a startup which is yet to be launched seems to overstate the Indian market. That concerns me,” said Parag Dhol, managing director, Inventus Capital Partners.

If not a major collapse of capital and business, it would at least slam the break on the fundraising momentum for startups entering mid-stage. The revived confidence in investors due to Flipkart-Walmart deal, which delivered to its investors including Tiger Global, SoftBank etc., might take a hit.

“For a brief period, the pace of fundraising will be slowed down until investors see some other opportunity areas,” said Harish H V, former partner at accountancy firm Grant Thornton India. “While investors may lose some amount of money and companies may not generate significant value, but it will not erase the value completely.”

“The only thing that entrepreneurs must make sure this time is to avoid burning too much money and control losses. They shouldn’t give offer discounts to attract customers since it doesn’t create loyalty,” said Pai.

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