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Flipkart, Zomato Markdowns Reflect Wider Valuation Problem In Startup Sector

The question that is playing on every investor's mind today is whether valuations have been based on speculation or solid business fundamentals

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First it was Flipkart that saw a markdown of valuation. Then it was restaurant listing portal Zomato. Well, here's how the story unfolds.

It was just last year in June that Flipkart made headlines when it raised $700 million from Tiger Global Management, Qatar Investment Authority and other investors at a valuation of $15 billion. It is not even a year yet and the ecommerce giant has already witnessed a markdown in valuation not once but twice over. First it was by Morgan Stanley in March and now it is two small mutual fund investors at Flipkart that have marked down the company's valuation. And if the sources at the VC fraternity are to be believed, it is safe to peg Flipkart's current valuation anywhere between $8.8 billion and $10.5 billion.

Zomato, too, has seen a similar slashing of valuation by about 50% by HSBC Securities and Capital Markets (India) to 500 million. So, what does this mean for the companies?

Well, while the dip in valuation may have brought in the focus on the e-commerce giants directly, it also reflects on the overall fledgling startup industry. After the markdown in valuation, the question that is playing on every investor's mind today is similar - have the valuations so far been based on speculation rather than taking the actual fundamentals into account.

We at BW Businessworld were the first to capture the trend of valuations coming down in 2015 when there were spate of investments in startups.

Now, believe it or not, this may not be as big a cause of concern for Flipkart and Zomato alone as it is for the industry. These are still the largest e-commerce ventures in India. While Flipkart enjoys a solid brand, a strong leadership team and is backed by deep-pocketed investors, Zomato is considered a prominent restaurant listing portal.

So, given these parameters of strength, it's obvious that it is easier for these companies to bounce back and grow on valuation, even if it takes a year or two. The larger question here is for the overall ecommerce industry where there is already a 'problem of plenty' with too ventures raising funds from risk capital investors. When a company like Flipkart could see its valuation crumbling, how safe are the other bourgeoning ventures?

A lot of innovative ideas have come up in the last 2 years and not all of them have the bandwidth to expand and go to the next level even if there is capital available. Today, even as most of the ecommerce companies have raised money, the issues that they are facing are somewhat similar: how to get enough margins, how to be price competitive and how to keep customer acquisition costs low.

While some of the industry leaders have the bandwidth to ride through this, it is obvious that most of the players will witness phase out or witness consolidation going forward. Besides, over the next one-two years, it is imperative that the industry will see a massive correction in valuation with clear winners emerging. The nature of the startup business is such that even if one of ten becomes a blockbuster, the purpose is served.

The early signs of shakeout or consolidation in the industry are already visible a cross diverse sectors. As per data available with research firm Venture Intelligence, as many as 139 acquisitions took place in the startup space in 2015, more than double the number of startup acquisitions that were sealed in 2014. In 2013, as many as 42 startups were acquired by the biggies in the sector and the number is only expected to grow! Needles to mention, this place sure seems to be hotting up with action. Stay tuned for the latest!


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