Almost 70% of start-ups globally will fail: Infosys co-founder Kris Gopalakrishnan

Infosys Co-Founder and former CII President Kris Gopalakrishnan on Monday, said almost seventy per cent of start-ups globally will fail and only five to ten per cent will become large and scale up.

"Almost seventy per cent of start-ups will fail. About 20% will survive but will not grow. They will remain small enterprises, and may be only five to ten per cent will become large and scale up - that is the spastics globally," he told reporters at the announcement of the 12th Innovation Summit 2016 here, of which he is the chairman.

This should not, however, be treated as a concern or a challenge, but it is a part of natural process of evolution, he added.

"The key is what are the learnings, and how do we continue to nurture this," he said.
Asked who has made a mark globally as of now, Gopalakrishnan said Flipkart and Snapdeal have made a mark and may be in three to five years from now, people would start talking about these companies in a big way.

"I would say Flipkart and Snapdeal - these companies have made a mark. Paytm and Freshdesk - there are so many of them actually. They have made a mark and that process will continue. May be three years from now and five years from now, you would start talking about these companies in a big way," he said.

Asked if it is a worrying factor that most of the e-retailers are not making profits, Gopalakrishnan said there will be some consolidation and hoped some Indian-started entity will remain because global domination is possible in the internet field as it is not bound by any borders.

"When you look at transport, hospitality, logistics - these are the companies, which will be the names in future in years to come," he added.

Replying to a query, Gopalakrishnan said both private equity and venture capital funding has slowed down for different reason because the exits are not happening.

"Both private equity and venture funding have slowed down for a different reason because exits are not there. When this happens, money is not recycled," he said.

"Most of the venture funds are waiting for some exits to happen and the exits are happening through mergers and acquisitions - consolidation where you may no be able to get the full value of investment," he said.

Asked if he sees a Google-type company emerging out of India, Gopalakrishnan said, "Yes it is possible, but we also need to remember that, across the world there is one Google."

Flipkart denies report of sale talks with Amazon

Talks between both firms were reportedly held to sell Flipkart for $8 billion.

Flipkart, India’s largest online marketplace, has strongly denied a newspaper report that said they had exploratory talks with Amazon in the last quarter of 2015 for possible sale. 

Taking to Twitter, Sachin Bansal, Executive Chairman of Flipkart put out this cryptic tweet.

Citing several sources in the investment community, The Economic Times reported on Wednesday that Amazon had made a preliminary offer of up to $8 billion to acquire Flipkart, almost half of its previous valuation of $15.2 billion. The newspaper said they have spoken to three sources who were top executives in venture capital and private equity firms.  

ALSO READ: Flipkart opposes entry tax by states: Why it is a fight to the finish

Meanwhile, another source informed that Amazon had offered a little over $5 billion for Flipkart’s e-commerce business and $3 billion was pegged for the company’s logistics business.

The talks between both the companies, reportedly held in the last quarter of 2015, went cold after the offer was perceived to be too low. The sources also told the newspaper that there was no reason to believe that a deal will be struck or that the talks were still ongoing between them. 

Valuation woes

The development comes at a time when Morgan Stanley has marked down its investment value in the online marketplace by $4 billion to $11 billion. 

Meanwhile, Flipkart is also currently in talks with Alibaba to raise $1 billion, but the Chinese e-commerce player was said to be investing at a lower valuation than $15 billion.

Why Morgan Stanley’s action on Flipkart is bad news for Indian unicorns

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company.

Bengaluru/New Delhi: Late last month, Flipkart India Pvt. Ltd, the country’s largest and most valuable Internet company, got a taste of the exacting standards of US stock markets, where it hopes to list.

On Friday, Morgan Stanley Institutional Fund Trust, a minority investor in Flipkart, disclosed a write-down in the value of its holdings in the company by as much as 27%. The mutual fund reported the number in a filing with the Securities and Exchange Commission (SEC), the US stock markets regulator.

Flipkart was valued at $15 billion when it received $700 million from Tiger Global Management, Qatar Investment Authority and other investors in June.

That was its fourth round of fund-raising in a year. Its valuation shot up roughly fivefold from $2.5-3 billion in May 2014.

Morgan Stanley’s latest estimate implies the mutual fund now values Flipkart at $11 billion.

The markdown is significant not only because it proves that Flipkart’s valuation had run ahead of itself, but also because mutual funds comprise one of the largest institutional buyers of shares in stock markets.

At least two other mutual funds, T. Rowe Price and Baillie Gifford, are investors in Flipkart. T. Rowe Price hasn’t yet reported the latest estimated value of its stake in the company.

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company. Flipkart declined to comment for this story.

Flipkart is hardly the only unicorn, a term that is used to describe start-ups that are valued at more than $1 billion, to have its value marked down by mutual fund investors.

Along with cutting the value of its stake in Flipkart, Morgan Stanley also reduced the worth of its holdings in file storage company Dropbox Inc. and data analytics company Palantir Technologies Inc. Late last year, mutual funds owned by T. Rowe Price, Fidelity and BlackRock cut the worth of their holdings in US unicorns en masse.

