Are VC funds making money by investing in Indian, Southeast Asian startups?

ANIUpdated: Monday, March 07, 2022, 09:42 AM IST
A total of 828 VC funding deals were announced in India during January-July 2021 while the total disclosed funding value of these deals stood at $16.9 billion. |

Last week, Accel (formerly Accel Partners) announced the launch of a $650 million fund which will invest in Indian and Southeast Asian startups. It represents the seventh time the venture capital fund is sinking money into the region and its largest to date.

Headquartered in Palo Alto, California, the American firm specialises in working with startups in seed and early growth stage. It also has offices in San Francisco, London and India. Among its marque investments are Facebook, Dropbox, Slack and Spotify. In India, Flipkart, Freshworks and Swiggy are some of the more famous companies that it has invested in.

Spectacular expansion of startup ecosystem in India

India has seen a spectacular expansion of its startup scene in the last few years. Over 52,000 entities are officially recognised as startups by the Department for Promotion of Industry and Internal Trade (DPIIT) as of July 2021. DealStreetAsia estimates that 30 firms in India reached $1 billion in valuation last year, making the total number of such "unicorn" firms touch 50 in the country.

While it is important and indeed takes a lot of skill, experience, and foresight to correctly pick a company at an early stage, it is equally important to be able to "exit" with a profit. The most common way for a startup to exit is via an Initial Public Offering (IPO). However, being able to list publicly on the stock market doesn't guarantee success.

SoftBank's Vision Fund reports quarterly loss

One of the largest venture capital funds in the world, Japan's SoftBank Vision Fund reported a quarterly loss of 825.1 billion yen ($7.3 billion) in the three-months which ended September 2021. This was due to the plunging value of recent listings such as South Korean ecommerce firm Coupang Inc. and Chinese ride-hailing app Didi Global Inc. Softbank's 2019 failed attempt to list US shared workspace services company WeWork is still fresh on many people's mind.

Investors were concerned over issues of corporate governance, valuation and future profitability. Although it did eventually manage to IPO after merging with a SPAC (special purpose acquisition company) in October 2021, with a valuation of about $9 billion, it was still way off the $47 billion valuation touted to investors during the 2019 IPO attempt. It's closing price last Friday was $4.77, some 68 percent off its October high.

Another of Softbank's bets which is not turning out too well is Singapore's Grab. Southeast Asia's largest ride-hailing and food delivery company listed on the US market December 2021 through a SPAC. Its host SPAC, Altimeter's share price was $11, the day before it listed but on the first day after listing, it closed at $8.75. Currently, as of last Friday, it was trading almost62 percent lower at $3.36.

Last week, Grab posted disappointing results - its first since listing - with revenue falling 44 percent to $122 million in the fourth quarter, well below the average analysts' estimate of $167 million. Its quarter-on-quarter loss expanded $465 million to $1.1 billion, including expenses related to Grab's listing. The firm cited higher driver incentives and promotional offers as the reason for the heavy loss. Its share price has now lost nearly three-quarters of its value since listing, valuing it at $12.6 billion, down from its $40 billion value at IPO.

Another ubiquitous Singapore new economy company and regional ecommerce giant Shopee which trades under the name of Sea Limited has also seen its value plummet in recent weeks. Its share price closed the week at a post-pandemic low of $97.44, valuing it at $54.35 billion. Last October, Sea Limited which is listed on the NYSE, was deemed by investors to be worth $208 billion when its share price hit an all-time high of $372.70. This made it Singapore's most valuable company and worth almost three times higher than Singapore's next most valuable company, DBS Bank which had a market value of $71 billion at its peak.

Last week, the Tencent-backed company reported a wider net loss of $0.88 per share than expected by the market which estimated that it would lose $0.59. The quarterly loss per share is similar to that achieved in the same quarter last year. Although total revenues rose 105.7 per cent to $3.2 billion year-over-year surpassing analysts' expectations of $2.91 billion, the market focused on its poor earnings, causing the share price to fall 31 percent for the week.

Sea's problems were not limited to poorer earnings. In January, Tencent offloaded $3 billion worth of its shares to reduce its holding in the company from 21.3 to 18.7 percent. Tencent however reiterated its commitment to retaining its substantial majority stake in Sea for the long term. Furthermore, its gaming arm Garena, had its popular survival shooting game "Free Fire" banned from app stores by Indian authorities for unknown reasons. India was Garena's top market for the game but makes up only 2.6 percent of its mobile game net sales in 2021.

Softbank's troubled investments in India

India's fintech firm, Paytm which listed as One97 Communications, is another one of Softbank's troubled investments. India's largest IPO which raised $2.44 billion fell 27 percent on its debut on the stock market in November 2021 and has never recovered. As of last Friday, it is trading at a discount of over 63 percent of its issue price of Rs 2,150. Its value is now at USD6.66 billion compared with its IPO value of $20 billion.

Restaurant aggregator and food delivery firm Zomato had a better debut rising to close 65.6 percent above its IPO price of Rs 76 in July last year. However, its current price is only a touch above its IPO price at Rs 79.85 and 52 percent lower compared with its November high of Rs 169.

Accel-backed software firm Freshworks which started in Chennai but now based San Mateo, California listed on Nasdaq in September 2021. Priced at $36 at IPO, it raised over $1.03 billion and surged as much as 33 percent on its debut. However, it has since pulled back to $17.02, a fall of almost 53 percent valuing the company at $4.81 billion compared with its IPO valuation of $10 billion.

The above examples of falling valuations must of course be put in the context of rising interest rates which has caused the price of growth stocks to fall. On top of that, there is considerable market uncertainty owing to the ongoing war in Europe.

Sensex vs Nasdaq

For comparison, during roughly the same period as the examples above, the Sensex has fallen 11 percent and the tech heavy Nasdaq is lower by 17 percent. Most growth companies that have listed recently have yet to turn a profit and in the current uncertain market, investors are favouring "value" stocks which provide more earnings certainty. The months following the outbreak of COVID-19 where value of growth stocks skyrocketed appears to be over and venture capital firms should expect to be less successful with the startups they have been working with.

However, the stock market is cyclic and there may come a time where growth stocks come back into fashion and make some of these investments look better.

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