market correction underway as startup unicorns are losing valuation

India’s booming startup ecosystem, which had been the toast of the town for the last couple of years, is back in the news. While until sometime back, startups were being celebrated amidst great fanfare due to high valuations and big buck investments unlike ever before, the mood is now sombre after Flipkart’s recent devaluation — the fourth time in a row.

Flipkart, which enjoys 45 per cent of the market share in the e-commerce segment, was marked down by Morgan Stanley in its recent valuation by almost 27 per cent. This led to Flipkart’s net worth dropping from US$15.2 billion to US$11 billion.

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With the looming spectre of Amazon cutting swathes through Flipkart’s market, this devaluation couldn’t have come at a worse time. Just when Flipkart needed more funds to counter the competition from Amazon, the devaluation will mean slowing down its growth plans.

What is worse is that Flipkart is not the only unicorn whose fortunes have taken a hit. HSBC Securities and Capital Markets, too, have cut back on the valuation of  Zomato by a whopping 50 per cent. With the unicorns losing their shine, a pal of gloom has descended over Indian startups. What is important, however, is that startups now need to introspect what and where things have gone wrong, and implement corrective measures to get onto the right track.

Here’s why things went wrong in the first place

A couple of years ago, investors were flush with excess money and looked towards new and growing markets like India, which now has the third largest concentration of startups, to widen their portfolio of investments. Since the startup fad was still relatively new then, there was little data to back their investments. So they went ahead with their gut feel. Thereafter, it was purely a matter of luck in terms of which investments paid off and which ones didn’t. The final blow was the constant pressure on these startups to scale up, when they were not even close to being sustainable.

Unfortunately the method to escalate size and reach was all wrong. All of these e-tailers resorted to the deep discounting model to grab market share and kill the smaller competitors in the horizon. Rapid horizontal growth across tier 2 and tier 3 cities took place without putting in place adequate backend logistics and infrastructure. The bottom line was all red, with a majority of the startups clocking losses with a zero profit generation revenue model.

Q3 of 2015 saw a drop of 50 per cent in series B funding by investors and 80 per cent fall in the series C rounds as compared to Q3, 2015, as per a Tracxn survey. So it’s time for startups move away from high cash-burn mode of operations and start focusing on creating some real value for themselves, customers, and other stakeholders.

A new way of doing things

This could mean going frugal and looking at long term sustainability as well as tweaking the current business model, finding new growth metrics and avenues.  It would also mean analysing how operations can be optimised by trimming down spending on areas that are not yielding the desired results or figuring out how to turn things around in those areas.

This is also the time when copycat ventures with little innovation and novelty in their offerings will be weeded out. Moreover, given the current situation, there is likely to be a sort of market correction, with quite a few consolidations happening in the startup space.

Also Read: Patriotism is the last refuge of the failing copycats: Experts flay Flipkart’s demand for protectionist policies

With tightened purse strings, job cuts are on the anvil, too. Startups will be left with little choice than to slash their workforce in the face of such slowdowns and shutdowns. Demonetisation will only compound their woes further in this regard. All in all, this cycle will be a major learning curve for future startup operations in India.

However, all is not lost for the Indian startup industry. Flipkart might lose out to Amazon with deeper pockets at the moment. But, the spirit of Indian entrepreneurship will stay alive. The country is poised for a startup revolution, fuelled by the aspirations of   increasingly globalised Indians.

New expectations, new focus

Once limitations in internet bandwidth, smartphone penetration, regional preferences, and now, the move towards a cashless economy are sorted out, the glorious days of startups will be back. Not to forget: startups that figure out the right moves during these seemingly tough times and build sustainable models will emerge a cut above the rest, and will not fail to get noticed by investors even now.

The Flipkart devaluation only goes to show that investor preferences have changed over time. It is not as if investment has come to a standstill. So, rather than fretting about the situation, all that is required is that startups begin aligning themselves with the evolved set of expectations and the renewed focus on building a business with a clear differentiation and self-sustainable model.


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