Valuation of Flipkart

Success story of Sachin Bansal: The entrepreneur who almost shut down Flipkart

We’ve all known Flipkart to be a successful e-commerce giant. However, the founder of Flipkart, Sachin Bansal didn’t have it easy at all points.

We’ve all known Flipkart to be a successful e-commerce giant. However, the founder of Flipkart, Sachin Bansal didn’t have it easy at all points. His journey of building Flipkart into a successful venture was also etched with enough trials and tribulations which almost made him rethink his business plan. He almost lost faith in his idea and was close to shutting it down.

The Reason

The e-commerce site, Flipkart, faced a sharp dip when the company’s assets were evaluated. In TIE-Delhi-NCR, the confident yet unfazed 34-year old was quite disturbed by the valuation of his start-up by organ and Stanley and claimed that that Flipkart existed in theory and didn’t really have much transaction backing it up. In February ’16, Flipkart estimated its total value to be $15.2 billion. However, Morgan marked down at the stake of the company to a $109.37/share which was an all time low at the fund-raiser.

Bansal was unaffected by the move and still believed in execution despite all odds. He also claimed, “There is no doubt in my mind that in three years, we will cross all projections.”

Currently Flipkart was valued at $15 billion after it raised over $700 million from prestigious investors like Tiger Global Management.

How 2012 Looked For Flipkart

2012 wasn’t a very good year for Flipkart as the e-commerce site had to avail a ‘down round’ of funding.
The founder, Sachin Bansal stated: “The delay in raising money on hopes of better valuations was a wrong business call. It was the toughest time for us. We were hoping that if we delay raising funds that was available, we’d be able to get a better valuation. However, Flipkart had to raise funds at valuations of $750 million compared to $1 billion in the round before it.”

The company didn’t show any records of growth till the end of the year. However, with the reputation of the company at stake, Sachin Bansal took it upon himself to go back to the board and regroup. He had ideas about reducing cost and wanted to figure out more ways to make the company more appealing to consumers.

The Next Step

For any other company, the obvious decision would have been to take a giant step and go public. But, even under continuous speculation. Bansal decided that they’d not go public. H claimed that going public would mean tapping into more public domains which wasn’t really a requirement at that moment. Instead, he believed in the growing market and discarded the idea of raising funds altogether. He also made this decision as he believed that the depth and expansion in the private market currently should be taken advantage of instead of going public completely.
He also claimed that someday they’d need to go public but that wasn’t the correct time for venturing into the public market.

Lessons start-ups could learn from Bansal and his e-commerce venture Flipkart:

1. Tap funds when they’re readily available

The statement “Funds are absolutely essential for a start-up” isn’t foreign to any entrepreneur. Bansal also advises the budding entrepreneurs to raise funds for their business when they’re readily available rather than when they are necessary because that situation isn’t a very desirable one.

This advice was based on a decision taken in 2012 when the company was going through a ‘down round’ of funding phase. He claims that this point is a make or break point for a start-up.

2. Focus when things are going good

Bansal follows the mantra ‘Customer is the king’.

He also advices the budding entrepreneurs to focus on things when the business is good and not when things are going awry. From his standpoint, quality of business and capital issues faced by the business are the two things every entrepreneur should focus on. He also advices that improvement is a gradual process which should take place even when things are going good.

Bansal: “As entrepreneurs we don’t get emotionally attached to solutions; we get emotionally attached to the problem.”

3. The major focus areas

He believes that focus points for a start-up company should be the market conditions and building team strength. Business plan undergo numerous changes so a constant focus on the market opportunities and tapping them in time is crucial.

4. Boundaries are necessary

It may occur to a creative entrepreneur that boundaries are not necessary. But, having certain constraints and don’ts can actually save a start-up from making mistakes.

5. Take criticism with a pinch of salt

Flipkart has faced numerous issues on Big Billion day2014, because it servers shut down and refused to operate properly. However the company came out of that situation and took certain steps to improve in the future.
Also, feedback and criticism garnered from passionate people in the same field is always a good thing as it gives you a chance become better in the future.

6. Always look out for the greater picture

It sounds repetitive but it is tough to adopt in a business model and at certain points, you’re bound to encounter failure. However, at those points, focus on the positives and the big picture (the sole reason why you started the company) and strive to become better.

7. Keep tabs of your competitors

Keeping tabs of your competitors is necessary as it could teach you about a lot of things you might be doing wrong in your venture. Bansal shops on every other e-commerce site and sends mails to his team regarding areas they could actually improve upon. This is entrepreneurship at its best!

8. Your personal and professional life are different

The life of an entrepreneur can be tough. In the professional space, he has to deal with investors, meetings, decisions and criticism. But once of that space, Bansal is the perfect family man. He has a doting six-year old son and he loves spending time with his son. Separating personal and professional life can have positive effects on your health as well.

Bansal has successfully earned the title of a successful entrepreneurship and deserves every bit of it. If his lessons are kept in mind, every entrepreneur will receive massive help from a man who almost shut down a billion dollar company.

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.

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.