Once the darling of investors, tech start-ups are facing harsh reality 2.0. Valuations are slumping and some people are getting wise and beginning to question their business models. A clutch of serious valuation corrections have set off an avalanche.
Most recently, US-based investment management company Vanguard has slashed the valuation of Ola’s parent company, ANI technologies, by 35% to $4.8 billion. This is bad timing for Ola as it has come at a time when the company is planning to go public next year. Other unicorns have taken a beating too. BlackRock has halved edtech giant Byju’s valuation to $11.5 billion from $22 billion, and SoftBank has downsised Oyo to $2.7 billion last September.
Another US investment company, Invesco, has slashed the valuation of app-based food delivery platform Swiggyby 33% to $5.5 billion from the earlier level of $8.2 billion. It was Invesco that in January 2022 led a $700 million funding round for Swiggy, which gave the company a humungous valuation of $10.7 billion.
The impact of these meltdowns predictably is going upstream. Big investors who had put a lot of eggs in the tech start-up basket are now facing the heat. SoftBank Group Corp, a big investor in Oyo, Paytm and Delhivery, reported a record loss of $32 billion, across its Vision Fund I and II, up from $18.9 billion it lost the previous year.
It is also telling SoftBank made investments of only $3.14 billion through its two primary funding vehicles in 2022-23, a huge markdown from $44.26 billion it invested in the earlier year.
Bumpy ride
Its been a yo-yo ride for tech start-ups. As Covid conditions eased, Indian start-ups raised an eye-popping $42 billion over nearly 1,600 deals in 2021. The year also added 42 unicorns (those with valuations of $ 1 billion or more).But the beginning of 2022 saw the first meltdowns; and signals that these start-ups were hugely overvalued. Paytm, which had gone public in November 2021, fell sharply after listing but within months its shares had eroded by more than 50% compared to its 52-week high of Rs 1,961 on November 18. Its consolidated losses for the year ending March 31, 2022, was Rs 2,396 crore.
Food delivery app Zomato, which listed in July 2021, plummeted over 40% after it hit a high of Rs 169.10 on November 16. Other start-ups that went public in 2021 too fell sharply in January last year as investors had second thoughts and their performance was below expectation. Those that tumbled on the stock market included CarTrade Tech that fell 55% from its November 2021 high and insurance platform Policy Bazaar by 47%.
Faulty business model
The lower valuations and crisis hitting Indian tech start-ups in the second round now is partly a result of global headwinds. Continuous recessionary pressures over the past 6-9 months has seen even Big Tech firms including Microsoft, Meta, and Google logging slower business and resorting to mass retrenchments.
Microsoft, that retrenched 10,000 employees a while ago has just said it will not raise pay for all full-time workers this year to generate “enough yield” to shift toward AI. Cognizant, preparing for a few painful quarters ahead, is all set to shed 3,500 employees.
But looking beyond the challenges of macroeconomics, many investors and promoters of Indian startups have got their story wrong, and bitten off more than they can chew. Unlimited growth in all directions has damaged their core businesses and has sometimes led to an implosion.
Sample Ola. Its growth-at-any-cost model has taken a heavy toll. It was first forced to shut its cab infotainment business last November, and then its used-car outfit, Ola Cars, and then its food delivery business. One by one the various platforms – Ola Café, Food Panda, and Ola Foods have all shut forcing out nearly a thousand employees.
The edtech sector, projected at one time to be $30 billion opportunity by the end of the decade, was overvalued on estimates of online learning during the pandemic. The reopening of schools and physical coaching centers should have triggered a big course correction, but the Byju’s, Unacademys,Vedantus and upGrades plodded on as if nothing had changed.
Funding in edtech start-ups plummeted from $5.82 billion in 2021 to $2 billion in 2022 till August 15, according to our data tracking platform Fintrackr.These edtechs also posted heavy losses during FY21. Eruditus registered a Rs 1,934 crore loss, followed by Unacademy’s Rs 1,537 crore loss in FY21. Vedantu registered a Rs 604 crore loss during the same period. Byju’s, which is yet to file its FY21 numbers, saw a Rs 262 crore loss in FY20.
The new, revised valuations is a shake-up that has come not a day too soon. Looking at the performance in the sector, further erosion in valuations are in the offing. It is good we are moving to more realistic business plans; but it also flags how promoters and investors’ splurged billions of dollars of public money because of faulty due diligence.