Soaring Start-up Valuations, Rising Questions

On June 25, listed diagnostics chain Thyrocare announced the sale of 66.14 per cent stake to API Holdings, the parent company of online pharmacy PharmEasy, for Rs 4,546 crore, in the first-ever acquisition of a publicly listed company by an Indian unicorn. PharmEasy is the first unicorn in the epharmacy space earlier this year. The deal also triggered an open offer for the purchase of an additional 26 per cent stake at Rs 1,300 a piece, a discount of 10 per cent to Thyrocare’s closing share price on the same day. The total deal value, including the open offer, is pegged at over a billion dollars. Thyrocare’s shares, however, fell 10 per cent intra-day on June 28 due to the discounted open offer.

Market watchers say the deal is the beginning of hectic activities in the start-up world, with many more companies likely to announce IPOs later this year.

In fact, the déjà vu moment for Indian start-ups began a few months ago. In the second week of April, six companies, including PharmEasy, Meesho, CRED and ShareChat, announced new rounds of funding of over $1.5 billion, and turned unicorns, that too within a week. India has already seen 15 unicorns in the first six months of 2021 itself. With liquidity increasing, private equity funds raised $188 billion in Q1 2021 (January-March), against $163 billion in Q1 2020, according to a report by Prequin, which provides data on alternative assets.

Though some like Zomato, InMobi and Paytm have already announced their roadmaps for IPOs, the WeWork listing debacle in the US two years ago raises a red flag. Within one month of announcing its IPO in August 2019, the co-working company reduced its valuation from $47 billion to nearly $10 billion and deferred the listing indefinitely.

While one may argue that the eyebrow-raising valuations are valid given the future potential that some of these start-ups hold, their profitability is another story. Still, a number of investors are looking to double down on investments that have already seen market validation, with Tiger Global leading the pack. The American hedge fund has invested in at least eight of the 15 companies that turned unicorns during January-June 2021. While industry experts say the funding party is likely to go on for a while, the real test will be when the money slows down or how the market laps up the IPOs.

Soaring Valuations

In its Q1 start-up pulse survey in May last year, Nasscom President Debjani Ghosh observed that 90 per cent of start-ups were seeing a decline in revenues, 30-40 per cent had temporarily halted operations or were in the process of closing down, and 70 per cent had a cash runway of less than three months. But by the end of 2020, 12 new unicorns were added to the list. The number has increased to 15 in just the last six months.

The first to enter the club in 2021 by doubling its valuation to $1.9 billion was Digit Insurance, a tech-based general insurer company. In January it raised $18 million from investors, including 91 Partners, Fairfax Financial Holdings, Faering Capital and TVS Capital Funds, to be valued at $1.9 billion, from its last funding valuation of over $800 million. In the first week of July, the company raised another $200 million from Faering along with Sequoia India capital and IILF Alternate Assest, at a current valuation of around $3.5 billion. In February, software-as-a-service (SaaS) healthcare company Innovaccer, backed by Tiger Global, raised over $100 million, sending its valuation up three times to $1.3 billion in less than a year from around $350 million in the last round. In April, Meesho, the social commerce platform, raised $300 million in a new funding round led by SoftBank at a valuation of $2.1 billion, a threefold jump from its previous funding round of $125 million in 2019 when it was valued at $700 million.

In April only, homegrown social network ShareChat raised $502 million in a funding round led by Tiger Global, Snapchat parent Snap Inc and existing investors Twitter and Lightspeed Venture at a valuation of $2.1 billion, up from nearly $700 million last year. “Thinking, moving fast and feed ranking are our strengths,” says CEO and Co-founder Ankush Sachdeva. Riding on the social media wave, ShareChat aims to acquire a billion users.

In the fintech space, payments company CRED saw its valuation zoom to $2.2 billion in April. It had raised $215 million in a series D funding round. The company was valued at around $800 million just three months ago. However, shortly after reaching the $1-billion tag, CEO Kunal Shah tweeted, “Unicorn tag, high valuation are all vanity metrics till the company delivers profits”.

