Valuation cuts of Indian Unicorns are escalating, therefore, became the talk of the town. Do you know Valuation Cuts are no less than a nightmare for startups and especially if it is a Unicorn? Recently, global asset managers have slashed their valuations of high-profile Indian startups like Byju, Swiggy, etc.
By the end of 2022, around 105 Indian startups gained “Unicorn Status.” Unfortunately, in the present scenario, that number has been reduced to just 84. What happened to the rest 16? Four of them were acquired and the valuation of the remaining ones declined below $1 billion. How did this happen? What’s driving the valuation of Indian unicorns? You may ask. Well, there are multiple reasons behind this. We will delve into the details in this write-up.
Unicorn Status: Significance and Benefits
“Unicorn status” is not just a term but a dream of every startup in India. See, startups are laid with numerous missionary visions for a better world. But how will you evaluate whether the company is successful or worthy enough as a business entity? Well, the former (evaluation of success) can be done through its profit/loss statements. But what about its worth? You can determine the economic value of a business unit through “Business Valuation.”
Unicorn refers to the achievement of a privately-held startup company reaching a valuation of $1 billion or more. It is a significant milestone that signifies extraordinary growth and potential. Attaining unicorn status indicates that the company has attracted substantial investment and gained widespread recognition. It showcases the ability to disrupt industries, develop innovative solutions, and capture a significant market share.
Unicorn status also attracts top talent, boosts credibility, and enhances opportunities for partnerships and acquisitions. It represents a remarkable accomplishment in the competitive startup ecosystem. It is often accompanied by increased media attention and heightened expectations for future success. Recently, you must have got the news of “Nvidia” joining the elite club due to a trillion dollar valuation.
Unicorn Status: A Temporary Tag
Thus, when the business valuation of a firm reaches $1 billion, you call that company a “Unicorn.” It will give you ample benefits mentioned above. Quite interesting! Let me give you a plot twist. “Unicorn status” is not permanent! Really? Yes. It means that the valuation of a company can increase or decrease based on certain conditions. How?
Let us explain it in simple words. Valuation of a company refers to the process of determining the total economic value of its business & assets. So if its business heads south or the value of assets declines, the overall valuation of that company decreases too. That’s what has happened with Indian unicorns too!
Current Scenario of Indian Unicorns
Our unicorns are suffering through markdowns in the valuation. Although such startups claim that the valuation cuts have a minimal direct impact on them. But nobody can deny the fact that markdown in valuation is going to be a major hindrance for IPOs (Initial Public Offerings). Before diving into the details like causes/reasons, let’s have a quick overview of the current scenario of startups that went through valuation cuts.
|Startup (Company)||Major Investors||Former Valuation||Latest Valuation||Valuation Cut (%)|
|Byju’s||Blackrock, Prosus, and Softbank||$22 billion||$8.2 billion||73%|
|Swiggy||Invesco, Baron Capital and Blackrock||$10.4 billion||$5.5 billion||49%|
|Ola||Vanguard||$7.4 billion||$4.8 billion||35%|
|Pine Labs||Neuberger Berman||$5 billion||$3.1 billion||39%|
|PharmEasy||Janus Henderson||$5.6 billion||$2.8 billion||50%|
|Meesho||Fidelity||$4.9 billion||$4.4 billion||9.7%|
|Eruditus (ed-tech firm)||The Private Shares Fund||$3.2 billion||$2.9 billion||9%|
|OYO||SoftBank||$10 billion||$2.7 billion||73%|
Although they are still unicorns because their valuation is still over $1 billion. But the decline in valuation presents a negative impression of the company.
According to experts, if the valuation cuts of Indian unicorns surpass 25% then it becomes an alarming and challenging situation. That’s why valuation cuts of the above companies are a concerning situation despite holding the unicorn status!
