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Party’s Over, Startups downgrades Values, Lessons of tough times

It’s time for reality check for companies as investors start to tighten purse strings now

When online photography startup Canvera raised RS 15 crore in fresh funding from existing investor Info Edge last week, the company had to settle for a three-fold decrease in its value, indicating the tightening of purse strings by investors as a year of plenty draws to a close for Indian startups. Canvera, founded by Dhiraj Kacker and Peeyush Rai, was valued at RS 75 crore before the deal closed last week compared with the valuation of RS  250 crore it received during a funding round of RS 10 crore in October 2014, according to regulatory filings made by Info Edge.In startup parlance, such a deal is termed as a `down-round’ and this latest deal is being seen as a precursor to more such transactions in the coming year.

Jessica and Jeb.

( Image Credit Flickr Commercial use)

 

“At least they are getting capital to continue building their business.There will be companies which will go bust, or will have to merge,“ said a venture capital investor, refer ring to the broader effects of companies having to accept money at a lower valuation in times of a slowdown. Total venture capital dollars and deals hit a new low in October, with 24 deals worth $112 million, down from a peak of 43 deals worth $831 million in March.

Down rounds — where investors purchase stock from a company at a lower valuation than the valuation placed upon the company by earlier investors — are expected to rise in number as India’s startup sector sees a slowdown in funding. While talk of founders being unable to bag expected valuation for their startups is growing louder, this is the first instance of a down round confirmed by regulatory filings.

In this case, Info Edge has now invested a total of .

`90 crore in Canvera and owns a 49% stake in the company. Other investors in Canvera include DFJ, Footprint Ventures and Mumbai Angels.

 

Experts are of the view that down rounds presage a troubled future either for the company in particular or in general for the sector that it operates in. Apart from a dip in the value of shares held by existing investors, founders and employees with stock options also take a hit in such transactions.

“Companies are valued based on both future and actual performance, if the valuation is coming down, (then) investors believe that future is not that well as compared to previous rounds.

However, it is not all gloom for recipients of down rounds. Although such terms are not widely known in the Indian startups sector, globally several companies have sur held by existing investors, founders and employees with stock options also take a hit in such transactions.“Companies are valued based on both future and actual performance, if the valuation is coming down, (then) investors believe that future is not that well as compared to previous rounds,“ 

However, it is not all gloom for recipients of down rounds. Although such terms are not widely known in the Indian startups sector, globally several companies have sur vived down-rounds and lived to tell the tale.

Facebook had raised capital from Microsoft at a valuation of $15 billion in 2007, two years later its valuation was down to $10 billion at the time of a funding round from DST Global. The publicly-listed company now has a market cap of nearly $300 billion.

Canvera said in a statement that it will use the latest round of funding to aggressively grow its business.

The company produces printed wedding albums, with business model of building the brand with the consumer but monetising through the professional photographers. Its main revenue source is printed albums sold to the photographer. Canvera’s online classifieds directory now has over 10,000 photographers listed from over 700 cities. In a sum-of-parts valuation of Info Edge, where its various businesses and portfolio companies were valued, Canvera’s revenues were pegged at .

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