India and the Synthetic Upround

Presto! Flipkart's lower book value lets it raise cash above funds' assessment.

Recent markdowns in the valuations of Indian startups might be just the boost nascent companies need as they scrap for cash amid concern over their futures.

E-commerce providers Flipkart Online Services Pvt. and Snapdeal and taxi service Ola have all been struck by continued book-value repricing as investors including Fidelity, Valic and SoftBank trimmed their expectations, VCCircle reported this week. Fidelity's $8.71 billion price tag on Flipkart is its lowest in more than a year, and substantially below the $15.2 billion the company reportedly was worth after a July 2015 equity sale. 1


Flipkart's valuation has been trimmed as investment funds readjust their expectations

Source: VCCircle

Note: Data are typically filed to the U.S. SEC two months from valuation date.

Three months ago, I wrote about the fundraising pain faced by Indian startups as the spigot of venture-capital cash started to slow to a trickle. Beyond boosting sales and trimming costs (oxymoronic in the startup world, I know), there's another way to lure VCs into fresh rounds of funding, and that's by giving them more equity bang for their investment buck.

We all know that a downround is a fate worse than out-of-the-money options. Earlier investors see the worth of their stake decline when a subsequent injection of equity capital is done at a lower valuation. Not only is that bad for the VC fund, it's a huge loss of face. An alternative way to raise cash without damaging this oh-so-important share appraisal is to sell debt instead, and we've seen more of that happen in Asia over the past 18 months, especially in China.

But if you can't sell debt, new investors won't buy at a higher valuation than earlier funding, and existing shareholders won't agree to a new tranche being issued at a lower price, then you're stuck -- unless someone else has revalued the startup for you.

With its book value cut even further, Flipkart now has the chance to raise funds at a rate higher than what Valic and Fidelity ascribe to it, even though it's below an earlier round, while the new investors can feel comfortable knowing they got a good deal on the stock. I call it a synthetic upround. VCs can see through this trick, but as long as there's upward momentum in the valuation, everyone can save face and tell themselves the direction is right.

More importantly, the startups themselves can stop wasting time begging for quarters and get back to building their businesses. And in India, there's still a lot of building to be done.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Various rights and preferences make fund book value and fundraising equity value an inexact comparison.

To contact the author of this story:
Tim Culpan in Taipei at

To contact the editor responsible for this story:
Paul Sillitoe at

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