Start-up Valuations Dive South Led By Current Challenges At Paytm and Byju's

Once valued at US$ 22 billion in 2022, estimates suggest that Byju’s is now at a fraction of that at below US$ 1 billion – a hefty 95 per cent drop. Three investors BlackRock, Prosus and Baron have all cut the valuations in Byju’s. Similarly, Vijay Sharma-led parent Paytm’s market worth has been eroded by Rs 20,000 crore in just a week, post the Reserve Bank of India crackdown on Paytm Payments Bank.

Latest reports this week also say that US investment major Vanguard has slashed the valuation of Ola’s parent company ANI Technologies to US$ 1.88 billion. Moreover, funds managed by Fidelity have marked down the value of both Meesho and Pine Labs. Pedigree startups Gupshup and Eruditus have also seen their valuation cut.

Finally, although India reached a tally of 100 unicorns – a term coined by US venture capitalist Aileen Lee -- in 2022, the journey since then has been slower with fewer unicorns being added to the list.

Chintan Vaishnav, chairman of India’s Startup20 and Mission Director of Atal Innovation Mission at Niti Aayog said, “The signal is clear. While there is an immediate impact on valuation, we have to make a distinction between value and valuation,”

“The long-term fundamentals of the Indian economy are strong. Therefore, the startup ecosystem will grow,” added Vaishnav.

Navas Meeran, chairman, Group Meeran, a south India-based firm that has invested in a series of start-ups, explained that one of the biggest reasons that a company like Byju’s is suffering is because its engagement level with the children/students has come down. “In many cases, the buyer is the parent but the child was not using the product,”added Meeran.

Meeran also noted how Dunzo in the quick-commerce area is almost closing down. “This has happened partly because it could not compete with Swiggy Insta for whom quick commerce was an add-on. All these have affected the current valuations of start-ups,” he added.

Why now?

The current write-downs that portray the changing fortunes of India’s startups are not new: from the peak rallies of 2021 and 2022, there has been a painful and gradual decline in valuation since 2023 partly due to the “funding winter.”

So, 2024 is only a continuation of 2023. Additionally, this is also a time for course corrections when valuations are being made realistic from unrealistic highs of the past. That is, riding on sentiments and recovery post-Covid, investors paid big money to get a slice of Indian start-ups. That is being rationalised now.

Second, it is largely the global funders (as opposed to Indian private equity firms) like Vanguard, BlackRock, Neuberger Berman in Pine Labs and Janus Henderson in PharmEasy that have taken the lead in marking down valuations in Indian start-ups. These are also linked to the continued slowdown in the global and US economies.

Third, corporate governance issues seem to be at the heart of the troubles in both Byju’s and Paytm. While in the latter, the RBI barred Paytm Payment Banks from accepting fresh deposits from this month’s end, in the case of Byju’s it has been a continuing saga of high losses, ambitious marketing spends and delayed submission of audited accounts.

Investors have now made it clear that they will not tolerate misdemeanours any longer.

Fourth, almost all of the investors and the startups were banking on the booming middle-class market. But as is now clear from the fate of the struggling fast-moving consumer goods (FMCG) segment, the market has not grown as fast as it was expected. This is only one reflection of the slowdown in the market.

What now?

With the funding winter still in place, start-ups that gave huge discounts are pulling out such offers. imminently, it will bring down customer engagement but create more sustainable businesses in the medium term. Swiggy for example has shut its premium grocery delivery service.

A few big start-ups are raising funds by issuing convertible bonds giving investors the right to convert securities into equity. Notably, Sharechat and Uddan have gone this route.

One of the key objectives of StartUp India is to build international bridges. In that endeavour, India has start-up hubs with a host of countries that include Israel, Portugal, Singapore, Sweden and Finland among others.

Chintan Vaishnav argues that after the current shakeup, India will focus on building a more asset-light model, which will be stronger and sustainable in the long run. Navas Meeran also predicted that technology-intensive start-ups will have a clear edge in the coming years rather than plain vanilla business models.

All in all, while there is a shakeup happening in the startup world, it is likely to emerge stronger in the medium-term.