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Will the drastic undervaluation of WeWork, Uber dent Indian Startups?

With the drastic fall in the valuation of WeWork & Uber, investors lose faith. The big question remains- how will the Indian startups be impacted?

WeWork is expected to list its shares in the following months. Earlier this month, several publications reported that the fast-growing subleasing startup might seek less than half of its $47 billion valuations fetched in January at a private fundraising round. Reuters, on Friday, reported that WeWork might consider the cost of as low as $10 billion, around one-fifth of its current worth. There have been increasing doubts if the initial public offering (IPO) will be happening on schedule.

Earlier in May, Uber Technologies Inc., which was considered the world’s most valuable internet startup, listed out its shares in the United States — making it one of the most highly anticipated IPOs in the recent years. However, by the end of 10th May, Uber’s shares slid by 8%. The equity has dropped for another 22% ever seen by Uber’s rival, Lyft Inc.

Such events, the Uber IPO particularly, can mark a turning point for the startups universally. It appears like globally the hype has been evaporating in the venture investing environment. Many claims that it’s like the end of the progressive startup era. This might have some influence on various Indian unicorns that have pursued a similar growth-at-all-cost strategy. Many of these unicorns- companies with valuations of over $1 billion- hope to go public in the next few years.

According to a report, in 2018, Flipkart witnessed its record-breaking sale. Ever since then, the investors have been taking out speculations about the next Indian startup that could secure a massive exit. There have been a couple of signs that another Indian unicorn could deliver a successful exit-either through the public listing or sale any time soon. However, after Uber’s disappointing listing and WeWork’s undervaluation, it seems as if that hope might be lost.

The world following Flipkart

In 2018 May, Walmart shook hands with Flipkart & agreed to buy a stake of 77% in the company, making the valuation of the Indian e-commerce giant at $21 billion. The sale overshadowed the previous biggest buyout of Freecharge at $400 million by Snapdeal in 2015.

When Walmart took over Flipkart, it had announced that it would seek an initial public offering for the firm at some point. Though it’s given that Flipkart is expected to continue to invest a billion dollars in expanding its business, investors say that it might be difficult for the firm to attain profitability shortly. With the expected entry of Reliance Industries Ltd in the e-commerce platforms, Flipkart’s hunt to list down its shares might be made difficult.

Anand Lunia, the founding partner at India Quotient, said, “The consumer internet unicorns still don’t have great unit economics, so an IPO by any of them looks highly unlikely for the next two to three years,”

Paytm’s struggle

Paytm has been struggling to maintain its leadership in the market as competitors Google Pay and PhonePe, Walmart’s buyouts, have spent a hundred of millions of dollars to increase their share of digital payments. The bottom line doesn’t make for a pretty picture either. On 31st March, One97Communications Ltd, Paytm’s parent firm, reported a loss of Rs 4,217.2 crore, up from Rs 1,604.34 crore the previous year. The firm’s revenues rose by 8.2% only to Rs 3,579.67 crore in the financial year 2019. Paytm Mall, the firm’s commercial business, has failed to make a dent in the Flipkart & Amazon dominated the market. It’s expected to have a limited presence in the online marketplace despite its $150 million fundraise from eBay in July.

Other startup tensions

Swiggy & Zomato, food delivery startups, have been locked in an enormous market share battle that has shown zero signs of letting up. The two companies have been suffering significantly higher losses. On the other hand, homegrown Ola’s core cab business has shown a steep decline while its other two ventures of food delivery and payments haven’t taken off yet. Oyo has been working on its unprecedented expansion spree worldwide that will be requiring massive investments for the upcoming years. Oyo is, however, to prove the profitability of its business market, even in its older markets like India.

Over 20 months, the amount of unicorns has almost doubled. The behavior reflects the rise in the investor’s appetite for significant and fast-growing internet assets. Despite, the most valuable unicorns left are Ola, Byju’s, Paytm, Oyo, Swiggy, and Zomato. Most of the mentioned unicorns are facing long-term challenges that make an IPO seem unlikely.

The Uber outlet

The global investors have started questioning the growth-at-all-cost approach after the weak market debut of Uber, making the listing prospects of Indian internet startups a bit dull. Uber has ushered in the trend of startups to stay put for long periods instead of seeking IPOs. Now that its highly awaited IPO has failed drastically, the charm of firms with high growth & high losses may diminish over the upcoming years.

Ashish Sharma, Chief Executive Officer (CEO) at InnoVen Capital India stated, “The Uber IPO and the upcoming WeWork IPO demonstrate that there’s a meaningful disconnect between private and public valuations, particularly for high growth consumer internet firms that continue to burn a lot of cash as they invest for growth.”

Uber & WeWork together count SoftBank as their largest backer. The two are amongst one of the first and foremost outcomes of Softbank’s plan to bet on massive amounts on mature tech startups. The leading conglomerate has invested nearly $20 billion in WeWork & uber together from its $100 billion Vision Fund. The Japanese investor has announced another fund of $100 billion in July.

The secondary itinerary

To be certain, the lack of listings does not mean that the investors will be starved of liquidity. Before the Flipkart sale, exits had increased in any case, mostly through second share sales. These large transactions have helped the virtual capitals return cash to limited partners and raise new funds. The VC investors accumulated around $2.8 billion in the year 2017, up from $1.8 billion in 2016, according to the data supplied bu Venture Intelligence. In July, Ritesh Agarwal, CEO of Oyo, announced that he would be investing $2 billion in the company, mostly by buying back shares from the firm’s early stakeholders Lightspeed Venture Partners and Sequoia India.

“There’s very healthy demand from private equity and other late-stage investors for consumer internet startups. They will buy shares from early investors in the unicorns and other fast-growing companies. A majority of exits will happen through this route rather than IPOs or buyouts for the foreseeable future,” said Vinod Murali, Managing Partner of Alteria Capital, a venture debt fund.

Small to medium-sized buyouts might increase as large companies like Reliance, Naspers and Walmart seek to improve their mark.