The second fintech firm to enter the unicorn club in April was five-year-old Groww with $83 million in fund-raising led by Tiger Global.

The Real Picture

Some analysts think these companies don’t really make money and question their true value as a company. However, there are others, who think some of these start-ups have achieved significant scale, and are showing sustainable revenue growth, besides building specific solutions for large enterprises and cutting down their losses. “In that sense, the valuations of these companies reflect their impact on large businesses. It also reflects on the strength of the tech talent available in India and the maturity we have reached in terms of building globally scalable product tech platforms” says Sajan Pillai, Managing Partner, Season Two Ventures, California.

“We knew that social media is a huge part of our lifestyle and Internet penetration will increase exponentially in coming times, which will benefit ShareChat in unlocking huge valuation going forward” says Ashvin Chadha, Co-founder and Partner, Anicut Angel Fund, which has taken a bet on ShareChat.

Season Two Ventures’ Pillai argues that what may seem trivial in terms of value today can accelerate in terms of both top line and bottom line tomorrow due to an intersection of multiple trends. “Some of these may be just trends today, but can become big business ideas in the future.”

The ability to keep pace with changing times and use technology to provide users with better and innovative offerings are the primary criterion that funds look for while investing in a company, says Anicut Angel’s Chadha.

Also, the global private equity market has seen a strong recovery this year, compared with 2020. According to Preqin, fund managers are sitting on a record $1.6 trillion, pressurising dealmakers to identify investment opportunities quickly as recovery picks up. After a comparatively slower 2020, fund-raising activity is back on track in Q1 of 2021. A total of $188 billion was raised by 452 funds during January-March, a 16 per cent and 5 per cent increase, respectively, against a year ago. Size wise, India is one the most promising markets after the US and China. Hedge funds, sovereign funds and even family offices are looking at avenues to deploy funds in the country. The volatile nature of the stock market also makes the private market a key area for deploying funds. The slowdown of last year had impacted funds’ internal rate of return (IRR). “So, it becomes a very key criteria to figure out a way to deploy the money very quickly within the remaining time period” says Atit Danak, Principal and Head of CoNXT practice at Zinnov, a global management consultancy. Metrics such as IRR become important when they go for the next round of fund-raising.

But How Real Is It?

What has changed in the last couple of years is that Tier-1 venture capital firms are now entering funding rounds at an early stage by cutting smaller cheques. “While VCs are going earlier, there are also many micro VCs (with less than Rs 100-crore AUM) coming into the market. There is also interest from HNIs,” says Nimesh Kampani, President, LetsVenture Plus. The early-stage platform did 40 transactions during January-March 2021, against 105 in 2020.

So, though the funding frenzy is a bet on start-ups’ expected growth in the coming years, profitability is not a milestone that India’s 50 unicorns are likely to reach an time soon. For instance, according to reports, while Meesho’s financials for FY20 show revenues growing nearly four times to over Rs 300 crore, losses also increased over three times to nearly Rs 315 crore. CRED, in FY20, posted a net loss of over Rs 350 crore, while revenues were a tad over Rs 52 lakh! Groww, which recently acquired Indiabulls’ mutual finance business for Rs 175 crore, posted a net loss of nearly Rs 8 crore in FY20, against Rs 23 lakh in FY19 due to increased expenses. Revenues stood at around Rs 1 crore.

“Profit is not an important metric as long as companies are growing at a fast pace, although good investors are well aware of the unit economics,” says Madhukar Sinha, Founding Partner, India Quotient, an investment firm.

But, in reality, investors will not pump in money endlessly, given that the ultimate objective of any company is to become profitable. So, while as many as 12 unicorns are expected to go for public issues, the true test will be how the market values them, and whether listings really help companies grow or only provide an exit to investors.

@rukminirao