Are Indian startup founers in denial?

On August 8, after SoftBank reported a record $23 billion quarterly loss, chief executive Masayoshi Son sent out a warning to founders of unicorn startups who are too attached to their companies’ pre-downturn valuations.

Those unwilling to accept a lower price tag to raise funds will face a longer funding winter than those willing to compromise, Son warned in a post-earnings briefing.

“Our Vision Fund saw huge losses but unfortunately unicorn company leaders still believe in their valuation and they would not accept the fact that they may have to see their valuation (go) lower than they think,” he said.

Down rounds are rare in India

On July 19, Reuters reported online pharmacy PharmEasy was in talks with investors to raise $200 million, but at a valuation that could be 15% or even 25% lower than last year’s $5.1 billion.

A ‘down round’ by PharmEasy — when a firm sells shares at a lower valuation than before – will be the first for a high-profile Indian startup in recent times.

But that may be about to change

Several high-flying startups have had to let go of their treasured – but often highly inflated – valuations this year amid the recent carnage in global equity markets and lacklustre demand for new listings.

These include high-profile companies such as payments firm Stripe, Swedish buy-now-pay-later firm Klarna, crypto lender BlockFi, and delivery startup Instacart.

  • Instacart has cut its valuation by 40%, citing market turbulence due to red-hot inflation and fears of a looming recession.
  • BlockFi has seen its valuation drop by 67%, while Stripe’s is down 28%.
  • In July, Klarna raised funds in a down round at a valuation of $6.7 billion – a drop of more than 80% from the $46 billion price tag it commanded last year.
  • In the US alone, 81 US companies have had to take a valuation haircut this year, according to data from PitchBook.

“It will be very difficult for startups to maintain their high-valuations in the current market, and a down round may be better to level-set with founders and investors the reality of the situation,” Miguel Fernandez, cofounder and CEO of Capchase, a New York-based investor, told Reuters.

The funding winter hasn’t spared India

Indian startups raised $6.9 billion across 409 funding rounds in Q2 2022 (April-June), 33% less than the $10.3 billion they raised in the previous quarter. In the same quarter last year (Q2 2021), they raised around $10.1 billion, according to a Tracxn report.

Late-stage deal volume stood at $4.6 billion in Q2 2022 — a 41% drop from the previous quarter. Early-stage deal volume fell 9.5% from the previous quarter, while early-stage deals were down 16%.

The number of startups that raised funds in Q2 2022 also fell 29% to 404 from 574 in the previous quarter.

Yet, a recent survey said startup founders in India are optimistic about raising funds.

In the third edition of the ‘India Sentiment Outlook Survey’ by venture capital firm 100X.VC, 52% of founders surveyed said they planned to raise funds in the next three months.

Almost half (49%) said fundraising has improved significantly post-pandemic, about 23% said it would be extremely difficult to raise funds going forward, and 28% said they expected no change from pre-pandemic times.

The next few months will tell whether this optimism is justified or many Indian founders are in deep denial.


Top Stories By Our Reporters

RBI and fintechs

RBI tightens scrutiny over digital lending apps with new guidelines: The Reserve Bank of India on Wednesday issued detailed guidelines that will increase scrutiny over digital lending apps and lenders who engage with them.

New lending rules will force fintech firms focus on NBFC ops: The RBI’s digital lending guidelines have increased the pressure on new-age lending businesses, forcing them to focus on their non-banking financial company (NBFC) units and book building, as the regulator gives importance to regulated entities.

Fintech firms to seek clarity on some of RBI’s new lending rules: Fintech industry bodies, including Digital Lenders Association of India (DLAI) and Fintech Association for Consumer Empowerment (FACE), are collecting inputs from member firms to seek clarity from the Reserve Bank of India (RBI) on its new digital lending guidelines, sources told us.

Eight account aggregators await RBI licence to go live: Eight fintech entities that have received in-principle approval from the Reserve Bank of India to operate as account aggregators are confident of going live in the next quarter or two.

Indian fintech firms will handle $1 trillion in assets by 2030, says report: Funding in Indian fintech startups touched $7.8 billion in 2021 and the industry is expected to handle $1 trillion worth assets by 2030, according to a new report by venture capital firm Chiratae Ventures and EY India.


Cryptoverse

Crypto

WazirX tries to allay employees’ concerns on ED action, Binance dispute: Crypto exchange WazirX on Monday attempted to allay the concerns of its employees, days after the Enforcement Directorate froze its banks assets, leading to a public spat between WazirX CEO Nischal Shetty and Binance CEO Changpeng Zhao, also known as CZ.

ED probes 10 crypto exchanges in Rs 1,000 crore laundering case: The Enforcement Directorate (ED) is probing at least 10 crypto currency exchanges for allegedly laundering more than Rs 1,000 crore identified as proceeds of crime from firms under investigation in the instant loan apps case, sources told us.

