The Flip­kart mark­down ef­fect

The Pak Banker - - COMPANIES/BOSS -

Mor­gan Stan­ley In­sti­tu­tional Fund Trust, a mu­tual fund and mi­nor­ity stake­holder in Flip­kart, marked down the value of its stake in the Ben­galuru-based e-com­merce com­pany by 27%. That ef­fec­tively brings down Flip­kart's val­u­a­tion to $11 bil­lion from the $15.2 bil­lion it claimed when it last raised cap­i­tal.

The Mor­gan Stan­ley mark­down isn't sur­pris­ing. Two weeks ago, when I was in Ben­galuru, Flip­kart dom­i­nated nearly ev­ery con­ver­sa­tion. Folks in the start-up ecosys­tem-ven­ture cap­i­tal­ists, an­gel in­vestors and en­trepreneurs-had be­gun to place bets on how much its val­u­a­tion could slide this year. The es­ti­mates swung wildly be­tween $10 bil­lion and $5 bil­lion. The bets were only half in jest. They un­der­line the stress that many of those folks them­selves are cur­rently fac­ing on val­u­a­tions.

This year, very few com­pa­nies, if any, will be able to muster a mark-up on their cur­rent val­u­a­tions when they go out to raise their next round of cap­i­tal. In fact, whether in Ben­galuru or Mum­bai or Gur­gaon, en­trepreneurs and in­vestors alike are be­com­ing less and less fussy about val­u­a­tions as long as they can find the money. That it­self is be­com­ing dif­fi­cult in the wake of the on­go­ing slow­down in the startup fund­ing mar­ket.

Take the two big fund­ing deals an­nounced this week. Mum­bai-based Hop­scotch, an e-tailer of kids' and baby prod­ucts, has just raised $13 mil­lion in a Se­ries C round. The com­pany's state­ment on Mon­day said that the round was led by Face­book co­founder Ed­uardo Saverin, who had also led its Se­ries B round in Jan­uary last year. The state­ment doesn't men­tion any other in­vestor par­tic­i­pat­ing in the lat­est round.

Hop­scotch, in­ci­den­tally, was in the mar­ket to raise a much larger round, some­where in the re­gion of $30-35 mil­lion. Sev­eral peo­ple fa­mil­iar with the deal say that the com­pany had been pitch­ing the Se­ries C round to mul­ti­ple ven­ture cap­i­tal firms and a cou­ple of hedge funds for well over six months. It was un­able to meet that tar­get de­spite the pres­ence of mul­ti­ple ex­ist­ing in­vestors such as Rise Cap­i­tal, Jab­bar In­ter­net Group, Lion­Rock Cap­i­tal and Saverin.

The other com­pany that raised money this week is Ben­galuru-based man­aged home rentals mar­ket­place Nestaway. It has, ac­cord­ing to re­ports, raised an undis­closed sum from Tata Sons chair­man emer­i­tus Ratan Tata in what ap­pears to be a bridge round. Nestaway had last raised $12 mil­lion in a se­cond round of fund­ing in July from Flip­kart and Tiger Global Man­age­ment.

The first round came in March last year when IDG Ven­tures In­dia and a bunch of an­gel in­vestors, in­clud­ing InMobi founder Naveen Te­wari, pumped in $1.25 mil­lion. Like Hop­scotch, Nestaway has also been in the mar­ket for funds for a while. Nestaway is one of 50-odd com­pa­nies that Tiger Global, the New York-based hedge fund which in­vests in start-ups from a sep­a­rate ven­ture cap­i­tal fund, has backed in In­dia. The firm, ac­cord­ing to un­con­firmed re­ports, is cur­rently re­view­ing its In­dia start- up port­fo­lio and has slowed down fresh cap­i­tal com­mit­ments, es­pe­cially big-ticket ones.

Get­ting Ratan Tata, who is more of a strate­gic in­vestor rather than a fi­nan­cial one, on board may be de­signed to give Nestaway some lev­er­age in terms of brand­ing, even val­u­a­tion, in a choppy fund-rais­ing en­vi­ron­ment.

Whether Hop­scotch and Nestaway have taken a beat­ing on their val­u­a­tions in their lat­est rounds is not yet known. How­ever, even if they have, they would be among the smarter com­pa­nies out there. As one ven­ture cap­i­tal­ist I chat­ted with in Ben­galuru re­marked, "It's bet­ter to close a down round than no round."

Down rounds, where a com­pany is com­pelled to mark down its val­u­a­tion to raise fresh cap­i­tal, are be­com­ing more and more com­mon around the start-up ecosys­tem.

Smaller com­pa­nies may take some com­fort from the fact that even Flip­kart's next round, re­ported at $1.4 bil­lion, could well be a down round. The Mor­gan Stan­ley mark­down makes that al­most cer­tain.

It is no se­cret now-though many in the ecosys­tem con­tinue to deny there's a slow­down or a val­u­a­tion bub­ble for that mat­ter-that the slow­down in In­dia's ven­ture cap­i­tal mar­ket is real.

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