Shattered Aspirations: Untangling Turbulent Unicorn Startups
Paytm, which was founded by Vijay Shekhar Sharma in 2000, faced a turbulent period as investor confidence waned, causing a significant drop in its $17 billion valuation. After going public, the company's stock price plummeted by 27%, falling to ₹511 in May 2021 and ₹800 in September 2022. Amit Tondon, the founder of Institutional Investor Advisory Services, expressed strong dissatisfaction with Vijay Shekhar Sharma's leadership, leading the organization to recommend that Paytm shareholders vote against his reappointment as MD and CEO. The company also grappled with regulatory challenges, intense competition, and the need to diversify its revenue sources, making it a challenging task for Paytm to regain investor trust and navigate the evolving fintech landscape.
FSN E-Commerce Ventures, the parent company of Nykaa, saw its shares hit an all-time low of ₹1048, with its market capitalization dropping below ₹50,000 crore. Nykaa's stock experienced a downward trend, trading 59% lower than its peak of ₹2,574 in November 2021. Investor caution toward tech stocks, including logistics major Delhivery, contributed to these declines. The end of the one-year anchor lock-in period for Nykaa, Policybazaar, and Paytm's parent companies added to the selling pressure. Nykaa recently approved a 5:1 bonus share issue and is preparing to release its Q2 2022 financial results. Despite the challenges, Nykaa reported a 33.4% growth in Q1 FY23 net profit and a 40.5% increase in revenue.
Zomato, led by Deependar Goyal, faced even greater challenges. Its market share dropped from ₹169 in November 2021 to around ₹40 in July 2022 and ₹60 in September 2022. Before Zomato went public, Aswath Damodaran, a finance professor at New York University Stern School of Business and an expert on valuation, estimated the company's stock value at approximately ₹41. However, despite the warnings, investors who were not yet profitable purchased the shares at ₹76, and the stock briefly touched ₹169 before plummeting to ₹40. Damodaran recently provided a fresh perspective on the market, with his best-case stock valuation at ₹109.
The Federal Reserve's ongoing monetary expansion provided easy access to cheap money for investors, but central banks worldwide are now tightening the money supply by raising interest rates, signaling the start of a funding slowdown.
Investors are scrutinizing their investments more closely. Zomato has a market capitalization of ₹52,788 crore, revenue of ₹1,413 crore, and a profit of ₹185 crore. Paytm's market cap is ₹51,086 crore, with revenue of ₹1,679 crore and a profit of ₹639 crore. Nykaa's market cap stands at ₹66,335 crore, with revenue of ₹1,148 crore and a profit of ₹5 crore.
Raising money is becoming increasingly difficult, and commitments made by investors are now being reconsidered. For example, some equity investors who initially valued the online teaching company Byju's at $22 billion are now hesitant. Sumeru Ventures and Oxshott Capital, two investors who agreed to invest millions of dollars in Byju's, have not yet fulfilled their commitments. Byju's, which was expected to earn ₹4,400 crore in revenue for FY 21, only generated ₹2,280 crore.
Famous value investors like Warren Buffett and the late Rakesh Jhunjhunwala took bigger risks than global investors like Masayoshi Son of SoftBank, who invested millions of dollars in Indian startups as part of a portfolio strategy. When the tech bubble burst, SoftBank incurred a historic loss of $23 billion.
It's worth noting that companies like Amazon, Microsoft, and Tesla achieved success with limited profitability in their early days. However, these companies raised relatively little capital from investors. Profitability eventually became important, but it's crucial to acknowledge that without risky investments, there would be limited innovation and disruptive companies.