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Bubbling over

Amid the flurry of investments in start-ups, failures are rising too. will this lead to more realistic valuations?

Illustration: Manish Marwah

British economist John Maynard Keynes once famously said, “The market can stay irrational longer than you can stay solvent.” Indian start-ups are learning this adage the hard way, with some paying the price for the irrational exuberance of investors. Making a beeline for start-ups, investors have pumped in $7.4 billion in 2015, up 57% compared to last year, according to Tracxn, a start-up intelligence platform. Start-ups such as OYO Rooms and Grofers raised more than $100 million in a year from investors like Softbank and Tiger Global, barely two years after starting operations. Amidst this barrage of money, people seem to have forgotten to check the inner mechanics, especially the core that businesses can’t sustain on bad unit economics.  The fall, thus, is going to be severe, says Ashish Gupta, senior MD, Helion Ventures, an early to mid-stage, India-focused venture fund. “Valuations are going to be reset in India because we have priced ourselves ridiculously ahead of the market size.”

Arguing that the valuations based on gross merchandise value (GMV) don’t work, as the metric doesn’t include discounts, returns or cancellations, Gupta adds, “There is no arithmetic involved in valuing private companies. It’s only a function of how much the investors are willing to pay and how many investors you are able to line up.” In fact, he says, many of the businesses being funded make no sense, including a string of Indian start-ups cloned after US-based on-demand grocery delivery start-up, Instacart. The start-up allows customers to shop from stores like Whole Foods, Target and Costco online and then delivers the products within hours. Similar ventures have been floated by Indian companies over the past one year, with more than 55 companies attracting investments, including Grofers. The question though is how many firms do we really need to deliver a loaf of bread and milk, especially when there is hardly any differentiation. Moreover, the local kirana store does the same job, with the assistant doubling up as the delivery guy. “Instacart is not even a success in the US. That is the risk of extrapolating from the US and China. While we can learn from these markets, copying them blindly doesn’t work. I don’t know how many of these copycat

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