The Flip Side Of The Valuation Game

At a time when e-commerce companies are making headlines every second day for raising funds, Morgan Stanley’s recent markdown of Flipkart’s stock has been a bit disappointing not only for the online retail giant but for the entire industry.

Take 2015, for instance. When Flipkart raised $700 million from Tiger Global Management, Qatar Investment Authority and other investors in June, it was valued at $15 billion. However, the financial services firm’s estimate, nine months later, implies the current valuation has dropped to $11 billion.

Now, believe it or not, this may not be as big a cause of concern for Flipkart as it is for the industry. After all, no one can deny that Flipkart is the one of the largest e-commerce firms in the world. It enjoys a solid brand, a strong leadership team and is also backed by deep-pocketed investors. So, given these parameters of strength, it’s obvious the company will bounce back and grow on valuation, even if it takes a year or two. In a more favourable situation, if the market conditions are better, it could be earlier.

So, the bigger question here is for the overall e-commerce industry, whether there is already a ‘problem of plenty’ with too many ventures raising funds from risk capital investors. When a company like Flipkart can face devaluation, how safe are the other burgeoning ventures? A question on every investor’s mind today when e-commerce firms are riding on high, inflated valuations — some of them based on mere speculation rather than actual fundamentals being taken into account.

A lot of innovative ideas have come to the market in the last two years, but not all have the bandwidth to expand and go to the next level even if capital is available. Today, even as most of the e-commerce companies have raised money, the issues they are facing are somewhat similar: how to get enough margins, be price competitive and keep customer acquisition costs low. While some have the bandwidth to ride through this, it is obvious that most players will phase out or witness consolidation going forward. Besides, over the next one or two years, it is imperative that the industry sees a massive correction in valuation, so clear winners can emerge. The nature of the startup business is such that even if one of ten becomes a blockbuster, the purpose is served.

Early signs of shakeout or consolidation in the industry are already visible across diverse sectors. As per data available with research firm Venture Intelligence, as many as 139 acquisitions took place in the startup space in 2015, more than double the number in 2014. In 2013, only 42 startups were acquired by the biggies in the sector. Needles to mention, this place sure seems to be hotting up with action. Stay tuned for the latest!