The Volatility of Valuations: How are Investors Recalibrating It? The startup ecosystem has indeed witnessed some corrections in valuations in recent times. Exuberant valuations that were prevalent in certain sectors, particularly in the tech industry, have faced increased scrutiny and adjustments.

Many Indian unicorn startups — startups valued at over $1 billion — have experienced a sharp decrease in value as a result of the slowdown in funding.

In the past several weeks, VCs and investors have drastically reduced the valuations of many major Indian startups. Swiggy, BYJU, and Meesho all had their valuations decreased by Invesco, BlackRock, and Fidelity Investments, respectively.

Online pharmaceutical startup PharmEasy is the most recent Indian unicorn to run into difficulty. According to multiple reports, the company is in a deep crisis and has had its valuation drastically reduced while it looks for new capital. PharmEasy, which was formerly valued at $5 billion, intends to raise over $300 million at a reduction of 90% from the previous valuation, according to a TechCrunch story quoting sources.

PharmEasy's market value will plummet to between $500 and $600 million. As per the report, PharmEasy is raising more cash to repay Goldman Sachs, from whom it borrowed around $285 million last year, as it acquired a majority stake in diagnostics solution provider Thyrocare for more than $600 million.

Related Article: Valuation Cuts Calls for Prioritising a Sustainable and Resilient Startup Ecosystem

But why is there a cut in valuations and how are investors recalibrating it?

According to Dhainu Das, Co-founder of Agility Ventures, valuation cuts in high-growth companies are often caused by market corrections and a realignment of investor expectations. Investors reassess the valuation of companies as they mature and progress through various growth stages depending on a variety of variables, including market conditions, the competitive landscape, and financial performance. It's crucial to remember that valuations are dynamic and are subject to changes in accordance with market dynamics.

"Valuations are heavily influenced by a company's revenue generation and path to profitability. In the case of Swiggy and PharmEasy, the valuation cuts may reflect concerns related to their financial performance. Investors may be reassessing growth projections, operational efficiency, or competition impacting their ability to achieve sustainable profitability. These valuation adjustments enable investors to align their expectations with the current business realities," he said.

Sushanto Mitra, Founder and CEO, Lead Angels believed that valuations fluctuate based on supply and demand dynamics in the investment ecosystem. If there is a decrease in available capital or a decrease in investor confidence, it does impact valuations but there is usually a lag effect. This means that when supply of capital comes down, founders are not immediately ready to bring down valuations but as capital scarcity continues and companies start running out of money, they are forced to reconsider valuations.

"At Lead Angels, investors themselves analyze multiple factors and conduct due diligence to arrive at valuations that align with their investment goals and risk tolerance. At the same time we do study industry trends to make sure our valuations are not over the top," he continued.

Inflection Point Ventures' Co-founder Ankur Mittal acknowledges the recalibration of valuations at certain funding stages but continues to assess startups based on market potential, business strength, and founder capabilities. "Our approach aligns with the intrinsic value of startups. Despite the moderation in valuations, our investing philosophy and valuation principles remain steadfast," he added.

Neeraj Tyagi, Co-founder and CEO of We Founder Circle, has been observing and taking part in the ongoing recalibration of values over the past year as an investor, and this trend is anticipated to continue. According to him, the industry views this adjustment favourably since it shows that both founders and investors have evolved in their thinking.

Blume Ventures has adopted a conservative stance towards valuations. "We regularly review the portfolio on a quarterly basis, and if we determine that the current valuation mark in our books is unlikely to be sustained over the next six months, we take appropriate provisions in our portfolio. However, it's worth noting that even if a company's valuation has been marked down, there remains a possibility that the company could successfully raise capital at a higher valuation in the future," shared Ashish Fafadia, Partner at Blume Ventures.