Indian unicorns hype or reality

Indian Unicorns: Hype or Reality?February 2017

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Unicorn Overview

Unicorns in India

Case Study - Zomato

Case Study - Ola

Conclusion

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Case Study - Flipkart

Indian Unicorns – Hype or Reality? 3

Unicorn – The Business Context

• In the world of business, ‘unicorn’ refers to a company, usually a startup, with a stock market valuation or estimated valuation of more than USD 1 billion

• The term was first popularized by the venture capitalist Aileen Lee, founder of CowboyVC, who estimated that only 0.07% of all software startups ever reach a valuation of USD1 billion – those that do reach the USD1 billion mark are so rare to find, that is similar to finding a unicorn

First Create Hype, then Build a Unicorn

• The market value of unicorns are determined by private or public investors on the basis of their perception about the company rather than on the basis of an established performance record

• Investors try to hunt the big unicorns with big valuations - a reason why valuations start to spiral out of control as investors and attention follow “hot” companies

• The hype of the valuation can completely outpace the business model

•When valuation is raised based on hype instead of a true business model, it can spell trouble for investors, employees and customers

Unicorn Overview

Unicorns in India

Case Study - Zomato

Case Study - Ola

Conclusion

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Who are the Indian Unicorns?

Is it a Unicorn

Unicorn Overview

Unicorns in India

Case Study - Zomato

Case Study - Ola

Conclusion

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Case Study: Flipkart

• Flipkart was founded in 2007 as an online book store and later started operating as an online retailer offering various products such as electronics, personal care products, clothing and apparel, perfumes, and toys

Decline in Flipkart’s Valuation

• Flipkart’s valuation has declined six times in the last one year

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Jun Morgan Stanley

Dec Vanguard Funds

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Feb Morgan Stanley

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In order to compete with Amazon, Flipkart has been in talks with US-based retail giant Walmart for funding

However, the company has not been able to secure any funding, and the continuous devaluation will increase this challenge

Unicorn Overview

Unicorns in India

Case Study - Zomato

Case Study - Ola

Conclusion

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Case Study: Zomato

• Zomato is a restaurant discovery platform providing in-depth information for restaurants in India and internationally, and feature content such as scanned menus and photos; and user ratings and reviews of restaurants

Losing the Unicorn Status

• In May 2016, HSBC Securities and Capital Markets slashed the valuation of Zomato by half, from USD 1 billion to USD 500 million, on concerns around its business model

• The valuation was reduced on account of HSBC ‘s concerns surrounding Zomato’s advertisement-heavy business model, growing competition in the food ordering space, and money-losing international operations

• The decline in valuation came despite the company’s claim in February 2016 that it would hit profitability by mid-2016, and after traffic to its Indian platform grew by 8% between March 2016 to April 2016

•However, Zomato’s Founder & CEO Deepinder Goyal hit back at the HSBC report stating that no other investor that is aware of the company’s business model has marked down its valuation and that existing investors are bullish about the company and willing to back it further

Unicorn Overview

Unicorns in India

Case Study - Zomato

Case Study - Ola

Conclusion

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Case Study: Ola

•Ola Cabs is a cab aggregator that allows users to book cabs through a mobile application

• The company was founded in 2010 and started operations in Mumbai, before expanding to over 50 cities across India

Reducing Valuation to Raise Funds

• In order to raise fresh funds, in November 2016, Ola had reduced its valuation by 40% from USD 5 billion in November 2015 to about USD 3 billion

• This has made Ola one of the first Indian unicorns to accept funds at a lower valuation, in what’s known as a down-round

•Although startups are generally reluctant to accept down-rounds as it can depress morale and the value of existing investors’ stakes, companies that need capital to finance operations may have little choice

Unicorn Overview

Unicorns in India

Case Study - Zomato

Case Study - Ola

Conclusion

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Indian Unicorns: Hype or Reality?

The funding environment in India is contracting and it has become difficult for Indian unicorns to maintaintheir high valuations

Towards the end of 2016, SoftBank announced that it had incurred an investment loss of USD ~513 million,mainly on its assets in India which include unicorns such as Ola and Snapdeal

The need for funds to compete against global giants who are steadily increasing operations in India has led tocompanies seeking funds at lower valuations

Co-founders of Flipkart and Ola have stressed on the need for urgent government intervention to ensure alevel-playing field between local internet companies and their global rivals, especially in their fundraisingefforts

However, there is also a belief that investors are extremely bullish on India, and such markdowns are only aresult of investors seeking to show losses to reduce taxes

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