Reasons that drive Valuation cuts
Here comes the highly awaited part of this write-up. See, the valuation cuts of Indian unicorns or a company can occur due to various factors. It’s important to note that specific circumstances may vary from one company to the other. Some of the prime reasons that drive the valuation cuts are-
1. Poor Financial Performance
If you look at the financials of the above companies, you will notice that they are drowned in deep losses. Not only did they experience a sharp decline in revenues but also humongous losses. The lack of profitability shakes up the trust of their investors. As a result, the investors re-evaluate the worth of the loss-making companies in their portfolio which leads to a valuation cut. Weak financial indicators erode the investor’s confidence and result in a lower valuation.
2. Harsh Market Conditions
As you know, currently the world is going through a recession. Although it seems that India won’t have severe impact of recession. Also, it is doing better than other European and American countries. But you must note the fact that most of the lead investors of Indian startups are American Venture Capitalists. So our startups indirectly face the wrath of recession. Apart from recession, economic downturns, changes in industry trends, and shifts in market demand impact the valuation of a company. Other reasons for this include inflation and layoffs.
For instance, take the example of Byju’s. Being an ed-tech company, its valuations, as well as profits, skyrocketed during the pandemic. But as soon as the schools opened after the lockdown, the valuations and profits of Byju’s started declining. Can you identify which market condition led to the tragic story of the ed-tech startup? It is the shift in market demand. People still prioritize offline school education over online tuition.
Thus, if the overall market conditions deteriorate or the industry faces challenges, it affects how investors perceive a company’s value. This leads to the valuation cut of the company.
3. Issues in the Management System
The management team is responsible for running the company seamlessly and showcasing the bright side of the company. Certain management issues like ineffective leadership, governance problems, or corporate scandals spoil the company’s impression in the public’s eyes. As a result, the investors lose confidence in the management team’s ability to steer the company in the right direction. Thus, it leads to a reduction in valuation.
This is one of the major reasons that disappoint the investors. Sometimes, a company’s valuation was inflated in the past due to over-optimistic projections or market exuberance. Remember the time in 2020 when we were full of hope for the new normal era after the pandemic? We highly expected certain things like online education, food delivery, medicine delivery, etc. will play a crucial role in the upcoming era. Although the startups of these segments are doing well but are full of competition due to which they are falling short in the market. Some of the significant examples are Swiggy, PharmEasy, Byju’s, Eruditus, PineLabs, etc. As market conditions normalized, their actual performance fell short of expectations. Thus, overvaluation leads to a valuation cuts of Indian unicorns or startups.
5. Some other causes for markdown in Valuation
a) Competitive pressures
Intense competition within an industry also affects a company’s valuation. If competitors gain market share, introduce disruptive technologies, or offer superior products or services, it can weaken a company’s position in the market. Also, it faints the trust of investors and potentially lowers the valuation.
b) Legal or regulatory issues
Legal problems such as lawsuits, regulatory violations, or compliance issues can hurt a company’s valuation. Legal uncertainties and potential liabilities can reduce investor confidence and lead to a valuation cut.
c) Funding or liquidity concerns
If a company faces challenges in securing funding or experiences liquidity issues, it may lead to a lower valuation. Investors may be hesitant to invest or provide capital if they perceive a higher risk or uncertainty surrounding a company’s financial stability.
d) Changes in investor sentiment
Investor sentiment can fluctuate based on market conditions, news, or broader economic factors. If there is a general shift in investor sentiment, it can influence a company’s valuation, even if there are no significant issues specific to the company itself.
Indian startups are already facing hurdles to launch an IPO. The valuation cuts deteriorate the situation for our unicorns. Valuations of unicorns are mainly based on future growth potential and high expectations. If a company irrespective of unicorn status fails to meet those expectations or face challenges in scaling the operations. Then, the investors will definitely re-evaluate their valuations for that company. The markdown in valuation for Indian unicorns is influenced by a combination of factors that are mentioned above. Also, every company faces different circumstances that play a crucial role to determine the increase or decrease of valuation.