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The impact of COVID and the Russia-Ukraine war on the new-age companies can be seen in the results of the startups. Japanese tech investor SoftBank posted a huge $23.4 billion loss for the April-June quarter. Its Vision Fund investments contributed $17 billion to it.
The conglomerate marked down fair valuations of 284 of its portfolio companies. The biggest hit was on account of the Chinese giant Alibaba. Besides markdowns, the company took a hit on account of a weak Yen.
Out of the 284 companies that saw markdowns, many are in the unlisted space.
Only 35 companies across both the Vision Funds saw a higher gain in their fair valuations.
SoftBank devaluing its investments has ramifications in the Indian startup ecosystem. The company is the largest investor in the country with investments in companies like Flipkart, Zeta, and Meesho.
New-age companies in the listed space have been one of the worst affected in the market. Investors ran for safety to companies that had a visible cash flow. However, the recent rise in the market has seen the stocks of the new-age companies rebounding.
The problem is in the unlisted space. In his investor presentation, SoftBank chief executive Masayoshi Son indicated that even though listed tech firms have seen valuation corrections across the globe in several public markets, unlisted unicorn company leaders still believe that their valuations stand solid, and do not want to take a flat or down round.
Markdowns are not restricted to SoftBank alone. Other investors like Tiger and Sequoia have also seen markdowns.
This means that either the companies would have to source funds from new private equity investors at the valuation they want or generate enough cash flows internally to buy time to raise money from their main investors.
The markdowns may hit the Indian startup sector as companies and their lead investors will have to take a hit on their valuations.
Son said in his presentation “…So, until the bunch of unlisted companies don’t correct their valuations (in sync with public companies), we will see a longer funding winter.”
Valuations in the listed space have fallen more than in unlisted companies. If the market continues to correct on account of the Russia-Ukraine war, further markdowns can be expected in the coming quarters and these will be more severe in the unlisted space.
The Indian primary market has not taken off since LIC’s IPO and is unlikely to do so anytime soon. Indian new-age companies will have few avenues to raise money unless they agree to take a hit on their valuations. If they do so, it will have an impact on those startups that are listed on the bourses.
While private equity companies may be thinking of holding back further investments till valuations are right, Indian government continues to spend heavily. Manas Chakravarty writes on government spending in his article. Subhash Chandra Garg in his article on Welfare or Freebies argues that the most critical question is, which of the government schemes serve the cause of public welfare, and which are ‘freebies’.Investing insights from our research team
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Shishir AsthanaMoneycontrol Pro