Valuation markdowns of unicorn startups continue through 2023 with investors slashing the value of their holdings in Byju’s, Meesho and Eruditus. Venture capitalists (VCs) and fund managers told FE that although markdowns don’t directly impact the companies, they may still have unfavourable implications for future funding rounds and initial public offerings (IPOs).On Tuesday, US-based investor Fidelity Investments cut the fair value of its holding in e-commerce firm Meesho by around 10% to around $4.4 billion. It had originally led a Series F round in the startup at a valuation of $4.9 billion.
The markdown reflects the current market sentiment and underscores the funding challenges faced by Indian unicorns.Another US-based investor, The Private Shares Fund, has slashed the fair value of its holding in edtech unicorn Eruditus by 9% in the March quarter. This markdown indicates a decrease in the company’s valuation from $3.2 billion to $2.9 billion.
Ankur Bansal, co-founder & director of venture debt firm BlackSoil, said that international funds typically conduct valuation exercises of their portfolio companies either on a yearly or quarterly basis depending on the accounting principles they follow. He, however, pointed out that any valuation markdown beyond 25% could be a challenging situation for existing investors of a firm.
“For large fund houses, valuation process typically requires them to compare the existing share price of unlisted firms with their publicly listed peers. And globally and in India, public markets have gone through multiple rounds of corrections. Hence, these funds will be compelled to either correct or write off investments depending on the company’s performance and growth in the previous years as well,” added Bansal.
Siddarth Pai, founding partner at 3one4 Capital, said that valuation is a mix of fundamentals, potential, and market sentiment. The current market sentiment, driven by high-interest rates, has increased the cost of capital and forced startups to focus on profitability rather than growth. As a result, there is a reduced need for external capital, leading to markdowns to validate valuations.In the absence of profits and external validations of valuations through funding rounds, accounting standards and investor risk frameworks demand markdowns, Pai pointed out.
“However, it is important to differentiate between markdowns due to accounting standards and those resulting from capital raises. The former is subjective & the latter is absolute,” Pai added.Investors have now become more cautious about overenthusiastic valuations and are now prioritising a path to profitability. Startups with strong fundamental and unit economics that can demonstrate sustainable growth with profitability are more likely to command a premium valuation, experts say.
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 CY18-22, 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. Around 10 startups were publicly listed in the last five years and were excluded from Venture Intelligence’s unicorn tracker list.
Estimates by startup news portal Inc42 show that the median valuation-to-revenue multiples for the top 10 Indian unicorns stood at 23X in FY22. However, given the recent markdowns and the prevailing sentiment, these multiples are expected to revert to the overall mean. Yet, investors are seeking bargains, and Indian startups are becoming more attractive to global investors looking to participate in India’s growth story.
FE reported last month that domestic VC and private equity firms in India have been successful in attracting multi-million-dollar investments in the past two calendar years (CY22 and CY21), despite the funding slowdown and global bear markets. In the past, domestic VCs and private equity (PE) firms in India were typically dependent on institutional and strategies Limited Partners (LPs) bases such as life insurance firms, global endowment funds, and global sovereign funds. However, this has changed in the last 2-3 years, with Indian founders, cash-rich angel investors and Indian family offices pitching in as LPs into domestic VCs and PEs.
