Startup Funding and Valuation Bubble, Is It the Beginning or the End?

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In the Indian context, even e-commerce giants like Flipkart and Snapdeal are overvalued, according to Vinod Khosla, a prominent Silicon Valley investor and founder of Khosla Ventures. The valuation of Flipkart, which stood at a hefty 15.5 billion dollars last summer but has fallen by a whopping 23% this year, might be a sign of things to come in the Indian e-commerce sector and cause a domino effect in the market which will send the valuations of other Unicorns in the Indian startup scene tumbling down as well. Investments in startups rose from 844 million dollars in the first quarter of 2014-15 to 2.33 billion dollars in the last quarter 2015-16, this is a clear indication of investors pumping in crores of rupees into startups, expecting bumper gains in the future while turning a blind eye to the inherent flaws in their business models.

So is the Bubble really bursting? The answer to this question varies according to which corner it is emanating from. If you believe in the hullabaloo of individuals who panic over what’s happening on the surface and don’t bother to look under the hood for the intricate details, then yes, there is an impending doom about to happen. But people who have been in the game long enough and have witnessed meltdowns before will tell you that it is just a case of limited and healthy correction. Think of it as a marketplace made up of sellers (the startups) and buyers (investors) and the price (valuations) adjusting according to the changing market dynamics. The sentiment has been bearish but then again sentiments have never been trustworthy indicators.

Sooner rather than later, the valuations are going to start climbing again because of the surge in supply capital from three fronts. First, the billions of dollars of cash reserves among the S&P 500 companies. Second is the Chinese money flowing into these young companies. The wealthy Chinese have been pumping money into technology startups which are increasingly seen as a safe bet as the slowing Chinese economy eases hopes of extracting returns from stocks, property and gold. The third source is the money coming in from Sovereign wealth funds, foundations, hedge funds and mutual funds.

One unlikely source of capital could be the money coming in from the Industrial companies which are being disrupted. Some of them are facing challenges which are culminating into existential threats and over the period of time they will have to adopt the “if you can’t beat them, join them.” strategy. This has already begun with GM putting 500 million dollars into Lyft, GE and other industrial companies setting up funds to target startups and Ford reportedly working with Amazon and Google.

Bubbles take a lot of time to build up but crashes happen relatively fast. Once this period of over valuation ends, the growth rates will become sustainable and will operate at acceptable levels of customer economics leading to smart growth. This transition will neither result in 2008 nor 2001, which was essentially a trial by fire for tech companies. There will be casualties along the way, but it’s not the worst thing that could have happened.

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Sources:

- http://earlyinvesting.com/

- https://techcrunch.com

- http://fortune.com/

- http://www.reuters.com/

- http://yourstory.com/

- http://www.wsj.com/