Wings of unicorns curtailed by valuation cuts

To begin with, markdowns

Markdowns in the valuation of unicorn startups are nothing new. It just appears to have gathered momentum in 2023. Several Indian unicorns like Byju’s, Swiggy and others are seeing valuation cuts as big investors like Blackrock and Softbank are rationalizing the value of their holdings. To begin with, markdowns do not have any direct impact on companies. For instance, despite repeated markdowns by big investors, Byju’s still managed to raise funds at an indicative valuation of $22 billion last year. However, such markdowns could prove to be a hindrance for future funding rounds and IPOs. The markdowns are reflective of the present market sentiment along with funding challenges which several Indian unicorns are facing. 

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What sort of markdown did unicorns experience?

US-based Fidelity Investments cut the fair value of its holding in Meesho, an Indian e-commerce firm by around 10% to $4.4 billion. Incidentally, Fidelity had originally led the Series F round funding at a valuation of $4.9 billion. In another markdown instance, American investment firm, The Private Shares Fund, slashed the fair value of their holdings in the ed-tech firm Eruditus by 9% for the March quarter. This reduced the valuation of the start-up from $3.2 billion to $2.9 billion. While these markdowns are alarming, a challenging situation would only arise for investors if the markdown surpassed 25%

How exactly do funds carry out such value markdowns?

Market valuation is typically carried out by comparing the existing share price of unlisted firms with other competitors which are listed publicly. In India, public markets have undergone multiple corrections and hence funds have been compelled to either correct or write off investments, depending on both company’s performance and growth in previous years. 

Presently, market sentiments are being driven by high interest rates, which has led to an increase in the cost of capital and coerced startups to become profit-making rather than focusing purely on top line growth. There is a reduced need for external capital, leading to markdowns to validate valuations, and in the absence of profits and external validations through funding rounds, accounting standards and investor risk frameworks demand markdowns.

Are markdowns really a clarion call for unicorns?

Around 105 companies acquired unicorn status between CY18 and CY22. However, this has now reduced to 84 active unicorns seven of them losing market valuations by markdowns while another four were acquired. In addition, around 10 of the startups became publicly listed, hence getting excluded from the list of unicorns. While the median valuation-to-revenue multiples stand at 23x for the top 10 Indian unicorns, recent markdowns and prevailing sentiments are expected to pull these multiples down to more rational levels. However, investors are still seeking bargains, with Indian startups becoming more attractive than ever before to global investors. Of course, needless to say, most of the global investors still yearn to participate in the growth story of India Inc; especially with its promise of a $5 trillion economy and a robust start-up ecosystem. 

Funders are still raising capital big time

Domestic venture capital firms and private equity firms have been successful in attracting a plethora of multi-million-dollar investments over CY22 and CY21 Obviously, all that money has to be used up and cannot be idle for too long. Things have been quiet amidst a funding slowdown and bearish global markets, but that is unlikely to last for too long. Historically, VCs and PE firms were dependent on institutional and strategic limited partner bases such as life insurance and global sovereign funds, but the paradigm has shifted over the last 2-3 years. It is now a mix of Indian founders, family offices and angel investors pitching in as limited partners into domestic VCs and PEs. That is changing the rules of the game; and perhaps getting more skin in the game! But unicorn down-valuation is surely time to reflect on the greater fool theory that was doing the rounds in unicorn valuations. That may be history!

Content Source: Financial Express