WazirX says it is compliant with KYC rules: Zanmai Labs, the operator of Indian cryptocurrency exchange WazirX, said on Tuesday that it had a no-tolerance policy towards illegal activities. The statement comes just days after the Directorate of Enforcement (ED) alleged that the company was in violation of know your customer (KYC) guidelines.

Binance, WazirX ownership row has crypto users in knots: A public spat between global cryptocurrency platform Binance CEO Changpeng Zhao, known as CZ, and WazirX cofounder Nischal Shetty has dealt a blow to the 15 million or so users of the Indian crypto exchange.

ED freezes another Rs 370 crore: The ED said on Friday it has attached Rs 370 crore in assets of a Bengaluru-based company linked to the instant loan app case. The assets were parked in bank and payment gateway balances and crypto wallets on Flipvolt, the Indian arm of Singaporean crypto exchange Vauld.


Funding news

Fintech

IPO-bound FirstCry may see its valuation hit $4 billion in secondary financing: Japan’s SoftBank is one among a slew of investors seeking to sell shares of FirstCry in the secondary market, valuing the company in the range of $3.5-4 billion as it prepares for a public listing, several sources told us.

AIFs due for closure struggle to sell holdings in startups: Alternative investment funds (AIFs) that are scheduled to wind up in the next few months have been struggling to sell their holdings in unlisted ventures and startups as investors stay clear of risky investments due to tightening liquidity.

Unicorns unwilling to take valuation cut face longer winter, says SoftBank’s Son: SoftBank chief executive Masayoshi Son said the ongoing funding winter will last longer for unicorn founders who are unwilling to accept a lower valuation to raise funds and continue to believe in their previous valuation. Unicorns are startups valued at $1 billion or more.

India SaaS firms face moment of reckoning on US belt tightening: Owing to the current belt tightening in the United States, Indian software-as-a-service (SaaS) vendors are sharpening their focus on products, hiring judiciously and reining in marketing spends even as they explore new market and geographic niches, according to top entrepreneurs and executives.


Paytm in the news

Paytm

Advisory firm IiAS opposes Sharma’s reappointment as Paytm CEO: Institutional Investor Advisory Services India Limited (IiAS), an advisory firm, has advised shareholders of Paytm to vote against the reappointment of Vijay Shekhar Sharma as its CEO, as well as his remuneration.

Shares of Paytm parent One 97 Communications closed 4.66% down on Friday.


Tech policy update

M&A

Legal experts raise concerns on proposed M&A rule: Global mergers and acquisitions in the digital space with an India connection are set to come under the purview of the country’s anti-trust regulator.

NCLAT dismisses NGO’s appeal in WhatsApp antitrust case: The National Company Law Appellate Tribunal (NCLAT) has dismissed an appeal by a non-governmental organisation (NGO) against a decision by India’s antitrust regulator that instant messaging platform WhatsApp had not been abusing its dominant position in the country.


ETtech Done Deals

Fund

■ Digital lending fintech EarlySalary is in the process of closing a $100 million financing round which is being led by private equity fund TPG and Norwest Venture Partners, according to multiple people ET spoke to. The round is expected to be officially announced in the next few days.

■ Customer engagement and user retention software platform Clevertap raised $105 million in a Series D funding round led by global investment group CDPQ. IIFL AMC’s tech fund and existing investors Tiger Global and Sequoia India also participated in the round. ET had reported on August 9 that the company was looking to raise $75 million. Clevertap aims to use the fresh funds for expansion and strengthening its team.

■ Ronnie Screwvala-led UpGrad picked up $210 million in a funding round at a $2.5 billion valuation. Many prominent investors participated in the round, including existing backers Temasek, IFC and IIFL. The funding comes amidst a challenging period for edtech startups, with many like Byju’s and Unacademy cutting their headcount to navigate the gloomy economic environment.


Hiring picks up momentum

Hiring_jobs_THUMB IMAGE_ETTECH3

IT hiring expected to surpass 2021 numbers, experts say: Hiring in the IT industry is likely to pick up momentum despite a slight dip in the past few months and is expected to surpass 2021 numbers, according to executives at staffing and recruitment firms.

Ola Electric making plans to hire about 3,000 for car project: Ola Electric is close to finalising plans for its electric car project and is likely to reveal this on August 15. The electric vehicle maker is looking to hire about 3,000 people for its upcoming car project, executives at multiple recruitment services firms told ET.


IT corner

IT

IT Industry faces perfect storm on talent, says Wipro’s Rishad Premji: The Indian IT sector is facing a “perfect storm” in terms of talent-related challenges, said Wipro Ltd executive chairman Rishad Premji, as nearly 40% of its employees have joined in just the past two years and a similar number are operating from tier II and tier III cities.

Govt to issue SOPs after IT industry flags work-from-home rules in SEZs: The government will soon release standard operating procedures (SOPs) that special economic zones (SEZs) must follow regarding new work from home (WFH) rules.