Why Startups Should NOT be Intimidated by The Thought of Devaluation

The Indian startup story has taken a new turn in the recent past. For the last half decade or so, venture capitalists and investors from across the country as well as the world have been very bullish about the startup scene picking up steam. With capital pouring in billions and trillions, Indian startups have managed to ‘go big’ and make a dent in the business world.

However, of late, there have been talks of how the startup bubble in India is about to burst. Several renowned companies like Flipkart and Zomato which have recently faced the wrath of investors on the grounds of high valuation are evidence enough about the trying situation for startups.

The Flipkart and Zomato story

July 2014 was a big milestone for the Indian startup community, since Flipkart – a homegrown startup and one of India’s most celebrated e-commerce companies – raised $1 billion in capital. India’s first e-commerce unicorn was thus, born. This was the inflection point of the startup growth trajectory in India that every business venture was looking forward to. There was no looking back from here. It encouraged many more aspiring entrepreneurs to take the much dreaded plunge and hop onto the startup bandwagon.

From the point of being considered in the same space as global e-commerce ventures like Uber and Airbnb, in February this year, Flipkart which has been the torch bearer of India’s startup revolution, lost approximately 27% of its $15 billion valuation (Feb 2016 valuation).

And then, much to the discomfort of the startup community, Zomato ended up with the same fate. The leader in restaurant search and discovery service, was devalued by 50% by HSBC. The startup launched by Deepinder Goyal in 2008 was valued at $1 billion post its eighth round of funding sometime last year and only a few days back, the revised valuation of Zomato has been pegged at only $500 million.

It came as a rude shock to all within the startup ecosystem and others who had been all gung-ho about the startup saga in the country and its steep growth.

What the recent devaluation means for the startup ecosystem in India?

The clear question at first is what happens to a business venture after it is devalued?

Theoretically and historically, it has been seen that investors tend to realign their equity stocks basis the lowered valuation rates. Other than that, there are other changes that also take place – loss of faith amongst the customers, difficulty in procuring further investment. However, it certainly doesn’t mean that it is the end of the road for the startup. It only means that the startup now needs to look within to see what it can do better and tide over yet another obstacle on its course to success.

The next question that arises is that what would happen to the other ventures in the Indian startup ecosystem?

While experts are already creating a cloud of disappointment in the sector citing statements that the sector must prepare itself for further devaluations and less capital availability for growth, the truth might not actually be so harsh. It wouldn’t be wrong to say that when capital was coming in to the country, startups across all levels were reaping benefits and in times of correction, all involved in the story will have to face the heat.

However, since India was a late adopter of the startup culture, it might be good to look at a global perspective to get a better view. Internationally, devaluations and slowdowns have been part and parcel for startups. Investors have slashed valuations of one the greatest success stories like Snapchat, Zenefits and Dropbox, but these companies are still going strong and are global icons for startups across the world.

Hence, while devaluations are definitely a big downer for the startup industry at large, it isn’t reason enough for budding entrepreneurs to put their business ideas on the backburners or let their dreams die a silent death.

What one needs to understand is that ups and downs are part of any business and risk is an integral part of being an entrepreneur. After all, isn’t that the adrenalin rush associated with entrepreneurship all about! Like many other hurdles, entrepreneurs should consider devaluation as yet another roadblock that needs to be overcome.

People will always be dubious – when startups were doing well, people were doubtful of its sustenance, and now, when there will obviously be even more apprehension in their minds. There is currently a huge stigma attached with being a startup that has undergone devaluation. It only creates undue pressure understand that it’s all part of the game.

The terrain is never smooth for an entrepreneur. Both, the good and the bad need to be taken with a pinch of salt and then one needs to move on and do the next thing to keep the startup running.

What to do next

Devaluation is never the end of the road for a startup, it is just a bend around the curve. The startup just needs to introspect and see what they need to do differently to be able to grow consistently and create maximum value for their customers and potential investors. While the funding amount certainly takes a hit after devaluation, the founder should not shy away from raising lesser funds than expected, because if they use the money judiciously and focus on doing the right things at the right time, the result will be for all to see and it’ll only be a matter of time till they prove their ‘real’ worth to the stakeholders and get their valuation back in order.

This way they can create more value for the current set of investors and raise the next round of funds at the expected value. The only thumb rule they need to remember is that they can never chase a certain valuation. If they focus on the right aspects of the business, the valuation will automatically take care of itself.

[About the Author: The article has been contributed by Vikram Upadhyaya – Chief Mentor at GHV Accelerator.]