Markdowns A Good Wake-Up Call For E-Commerce Companies, Say Investors


December 2, 2016

Nishant Sharma, Bloomberg Quint

New Delhi, 2 December 2016

In its ever biggest markdown of the Indian e-commerce company, a mutual fund managed by Morgan Stanley slashed Flipkart’s valuation by 38 percent on Tuesday. With this, the valuation of the country’s most valuable internet company stood at at $5.54 billion – the lowest since September 2014.

But Flipkart is not alone. Japanese investment giant Softbank earlier this month, announced a 58.1 billion yen ($513 million) investment loss in two of its biggest investments in India – cab-hailing firm Ola (ANI Technologies Pvt. Ltd) and e-commerce marketplace Snapdeal (Jasper Infotech Pvt. Ltd).

This comes at a time when these companies are looking to raise additional funding.

Reality Check

The country’s top startup evangelists and investors are not too worried though. Investors BloombergQuint spoke to said that a markdown in valuation is a much-needed market correction which will bring maturity in the Indian startup ecosystem that saw euphoric valuations over the last two years.

“This is nothing but a natural cycle that is bound to happen”, said Ben Mathias, managing director of Vertex Ventures in a telephonic interview. Vertex Ventures is the venture capital arm of Singapore state investment firm Temasek Holdings. “Last two years, there was a lot of rapture around startups and valuation were driven up because of that. The situation wasn’t limited to India but was also seen in Silicon Valley, China and other markets. What we are seeing today is a rationalisation of valuations and expectations. A needed market correction has taken place.” 

Raising heaps of money from late-stage mutual funds and cross-over funds in a heated fund raising environment leads to bubble valuations which increases the risk of potential markdowns when the market cools off, added Anshuman Verma, founder and managing director of venture capital firm M1L and a former partner at Accel Partners.

The Indian startup ecosystem was booming till 2015, with venture capital investments flowing in. Indian startups raised $5.5 billion (Rs 36,000 crore) from VC firms and angel investors in 1,096 deals, in 2015 alone, according to data compiled by research firm VCCEdge.

Tough Times Ahead?

The markdowns may cause promoters some pain as they will have to dilute a higher stake to raise funds, but industry experts said that if the company performs well and is able to meet its targets, lower valuation will not necessarily dent their ability to raise more funds.

“You can’t raise money on valuations alone. There are key metrics like profitability, margins, return rates. All this is what really matters and is what investors focus on while making investments,” said Sunil Rao, Partner, Lightspeed Venture Partners

Mathias of Vertex Ventures added if a company has reached the target it has set for the year, it shouldn’t worry about raising funds. It can raise money at robust valuations, despite markdowns.

Not everyone shares that view though.

“Trying to raise money for your venture post meaningful markdowns is akin to trying to refill and write with a broken (leaking) pen. It is tiring, messy, and irritating to write with such a pen. Isn’t it? Markdowns are demoralisers for companies, and act as leakers.” said Anshuman Verma, Founder and Managing Director, M1L

Lessons From Markdowns

Verma’s advice to e-commerce entrepreneurs is they should look at markdowns as a wake-up call. “They should consider markdowns as pointers to fundamental problems in the business that must be solved. It should push them to become more realistic, pragmatic and action-oriented,” he said.

According to Devangshu Dutta, chief executive at management consulting firm Third Eyesight, markdowns are a sign that investors were far more bullish and aggressive earlier, a view they no longer hold. “If the survival of the company depends on raising funds at lower valuations, one should do that. Survival should take precedence over valuations,” he said.

Verma said that with subsequent markdowns the startup ecosystem will see non-prudent founders and their investors accept the harsh realities of the art of markdowns.

“We will see further humbling of such founders/investors/companies. Many from the ecosystem still have not come to terms with the reality of loss-making in late-stage ventures in India. Few larger internet ventures are not accepting the state of affairs as they are, and this could be the starting point of all the problems,” he said.

(Published in BloombergQuint)