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Indian startups may face depressed valuations in the short term

Written by Moulishree Srivastava Published on   5 mins read

Payment services startup Paytm, cab-hailing major Ola, and hospitality giant Oyo have seen their valuations fall over the last few quarters.

A majority of Indian startups are starting at depressed valuations as the pandemic and the economic slump that followed erode businesses, while investors remain cautious in an uncertain market.

“The valuation markdown in startup space is bound to happen in times like these,” Santosh N, Managing Partner, D and P Advisory LLP and external advisor, Duff & Phelps, told KrASIA. The management consultancy firm, in a report in June, had predicted the valuation of startups would take a hit due to COVID-19 over the next few months.

Most of the startups that were negatively impacted may have seen a 30-40% impact on their valuation, he said.

If a startup is not negatively impacted but has been neutral, it may not see any major uptick in valuations because of the risk aversion (by investors), he said. “More or less, valuations would be flat. And if at all, there could be a small negative impact of 5-10% on their valuations.”

Anas Rahman Junaid, founder and MD, Hurun India, which tracks unicorn companies globally and had cut down Oyo’s valuation to USD 8 billion from 10 billion in a report published in August, said COVID-19 has been “a watershed moment” for the valuation of startups.

“For instance, Oyo as a dominant player was impacted by COVID -19, and there was uncertainty as to when things would normalize which impacted its valuation,” he said.

Junaid, who is also an angel investor said startups whose operations were directly impacted by the pandemic saw their valuation lowered by 3x compared to their valuation pre-COVID-19. “In many cases, investors are renegotiating the term sheets that were put together before COVID-19 as they feel they have an opportunity to get better prices.”

Swinging valuation

Digital payment company Paytm, India’s most valued startup, saw its backer T Rowe Price, mark its shares down by 25% as of June, local media Times of India (TOI) reported earlier this week citing regulatory filings. However, the report citing sources, said Paytm’s shares have been marked up close to their original price during the September quarter.

The shares acquired by T Rowe Price at USD 254 apiece, when it invested around USD 150 million in the Noida-based startup in December 2019, were marked down in June at USD 188 apiece, it said. Paytm was valued at close to USD 16 billion in its last funding round.


Junaid believes Paytm’s devaluation was primarily due to increased competition, change in market dynamics, and pandemic-induced market volatility.

“Most of the payments in India are moving towards UPI and there are quite a few strong players in UPI like Google Pay and PhonePe, which are backed by big holding companies like Google and Walmart (respectively),” he said. “So there has been increased competition and also the increased pressure in terms of cost to gain market share.”

A Paytm spokesperson told TOI that when the markdown happened, the market was “extremely volatile.” It said, now some of its new businesses like payment gateway, UPI money transfer, equity trading, lending, point-of-sale devices, and advertising are performing better than expectations.

Ride-hailing unicorn Ola, valued at about USD 6.5 billion in the first half of 2019, was another startup whose operations were severely impacted due to the pandemic. Owing to the complete halt of operations during the lockdown, investment firm Vanguard slashed its valuation by 50% as of August 31.

Ola’s shares which were valued at USD 311 apiece in February were down to USD 162.5. This is not the first time Vanguard has marked down Ola’s valuation. In 2017, Ola had faced a 41% markdown from Vanguard before restoring it a year later.

“Even after the lockdown was lifted, 80% of the private companies are working from home, while people are preferring to take their own vehicles,” Santosh said. “These companies are not able to have the same level of financial metric they had before COVID-19.”

Investment firms periodically do valuation exercise where they assess certain benchmarks, he explained. When the financial metrics used in the benchmarks are not that great, the valuations tend to be lower than usual.

“Because some of the financial metrics of the startups which investors track may have underperformed, they would have to take the write-down on some of the investments,” he said.

“This is bound to happen, but like many other asset classes, these can bounce back when things normalize,” he believes.

The road ahead

Most investments that have happened in the last few months were in the industries like fintech, edtech, gaming, and remote-working solution providers that either didn’t feel the pinch or were positively impacted by the healthcare crisis. It is to be noted that startups in the industries that have been benefitted from the pandemic have seen an uptick in valuation.

However, there haven’t been many deals in severely impacted segments like travel tech, mobility, and hospitality.

“If a company that has been neutral to COVID-19 wants to raise money, there would be fewer new investors interested in the deal compared to pre-COVID-19,” Santosh said. “In most cases, the company would only be able to raise money from its existing investors.”

“The new investors might actually ask for discounts in valuation or may be hesitant to invest, forcing only existing investors to pump in money,” he added. “Whenever existing investors pump in money, the valuation would generally be either flat or slightly negative.”

However, he feels that neutral companies may bounce back because of pick up in consumer spending on the back of pent up demand.

“By our estimates, there should be a decent uptick going forward, and stronger companies with digital play would become stronger and valuations would increase,” he said. “The only challenge is that most of the investors will hold on to cash to support their portfolio companies, reducing their ability to make new investments in companies in the next six months.”

Essentially, he said, this means valuations may not see the jump seen pre-COVID-19, and that there will be some pressure even in companies and industries that are doing well.

Junaid believes that given the volatility in the market, investors will look for a bit of certainty in terms of more exit options.

“Covid has accelerated the hypothesis that companies might have to think about not only achieving the growth rate but also look at having a clear path towards profitability,” he said. “All the unicorn globally are talking about it right now because having a clear path to profitability has become quite critical to building a sustainable business.”


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