Valuations dive in private markets as VCs count cash

“Six months ago, founders were doing value exploration at a later stage with a convertible round. But now, they prefer a clean round,” said Kashyap Chanchani, managing partner at The Rainmaker Group, a domestic investment bank focused on new-age companies. In a convertible round, startups borrow against bonds that In a down round, they issue shares at a lower valuation than the previous round.

This year, Wakefit, which sells mattresses and other sleep solutions, raised new capital in November 2021 at a valuation of less than $300 million, up from $380 million.

“Dollar (figure) may not give the correct picture as the currencies (USD and INR) have moved in this period. If you look at our INR position, Series C post-money and Series D post-money valuations are one —are very close to each other—so it’s at a flat valuation,” said a company spokesperson at WakeFit. The company said its mature businesses were reporting positive earnings before interest, tax and amortization (EBITDA), which helped it raise Series D capital in a tough environment.

According to Chanchani, boards are asking founders to accept whatever capital is available, even at low valuations. “Valuations in the private markets have been rightly in line with the performance of broad listed peers. There has been a decline of 40-60%,” he said, naming the companies.

Many unicorns actively seeking capital in consumer tech, edtech and health tech are still looking for investors even in the down times, said four investors tracking the ecosystem on condition of anonymity.

He said, “Earlier investors were ready to pay three to four times the revenue, now it has come down to two times. “Investors are no longer willing to offer high valuations,” said a tech investor who advises tech-led businesses, one of the four people cited above. round. Make sure this is happening only to the market leaders in each segment. For the second and third players in each category, it is becoming difficult to access capital at this point of time,” said the investor.

Some startups have seen secondary share sales, where one investor sells shares to another without the company receiving any capital. Shareholders of companies such as Chargebee, Postman and Icertis are selling their shares at a discount to previous valuation rounds. Sovereign wealth fund Abu Dhabi Investment Authority bought primary and secondary shares in Lenskart last month. Mint reported that the valuation for the primary round was above $4.2 billion, while secondary shares were sold at a discount. Mixed rating not known.

Increasingly, each deal has a growing secondary portion. Since secondary deals are typically at a discount to last-round valuations, the blended value (average of primary valuation and secondary) is still lower than previous valuations, said the second of the four people. According to him, companies alternatively demand higher primary valuations to make it look like an up-round. “Nobody talks about the blended value, and companies get away with just showing high primary valuations,” he said.

Unicorns PharmEasy and Upgrade have opted for an internal rights issue to avoid raising outside capital at distressed valuations.

Some startups have opted for structured loans to buy time – potentially at a future discount. For example, Dunzo this month raised $50 million in convertible debt from Reliance Retail and Google.

“Down rounds or decline in valuations are no longer a taboo, but a well-accepted conversation,” said Sumir Verma, founder and managing consultant, Merris Advisors. Certain e-commerce segments and enterprise tech may produce the next set of unicorns, Verma said.

While an early-stage investor, a third of the four people said, India still does not have a cheap market valuation, a fourth said that so far no large company has raised rounds in primary capital, and one or more of them This needs to be done for two others to follow. “There should be more (down rounds) in the Indian market this year. So far, people have held on or done some structured rounds so that they don’t do alternative rounds,” said this investor.

To manage the optics, some investors are using it to negotiate up rounds in the rupee due to rupee depreciation, which gets converted into down or flat rounds in the dollar. This can save an investor 10-15% in Internal Rate of Return (IRR).

“Investors are also agreeing to invest in installments as it can save them 10-15% in IRR in the first year,” said a fifth investor, adding that this makes the deal more lucrative for the upcoming investor. Can sweeten “Capital is also being handed over in tranches and is linked to milestones. These milestones are base annual revenue run rate, EBITDA profitability and reduction in burn rate,” said this investor.

ranjani.raghavan@livemint.com