Flipkart’s mark-down augurs lean times for India’s tech start-ups

Photo: Hemant Mishra/Mint

Photo: Hemant Mishra/Mint

Bangalore: Cash-hungry Indian star-tups like Flipkart Pvt. are discovering the fundraising party’s winding down.

The domestic e-commerce leader became one of the most prominent Asian start-ups to have its valuation slashed by a high-profile investor. Sending ripples through the industry, a Morgan Stanley fund marked down its value by more than a quarter to $11 billion, less than a year after financing clinched a $15 billion valuation.

That’s an unexpected setback for Flipkart: it’s currently seeking to raise about $1 billion, according to a person familiar with the matter who didn’t want to be identified because the deal is private. India’s top online retailer by sales is the largest of a crop of start-ups craving capital to bankroll a battle with Amazon.com Inc. and Snapdeal for a slice of the world’s second-most populous country. It didn’t respond to an e-mail requesting comment.

Beyond eight-year-old Flipkart, entrepreneurs and venture capital investors are bracing for leaner times and more down-to- earth valuations after two years of frenzied deal-making. A deceleration in funding could in turn quicken the failure rate among smaller, ill-prepared start-ups.

Party’s over

“The global market is seeing several flat or down rounds. There is no doubt that there will be more discussions and pressure around valuation of Indian start-ups, given what Morgan Stanley recently did,” said Ash Lilani, co-founder and managing partner of venture firm Saama Capital, which has backed start-ups including Snapdeal and Paytm Mobile Solutions Pvt. It’s since exited Snapdeal.

“Only the strongest will survive. The weak—those who do not have a solid business model but still managed to raise money—will wither away,” he said. “The companies with the right model, the leaders in the pack will continue to raise money but at realistic levels.”

Smaller start-ups are already feeling the heat as “investors sit on their hands,” said Ravi Gururaj, founder and chief executive officer of digital locker start-up QikPod, backed by Flipkart among others. Companies that are burning cash fast will have to tighten their belts and re-position. “There is going to be a market detox. It is a healthy sign.”

Deal slump

Investment in Indian technology firms had slowed from the peaks of 2015 even before the filing in which the same Morgan Stanley fund also marked down other prominent holdings like lodging service Airbnb Inc. and Dropbox Inc. Deals fell 46% and venture capital investment slid 18% in the final three months of 2015 from the previous quarter, when Indian start-ups raised $1.5 billion via 114 deals, according to CB Insights and KPMG’s Venture Pulse 2015 report.

That mirrored a global slump. Venture investment in start-ups around the world dropped about 30% in the fourth quarter compared with the previous one, according to CB Insights. And there was an increase in “down rounds,” when funds are raised at a lower valuation than in previous financings. During the last three months of the year, 26% of mature start-ups raised money at lower valuations than in earlier rounds, according to a study by law firm Fenwick and West Llp.

‘Consolidation phase’

“Clearly, the euphoric times are over and we are now moving into a consolidation phase,” said Vishal Gondal, CEO and founder of Mumbai-based GOQii, which makes wearable fitness bands with personalized coaching. Gondal’s firm was one of the few to get funding recently: $13.4 million from investors including China’s Cheetah Mobile. “It is now about the survival of the fittest.”

Indian start-ups have enjoyed an unprecedented funding boom over the past two years as global investors vied to grab a piece of a rapidly growing economy with a surging mobile population. The country has overtaken the US in smartphone usage with about 220 million users, according to Counterpoint Research.

Much of the mania has centered on an e-commerce market expected to grow an annual average of 44% to $75 billion by 2020 from $12 billion currently, according to Forrester Research. Flipkart has funding from Tiger Global Management and Accel Partners, among others, becoming in 2014 the only Indian start-up to have raised $1 billion in a single round. Snapdeal won over Japan’s SoftBank Group Corp. and Alibaba Group Holding Ltd, while Paytm drew Alibaba.

A reality check may be around the corner. Flipkart and Snapdeal—battling Amazon on their home turf—have spent heavily on advertising and deep discounting. Losses at the three companies in the year ending March will come to at least Rs.5,000 crore ($745 million), Kotak Institutional Equities estimated in a 5 February report.

“The last two years have been about lots of funding but from now on, these companies will have to start building the framework of business such as payment systems, logistics, delivery and warehousing,” said Satish Meena, an analyst at Forrester Research.

[“source-Livemint”]

China Smartphone Glory Days Are Over as Apple, Xiaomi Face Tough Times

China Smartphone Glory Days Are Over as Apple, Xiaomi Face Tough Times

China’s smartphone boom may be over, as even Apple Inc grapples with a slowing economy and investor darling Xiaomi Inc struggles to stand out amid intense competition in low-margin handsets.

On Tuesday, Apple reported the slowest-ever increase in iPhone shipments as the Chinese market weakened. That slowdown in the world’s second-largest economy is threatening to hamstring consumption across the country.

Xiaomi, China’s most valuable startup with a $45 billion (roughly Rs. 3,06,047 crores) pricetag, is under threat, after it missed targets for $1 billion (roughly Rs. 6,801 crores) in Internet service revenue and also handsets sales in 2015.

As China’s economy grows at its slowest pace in a quarter of a century, the country’s once booming smartphone market has become saturated. For vendors whose products have become commoditised and make little to no profit, that doesn’t just mean the years of easy growth are in the past, but that it could be a struggle to keep their heads above water.

(Also see:  Apple Says It Has Over 1 Billion Active Devices Worldwide)

“The large growth rates that we saw in years past are definitely much different now,” said Bryan Ma, analyst at IDC, which predicted China’s smartphone market will grow at 1-2 percent this year. “In theory it could slip below zero this year, but either way, it’s relatively flat.”

Last year, IDC estimated it grew 2 percent. From 2011 to 2013, the market on average more than doubled in size each year.

Xiaomi’s Internet services revenue surged 150 percent to CNY 3.71 billion ($563.94 million or roughly Rs. 3,834 crores) from CNY 1.48 billion a year earlier, an internal document reviewed by Reuters showed.

xiaomi_phone_reuters.jpgA spokeswoman for Xiaomi declined to comment on revenue for 2015.

Like peers such as Apple, Beijing-based Xiaomi is trying to sidestep a slowdown in the world’s largest handset market by coaxing smartphone buyers to also purchase Internet services and opening stores in China’s less wealthy cities.

The firm has grown rapidly since it started in 2010. But Xiaomi’s valuation has been questioned recently as the firm has struggled to maintain its early growth surge.

Xiaomi missed its global shipment target by 12 percent, selling 70 million handsets last year, when domestic rivals such as Lenovo Group Ltd and top player Huawei Technologies Co Ltd countered at home with similar Internet-only device sales campaigns.

“Given that Xiaomi’s valuation has always been based on the company being more than a commodity handset manufacturer, missing their services revenue goal by such a significant margin is even more concerning than missing their handset target,” said Ben Thompson, a tech analyst at Stratechery.

Now it’s a question of whether Xiaomi can grow that revenue fast enough to prove its critics wrong, Thompson said.

The company encapsulates the risks of a vendor like Samsung Electronics Co Ltd in recent years, who can’t build a moat for their business.

“The only way to win with an undifferentiated product is having a superior cost structure and scale,” said Thompson. “Samsung did it, and now Huawei is doing it. ‘Win’ is all relative though, if you’re making a couple of bucks in profit per phone.”

[“Source-Gadgets”]