The problem with unicorns is that they do not exist. They are the stuff which fantasy is made of (and for anyone wanting to read the best fantasy about unicorns ever written I’d recommend The Last Unicorn by Peter Beagle). This immediately highlights the problem with calling start-ups valued at over a $1 billion unicorns; these are real companies, after all. Unless the reference is to the valuations, which can sometimes be unreal.
And just how unreal, India realized last week, when Mint broke the story of an imminent down-round at Snapdeal. A down-round is a round of funding where a start-up raises money at a valuation lower than that at which it raised money in the previous round. Unkind analysts (and un-kinder journalists) refer to it as the “kiss of death”. I’d like to think of it as gravity simply reasserting itself.
Snapdeal, promoted by Jasper Infotech Pvt. Ltd, was founded by Rohit Bansal and Kunal Bahl—two of the original poster boys of the Indian start-up ecosystem. It started its life as a coupons site, a la Groupon, but quickly changed itself (pivoted is the term preferred by people in the start-up world) into a marketplace. At one point in time it was spoken of in the same breath as Flipkart (which we will come to in a bit), but after Amazon.com Inc. launched its Indian marketplace Amazon.in, Snapdeal became, first a close, and then a distant No.3.
Its numbers at the beginning of the last financial year indicated this. Mint reported on 18 January that Snapdeal’s loss widened from Rs1,328 crore in 2014-15 to Rs3,316 crore in 2015-16. In the same period, its revenue only grew 56%—from Rs933 crore to Rs1,457 crore. Just for contrast, the company’s revenue grew 450% in 2014-15 over the previous year.
The numbers may have had something to do with Snapdeal’s strategy.
In 2016, the company decided not to pursue the metric-of-choice for marketplaces, Gross Merchandise Value (the value of goods sold by sellers on its platform, sometimes excluding the discounts that are always on offer), and instead chase net revenue. “GMV is so 2015,” CEO Kunal Bahl said in an interview. And so, from the beginning of 2016, Snapdeal cut discounts and ad spending, focused on operational efficiency, and tried to reduce losses. Some of these efforts (at least three months worth) are probably reflected in Snapdeal’s 2015-16 numbers. Their real measure will be the marketplace’s 2016-17 numbers, which can be expected around December. Still, the fact that it is talking to investor SoftBank Group Corp. to raise funds at a valuation of $3-4 billion is an indication that all hasn’t gone according to plan. In its last funding round, Snapdeal raised money at a valuation of $6.5 billion.
Soon after Mint’s report on Snapdeal—a day later, actually—the threat of a down-round by an Indian unicorn became even more likely.
On 25 January, Mint reported that a fund managed by Fidelity Investments had slashed the value of its holding in Flipkart by a third last November (based on a recent filing by Fidelity), effectively valuing the already-storied marketplace at $5.58 billion, well off the $15 billion at which it was valued in its last round of funding.
This is not the first time a fund has written down the value of its holding in Flipkart (and it probably won’t be the last). Flipkart founder Sachin Bansal said in an earlier interview that such write-downs are “theoretical exercises” based on “uninformed opinion” and that “valuation is what will happen when a real transaction takes place”, but such write-downs do reflect prevailing investor sentiment even while not being entirely accurate. For instance, the Fidelity fund’s valuation of Flipkart is almost the same as that of a Morgan Stanley fund, which in November marked down the valuation of its holdings in the marketplace by 38%, effectively valuing the start-up at $5.54 billion.
But both numbers are likely off the mark. The most recent numbers available on Flipkart’s performance indicate that it managed to increase revenue and reduce the loss at its largest Indian unit, Flipkart India Pvt. Ltd, in 2015-16. So, while a $15 billion valuation does seem a bit steep, a $5.5 billion one looks low. It probably makes sense to look at a range and mutual funds with holdings in Flipkart (such as those run by Fidelity and Morgan Stanley) provide a ready one: six of them value the marketplace in the range $5.54 billion to $10 billion. And we won’t have to wait long to find out what the exact valuation of Flipkart is. Mint reported late last year that Flipkart is in talks with existing and new investors to raise up to a $1 billion by early 2017.
A down-round could mean pain for existing investors and the founders, especially in a country like India where it may well be seen as a failure, but it could also mean a more sustainable and profitable business in the long run.
The first unicorn to agree to a down-round will set a precedent. Even start-ups that are doing well will then have to field questions from aggressive investors looking to push down valuations. That is exactly what the overheated Indian start-up ecosystem needs right now. Greed is good, but gravity is better.