BlackRock is also an investor in online marketplace Snapdeal (Jasper Infotech Pvt. Ltd), which raised roughly $50 million last month at a valuation of $6.5 billion. BlackRock’s next filing on Snapdeal will be closely watched to see if other Indian unicorns will be marked down, too.

Snapdeal’s $50 million fund-raising, which was accompanied by $150 million in share sales by existing Snapdeal investors to new shareholders, took more than six months to close, primarily because there are not too many takers for India’s top e-commerce firms at their current valuations. The $50 million fund-raising was also significantly smaller than what online retailers typically seek from investors.

Mint reported on 4 February that China’s Alibaba Group is in early talks to buy a stake in Flipkart and increase its holding in Snapdeal. The talks are at a very initial stage and the likelihood of a deal is a function of Flipkart’s willingness to offer a discount on its current valuation of $15 billion, Mint had reported then.

“Our valuation has grown steadily between our last two funding rounds,” a Snapdeal spokesperson said.

There are two broad concerns about the valuations of Flipkart and Snapdeal. One, whether they will ever be able to cut their ballooning losses without sacrificing sales growth. Two, whether they will lose out to the Indian unit of Amazon.com Inc., the world’s largest online retailer.

Over the course of 2015, Amazon gained market share in India at the expense of both Flipkart and Snapdeal, according to publicly available data and several company executives.

Future estimates by mutual funds of their holdings in Flipkart and Snapdeal—and these companies’ eventual IPOs—will depend a lot on these two factors.

“Growing at negative operating margins to raise money in quick succession is a destructive style of doing business,” said Kashyap Deorah, serial entrepreneur and author of The Golden Tap, a book on India’s hyper-funded start-up ecosystem. “It kills the ecosystem... to build a thriving long-term business environment, we need to get off the addiction of global funds buying market spaces in India like territory.”

Deorah predicts Flipkart’s valuation will eventually slump to the amount it has invested. Flipkart has raised anywhere between $3 billion and $3.5 billion. “The downward trend will continue until Flipkart’s valuation equals invested capital,” he said.

To be sure, Deorah’s prediction seems extreme.

Flipkart is still the largest e-commerce firm in the last remaining big e-commerce market in the world. It has a solid brand, a strong leadership team and deep-pocketed investors, among other strengths.

“Flipkart’s valuation may look stretched at $15 billion in this current environment, but you can’t take away the fact that the company still has a solid business,” a Flipkart investor said on condition of anonymity. “In the worst-case scenario, it may take the company a year or two to grow into that valuation. But it will definitely happen. And if the market sentiment becomes better, it will happen sooner.”

By Sun Capital

Morgan Stanley slashes Flipkart’s valuation by over 25 per cent

Suncapital.co.in :

Is it sanity or is it the beginning of a bloodbath? Morgan Stanley has marked down its stake in Indian e-commerce company Flipkart to $103.97 per share, 27 per cent below the price of its last fundraising round. Last year, Morgan Stanley had valued Flipkart’s per share little over $142 per share. Importantly, the markdown comes just a week after Flipkart’s claimed that it’s valued $15.2 billion. The fall in share reduces Flipkart’s valuation to $11 billion.

Image credit: ShutterStock

Lowering valuation of Flipkart hasn’t come as a shocker to industry observers. Market observers have been anticipating correction in valuation of privately held Internet companies.  Mohandas Pai, ex-Infosys Board Member and founder of Aarin Capital, says:

These downgrades will happen in e-commerce till there is proper business model. The euphoria of fundraising at high valuations have to come to some reality and the current model of business is unviable because of the discount led model and high returns.

As per SEC filing, Morgan Stanley valued its Flipkart stake at $58.93 million in December 2015, as compared to $80.62 million in June 2015. While some see this mark down as only a modest one, analysts forecast that the implications will be bigger for other e-commerce companies as not many can digest a 25 per cent markdown (see this Twitter thread).

Interestingly, Flipkart’s rival Snapdeal witnessed a 30 per cent upward swing in its valuation when it raised $200 million recently. The Gurgaon-headquartered company is reportedlyvalued in the range of $6.5-$7 billion. The valuation of ShopClues also jumped significantly and it became the fourth Unicorn in the fledgling e-commerce market.

Satish Meena, Senior Analyst at Forrester Research, says:

Not many players in Indian eCommerce can digest a 25 per cent markdown. Flipkart’s valuation markdown will have consequences for others as everyone is riding on the same boat and valued based on the GMV number which is neither transparent nor correct but highly over stated.

Besides Flipkart, Morgan Stanley also  marked down shares of Palantir, a SaaS-based data analytic platform by 32 per cent, shares of Dropbox by 25 per cent, and those of Airbnb by 10 per cent.

Morgan Stanley reportedly uses multiple valuation methods for most of its private tech portfolio, including a 20 per cent discount for lack of marketability when using market comparable companies.

A few financial experts opine that investors in  Flipkart, Snapdeal and others would look to exit from these companies in the course of next two to three years (given their fund cycle and  obligation/commitment with limited partners).

“I believe that investors at some point are going to ask questions about e-commerce because certain funds will exit in three to five years. But the opportunity for the business in India is only going to grow,” says R Natarajan, CFO of Helion Ventures.
by Suncapital.co.in