From Uber to Zomato, tech startups struggle to sustain valuations

Many global internet companies are battling this downtrend. Uber, LinkedIn, Twitter, Airbnb, Snapchat, Dropbox, Cloudera and Palantir are some of the internet stars that have been devalued by 15-60% in the past year by some of their mutual fund investors

After Flipkart facing markdowns in valuation to the tune of 20-40% from US mutual funds, another Indian tech unicorn is now under scrutiny.

The brokerage arm of HSBC—which initiated coverage on Info Edge (India) Ltd, the largest shareholder of Zomato—cut its valuation of the restaurant listing site by half to $500 million. Zomato, however, has dismissed the HSBC report.

But Flipkart and Zomato are not the only ones. Many global internet companies, too, are battling this downtrend. Uber, LinkedIn, Twitter, Airbnb, Snapchat, Dropbox, Cloudera and Palantir are some of the internet stars that have been devalued by 15-60% in the past year by some of their mutual fund investors. Publicly traded stocks of NYSE-listed Twitter and LinkedIn have fallen as much as 61% and 39%, respectively, from their peaks.

The mutual funds have not given any reason for the sharp cut in valuation, but analysts say the markdowns were preceded by an inflation in their valuations when these mutual funds pumped in millions of dollars into these startups.

BlackRock Inc., Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management run or advise mutual funds that own shares in at least 40 closely held startups valued at $1 billion or more apiece, according to a report by The Wall Street Journal. The flood of money into startups pushed their valuations higher. The number of VC-backed private companies valued over $1 billion was 146 as of February this year, against 45 two years earlier, the report said.

Flipkart, which was last year ranked among the world’s top 10 startups, is subject to the growing skepticism among investors with four mutual funds—Fidelity Rutland Square, Valic Co 1, Morgan Stanley and T Rowe Price–marking down the value of the shares in the Indian company. These investors now value Flipkart between $9 billion and $11 billion. It is quite a climb down for Flipkart, whose valuation rose 15 times in four years to $15.2 billion by mid-2015.

Also Read: Valuation of Flipkart slashed by two more investors

Flipkart co-founder and executive chairman Sachin Bansal has shrugged off valuation concerns. He said late last month that the markdown was a theoretical exercise and not based on any real transactions.



However, critics of Flipkart’s growth model do not quite agree. “Look at Amazon stocks. It is growing,” said Mahesh Murthy, co-founder Seedfund. “Flipkart is the only one among the Indian ecommerce companies which got devalued,” he said. Amazon’s stock price has gained 55% in the past year.

In a recent article, Haresh Chawla, investor and a partner at India Value Fund Advisors, said Flipkart was in the middle of a crisis of its own making and observed that half of its gross merchandise value was from selling mobile phones, which was unsustainable.

Like Flipkart, Zomato has also downplayed reports of a markdown. “We have not raised any round since the last round of funding to have a valuation reset,” said the company spokesperson. “HSBC has never spoken to us, and doesn’t obviously understand our business well,” the spokesperson said.

Deepinder Goyal, co-founder and CEO of Zomato, wrote in an internal mail to employees that the company’s existing investors were “bullish about us, and are willing to back us further, if needed”.

Early-stage funding

The skepticism among Flipkart’s investors and the brokerage firm that evaluated Zomato’s performance clearly show a change in sentiment. They conform to the overall slowdown in the Indian tech funding scene. The fund crunch is more visible at the early-stage levels.



Valuation of Flipkart slashed by two more investors

There is a growing sense of uneasiness within the Flipkart investors as they realize India’s top e-commerce firm to be overvalued. It is still to be seen by how much margin.

There is a growing sense of uneasiness within the Flipkart investors as they realize India’s top e-commerce firm to be overvalued. It is still to be seen by how much margin.

American mutual funds Fidelity Rutland Square Trust II and Valic Co. have joined US asset management firm T. Rowe Price and Morgan Stanley in reducing the value of their investments in Flipkart.

According to filings with the Securities and Exchange Commission, the mutual fund managed by Fidelity Investments lowered the value of Flipkart shares it owns by almost 40% to $82 apiece as of 29 February 2016 from $135.8 in August last year. Valic marked down the value of its investment in Flipkart by 29% to $98.19 a share from $139 apiece.

In February, global brokerage firm Morgan Stanley had marked down its stake in the Indian e-commerce behemoth Flipkart by 27 percent. The mutual fund, called the Institutional Fund Trust Mid Cap Growth Portfolio, marked its stake in Flipkart at $103.97 per share.

T. Rowe Price slashed the holding value of its investment in Flipkart by 15.1% in its report for the quarter through March 2016.

None of the four firms have given a rationale for the valuation. Lowering valuation of Flipkart hasn’t come as a shocker to industry observers. Market observers have been anticipating correction in valuation of privately held Internet companies.

The markdowns come at a time when Flipkart is reportedly trying to raise more funds amid an intense battle with SoftBank-backed Snapdeal and the local arm of Amazon.com Inc to maintain its supremacy in the Indian e-commerce market.

After that funding galore in the initial years, things in the investment domain have started to slow down from past few years — specially Q4’15. Investors are now looking for a sustainable business model and profitability rather than just initial disruption through technology.

Flipkart also counts Tiger Global Management, Naspers, Accel Partners, Iconiq Capital, GIC, DST Global and Sofina Societe, among others, as investors.

Few financial experts opine that investors in Flipkart, Snapdeal and others would look to exit from these companies in the course of next two to three years.