Flipkart: A unicorn unbowed

The past 12 months have been tough for Flipkart, with the Indian e-commerce giant weathering a series of markdowns from US-based mutual funds. Fidelity and Morgan Stanley stood out by cutting their valuations across four consecutive quarters, but they were not alone in embracing a new reality.

It was inevitable that the cuts, which took the company’s valuation from $15 billion as of its last funding round to around $5.5 billion, would attract negative headlines. But many members of India’s VC community say relying on the judgment of other investors, particularly hedge funds whose expectations and assessment methods are unclear, is a mistake.

“Some of these guys are so removed from what is happening at Flipkart that I sometimes wonder how they can even value it,” says Anand Prasanna, formerly of Sequoia Capital India and Morgan Creek, and now co-founder of mid-stage tech-focused Indian VC firm Iron Pillar.

You've got to ask whether the people who valued these companies pretty high earlier just gave a wrong valuation, and now it's reverting back to normal – Anand Prasanna

While industry players acknowledge Flipkart’s struggles in recent years, they stress that investors must consider many factors beyond a simple dollar appraisal to judge a company’s worth. This applies to several Indian tech unicorns, with online marketplace Snapdeal and ride-hailing app operator Ola also experiencing markdowns in recent months.

Madness in method?

Flipkart has dismissed the idea that the cuts represents a warning sign for investors, calling the filings “theoretical exercises” that do not take into account its internal operations and planning. Indeed, the methods by which mutual funds value their portfolio companies are not known. It is believed that they rely on a mix of the companies’ financial information, the previous share price, and market values of listed firms in the same industry.

Some investors point to this last factor as a potential problem with the mutual funds’ assessments. Vishal Pereira, managing director with CreedCap Asia Advisors, says comparing India’s e-commerce companies with their listed counterparts creates unfair expectations for start-ups that are still at an earlier stage of development and targeting a completely different market. Others, however, point out that the market will inevitably make the comparison.

“It’s not apples to oranges, because for Flipkart to survive and be profitable, they have to compete with the likes of Amazon,” says a partner at an Indian law firm that has both Flipkart and Amazon as clients. “Even before the Fidelity report, people had been questioning Flipkart’s model, and Flipkart itself made a strong push to the government for a protectionist environment.”

The markdowns also came during a year that saw Amazon gain steam in India. In June it took the lead over Flipkart and Snapdeal in web traffic, while in July it beat them in gross merchandise volume (GMV) for the first time. The prospect of having to compete directly with a cash-flush US competitor has led some investors to question the Indian e-commerce players’ strategies.

“You’re seeing fewer questions on the Paytm model because it’s cash generative, whereas Flipkart, Snapdeal, and Amazon are burning cash,” says the lawyer. “So their survival is dependent on deep pockets, and if the investors don’t put in that money, then what is the survival model?”

Directly comparing sales figures may be misleading, however. CreedCap’s Pereira notes that while Amazon’s GMV is roughly equal to Flipkart’s, it achieved this with almost double the cash burn. Flipkart’s success in achieving a more disciplined performance record may reassure investors that it can mount a sustained challenge to Amazon given the needed financial support.

Along with the cash burn factor, market watchers note that Flipkart’s sales figures do not include those of fashion-focused online retailer Myntra, which Flipkart acquired in 2014 and in turn bought Rocket Internet-backed Jabong last year. The division reportedly has an almost 70% share of India’s fashion e-commerce market. Ventures like Myntra and logistics arm Ekart, originally created to handle the parent company’s deliveries and soon to be open to all e-commerce players in India, are seen as valuable extensions to Flipkart’s brand.

Investors also point to the Flipkart co-founder Binny Bansal stepping down as CEO in favor of Kalyan Krishnamurthy, a former managing director at the company’s largest backer Tiger Global Management, as a positive sign. Krishnamurthy is well-regarded at Flipkart, having formerly worked at the company during its heyday in 2014 as head of sales and returned to that position last year.

Back to reality

Despite these signs of strength, investors acknowledge Flipkart faces a serious challenge from Amazon and in stabilizing its core business. Iron Pillar’s Prasanna believes that the market’s earlier enthusiasm for unicorns may have been overblown, and developments like the mutual funds’ markdowns indicate the return of more realistic assessments.

“You’ve got to ask whether the people who valued these companies pretty high earlier just gave a wrong valuation, and now it’s reverting back to normal,” he explains. “When we look at a lot of consumer tech companies, we have to tell entrepreneurs the hard fact that their last round was overvalued and we’re actually going to value them below that.”

While the markdown announcements may have raised fears of a down round for Flipkart and its peers, investors feel the industry may benefit from the reality check that such a move would provide. Cutting off the cash spigot, or at least limiting the inflow, could push the company’s leadership to be more creative and focus on setting itself apart from competitors rather than drowning them in capital.

“If you’re burning capital because you want to stay relevant in that particular league and beat out competition, then there is no end to it,” says Vinayak Burman, founding partner at Vertices Partners. “If tomorrow you’re competing with someone who has three times deeper pockets, you’re bound to get burned out. The focus needs to be on what is my differentiator.”

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