Tsunami of devaluation:
Source: News9plus
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The current funding winter for start ups has been initiated by the inflationary pressures of 2022, causing a redirection of funds from investors into safer assets like US Treasury bonds. With rising interest rates, the capital accessible to start ups has dwindled. Notably, prominent players such as Tiger Global and SoftBank, known for previously extending generous valuations to start ups, have adopted a more cautious stance. This caution arises from the understanding that the safety net that existed in 2022 might not be present this time around.
Just as the public market reacts to company performance, the private market operates similarly, though data is less accessible. Valuation hinges on the present value of projected future cash flows, with increasing emphasis on tangible profitability and sustainable cash generation. Larger enterprises are navigating the transition to maintaining growth while achieving profitability. Failure to strike this balance results in market devaluation, contributing to a significant wave of start up devaluations.
The absence of new unicorns in the Indian economy during 2023 is attributed to the lack of a definitive valuation formula. Valuation ultimately boils down to negotiations between investors and start ups. Investors seek substantial returns upon exit, while start up founders desire increased valuation to secure more funding for growth initiatives. However, the approach of burning through cash to expand and gain customers has deterred investors. The focus is now shifting towards sound commercial practices, as scrutiny increases regarding metrics like EBITDA, profits, cash flows, and customer contributions.
In this challenging climate, a new breed of resilient enterprises is
poised to emerge – sustainable entities capable of global leadership. Despite
the funding constraints, these times are fostering the development of companies
that demonstrate resilience in the face of funding challenges.