Valuations Dive in Pvt markets as VCs count cash - LiveMint

Mumbai: Startup valuations in the private market are beginning to crack as investors save dry powder and deploy cash selectively, multiple investors and investment bankers said. Offers are increasingly made at valuations sharply lower than previous rounds, and all of them do not conclude successfully either.

“Six months ago, founders were keeping value exploration at a later stage with a convertible round. But now, they prefer a clean down round," said Kashyap Chanchani, managing partner of The Rainmaker Group, a homegrown investment bank focused on new-age companies. In a convertible round, startups borrow against bonds that are converted to equity in the future at a valuation that is decided later, whereas, in down rounds, they issue shares at valuations lower than the last round.

This year, Wakefit, which sells mattresses and other sleep solutions, raised fresh capital at a valuation of less than $300 million, down from $380 million in November 2021.

“The dollar (figure) may not give the right picture as the currencies (USD and INR) have moved in this period. If you look at our INR status, the Series C post money and Series D post-money valuation are very close to each other—so it is at a flattish valuation," a company spokesperson at Wakefit said. The company added that its mature businesses were clocking earnings before interest, tax and amortization (Ebitda) positive, which had helped it raise Series D capital in a tough environment.

According to Chanchani, boards are asking founders to accept whatever capital is available, even at a lower valuation. “Valuations in private markets have corrected in line with how the stocks of broader listed peers have performed. There has been a 40-60% drop," he added, declining to name companies.

Several unicorns in consumer tech, edtech and health tech actively looking for capital are still looking for investors even at a down round, four investors tracking the ecosystem said on condition of anonymity.

“If earlier investors were ready to give three to four times of revenue, now it has come down to two times. Investors are no longer ready to give lofty valuations," said a tech investor advising tech-led businesses, one of the four people cited above. “Businesses have also grown since their last round, but it will still look like a flat or an up round. Be sure this is only happening for market leaders in each segment. For second and third players in each category, accessing capital at this point in time is getting difficult," the investor added.

Some startups have seen secondary share sales, where one investor sells shares to another without the company receiving any capital. Shareholders in companies such as Chargebee, Postman and Icertis are offering their shares at a discount to the previous valuation rounds. Sovereign wealth fund Abu Dhabi Investment Authority picked up primary and secondary shares in Lenskart last month. While the valuation for the primary round was above $4.2 billion, the secondary shares were sold at a discount, Mint reported. The blended valuation is not known.

Increasingly, the secondary portion in each deal is going up. Since secondary deals are generally at a discount to the last round valuation, the blended price (average of the primary valuation and secondary) is still lower than the previous valuation, the second of the four people said. According to him, companies ask for a higher primary valuation to make it look like an up-round optically. “Nobody talks about the blended price, and the companies get away with just showing a higher primary valuation," he added.

Unicorns PharmEasy and Upgrad have opted for an internal rights issue to avoid taking on external capital at a distressed valuation.

Some startups have opted for structured debt—potentially at a future discount—to buy time. For instance, Dunzo raised $50 million in convertible debt from Reliance Retail and Google this month.

“Down rounds or a drop in valuations are not taboo anymore, but instead, a well-accepted conversation," said Sumir Verma, founder and managing director at Merisis Advisors. “Certain segments of consumer tech brands are the most affected while sectors like fintech, few e-commerce segments, and enterprise tech can produce the next set of unicorns," Verma added.

While an early-stage investor, the third of the four people, said India is still not a cheap market valuation-wise, the fourth said none of the big companies has taken down rounds in primary capital so far, and one or two of them need to do so for others to follow. “More (down rounds) should happen this year in the Indian market. So far, people have been holding off or have done some structured rounds so that they don’t optically take down rounds," this investor added.

To manage optics, some investors are using it to negotiate a rupee up round, which converts to a down round or a flat round in dollars, because of the rupee depreciation. This could save an investor 10-15% in internal rate of return (IRR).

“Investors are also agreeing to put capital in tranches as that may save them another 10-15% in IRR in the first year," a fifth investor said, explaining that this could further sweeten the deal for the incoming investor. “Capital is also being handed out in tranches and are milestone linked. These milestones are basis annualized revenue run rate, Ebitda profitability and reduction of burn rate," this investor added.

(Authored by Ranjani Raghavan and Sneha Shah from LiveMint)

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