SoftBank’s poor earnings may hit Indian unicorns: Valuation of startups may be impacted

In the June quarter, SoftBank’s net asset value (NAV) was down to $135 billion, a loss of $16 billion from $151 billion compared with the March quarter.

SoftBank’s poor earnings may hit Indian unicorns: Valuation of startups may be impacted
Out of the 284 companies that saw valuation markdown in the SoftBank Vision Fund portfolios in the June quarter, many were unlisted companies.

Japanese tech investor SoftBank’s mediocre June quarter results, which saw the conglomerate mark down fair valuations of more than 280 of its portfolio companies, may set a more profound precedent for Indian fund managers and venture capitalists (VCs). Start-up investors and investment bankers that FE spoke with said that Indian unicorn founders and their lead investors will have to consider taking a hit in valuations in future deals since many public market peers have already witnessed massive valuation corrections.

Fund managers and analysts also believe that both late-stage startups and unicorns may have to bear the brunt of valuation correction throughout the funding winter either through down rounds or at flat rounds in the forthcoming months. Brijesh Damodaran, co-founder and chief investment officer at Auxano Capital, said valuation corrections are already happening. “Remember, valuation correction need not just be a down round, it can also be a flat round — meaning certain companies are raising capital at the same valuation as they did the last time. No up round, even that indicates a correction of some sort,” he said.

Presenting the results in an investor presentation on Monday, SoftBank chief executive Masayoshi Son had a dark sombre tone and admitted that mistakes were made while investing in startups at the height of the funding frenzy prior to the pandemic. He reiterated that though the ongoing Ukraine war and Covid-19 may have impacted tech companies profusely, “these are all just excuses”. “We can point to a lot of reasons (behind the slowdown), but these are all just excuses. We have to self-reflect on the fact that if we would have been more prudent and had invested more properly, it wouldn’t come to this,” Son added.

Out of the 284 companies that saw valuation markdown in the SoftBank Vision Fund portfolios in the June quarter, many were unlisted companies. Only 35 companies across both the Vision Funds saw a higher gain in their fair valuations at the end of the June quarter. Son indicated that even though listed tech firms have seen valuation correction across the globe in several public markets, unlisted unicorn company leaders still believe that their valuations stand solid, and disagree to take a flat or down round.

“…unfortunately unicorn company leaders still believe in their valuation and they would not accept the fact that they may have to see their valuation decline lower than they think. So, until the bunch of unlisted companies don’t correct their valuations (in sync with public companies), we will see a longer funding winter,” Son said in a post-earnings presentation on Monday.

Fazal Ahad, CFA, managing director at investment bank Merisis Advisors, said that in the listed space, the valuation corrections happened on a daily basis depending on several factors. But in the private markets, valuations don’t get downgraded unless there is an internal audit or a valuation expert looking into the numbers while raising a new round. This fundamentally affects how founders in the unlisted space make decisions during a crucial funding winter.

“In unlisted space, most unicorn startups with a cash runway of more than 18 months or so may not be keen to immediately hit the market since they know that they may have to take a hit in valuation. Instead, these unicorns are resorting to cost cutting and layoffs hoping to extend the runway to more than 18 months, and betting on the market situation to improve by then,” Ahad added.

However, experts also indicate that not every tech segment will witness a correction in valuation. A revision in valuation among unlisted firms would be more pronounced in sectors where the burn rate is very high since these startups are cash guzzlers and depend mainly on external capital for growth rather than their own cash flows.

“Early stage companies with revenue are fairly have more chances for investment , when compared with a Series B + company. Firms that need cash flow and in need of money will even go for a down round, it depends on the state of the entity. Sectors like drones are gaining a lot more traction while sectors like edtech are the most affected,” Damodaran said.

In the June quarter, SoftBank’s net asset value (NAV) was down to $135 billion, a loss of $16 billion from $151 billion compared with the March quarter. The cumulative loss on investments at SoftBank Vision Fund 2 (SVF2) — one of its investment arms — slipped into the negative territory in the June quarter. On the other hand, SoftBank Vision Fund 1 (SVF1), which manages a good chunk of publicly traded portfolio companies, also reduced by 46% in investment value when compared with the previous quarter.

Nevertheless, Indian early-stage investors are optimistic about the sector since they feel that the funding winter won’t prolong as much as most analysts expect it to. “Fintech has already taken a dip in valuations. However, valuation correction in the Indian public markets also has stopped and we are seeing a robust pull back from the lower levels. The recent correction gave a lot of opportunities for long-term investors to enter at lower levels. India, as a fast-growing economy will reflect in the investors’ appetite to invest aggressively again. Indian unlisted companies will still raise soon enough as there is enough dry powder available with VCs and private equity investors,” Yagnesh Sanghrajka, co-founder and CFO at 100X.VC, said.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Photos