Impact of rupee depreciation on startups: As the rupee, which has depreciated nearly 7 per cent so far in the current calendar year, has adversely affected the rate of inflation India By making imports expensive, depreciation in the domestic currency is also affecting start up Appraisal and funding. experts say rupee depreciationAlong with other economic factors, has also had an adverse effect on funding for startups, Know in detail:
Tarun Sharma, managing partner at Megadelta Capital, an India-focused mid-market growth fund, said, “A large proportion of VC (venture capital) funding in India is from funds denominated in dollars, with funds valuing their portfolio values and dollars. Achieving the final return by exiting in. Therefore, any sharp movement in the rupee-dollar rate changes portfolio values (everything else remains the same).
What is more consequential in the ongoing dollar-rupee movement, he said, is a backdrop of overall poor global economic sentiment, driven by concerns over growth and inflation in developed markets.
“This has resulted in a sharp correction in stock prices (especially in the technology sector) with global capital providers becoming more risk-averse. This has had the dual effect of a low public market valuation (which is generally regarded as the benchmark for VC/PE deals and also to characterize the current value of the portfolio) and lower capital allocation to emerging markets. , “They said.
Therefore, the overall combination of risk aversion, low public market multiples and rupee depreciation results in low capital inflows into the venture capital space and depressed valuations, Sharma said.
The rupee, which closed at 79.65 since January 2022, has fallen nearly 7 per cent since January 2022 due to foreign investment outflows, rising crude oil prices, tighter US monetary policy and a general dollar strengthening. This was exacerbated by the global uncertainties arising from the geopolitical crisis caused by the Russo-Ukraine War.
Foreign portfolio investors were net selling since October 2021, which has taken a toll on the rupee. However, now FPIs have started pouring money into the Indian market.
Amit Ratanpal, founder and MD, venture capital firm BLinC Invest, said, “We need to look at whether there is enough liquidity for startups to grow business. Valuation has already corrected itself and is not linked to depreciation of Rs. The increased liquidity could actually push the valuation up a bit as more capital would be available for deployment.”
He said there is more than $6 billion of liquidity available for deployment, but funders are “sitting on the fence as the general overall market is correcting”.
When asked about the projected erosion of startup valuations due to rupee depreciation, Megadelta’s Sharma said, “It is difficult to estimate how much of the fall in funding is due to rupee-dollar changes alone, as a combination of factors. Growth-inflation concerns (including economic sentiments) have resulted in a sharp reduction in funding.”
He said investors who had invested heavily in the last year now have portfolios that are either loss-making or are seeing significant declines. “Because of this, they are slow on new investments.”
Due to financial stress, start-ups in India are resorting to layoffs to reduce costs. Edtech unicorn start-ups Byju’s, Vedantu, Unacademy, Ola, Trail and Cars24, among others, have all laid off more than 5,000 employees in India this year.
According to data from Venture Intelligence, only 3.5 percent of startups that raised $100 million or more during January-June 2022 were profitable, compared to 29.2 percent in the year-ago period.
Now, global capitalists are focusing on profitability rather than growth. Leading venture capital firm Sequoia Capital also recently told founders of its portfolio companies that the era of rewards for hypergrowth at any cost is soon coming to an end as investors turn to companies that demonstrate current profitability. can do.