COVID-19 impact: As start-ups attempt to tide over cash crunch, valuations take a hit
“Valuation is a function of the business’ growth prospects, quality of management and quality of business. And in the current times, growth prospects across the industry have diminished. This has led to a correction in pricing for start-ups wanting to raise capital. Valued on annual recurring revenue (ARR) basis, the average multiples have declined by 30-40 per cent,” said Pankaj Raina, Managing Director, Research and Investments, Zephyr Peacock India
Raina noted that in addition to valuation, founders are being relatively more flexible on other parameters, such as exit rights, board seats, investor affirmative/veto matters and liquidation preferences.
Click here to read the full article on ‘Business Line’
Below is an excerpt from the post which first appeared on Business Line on 22 June 2020:
In a matter of three months, Covid-19 has turned upside down even the best laid out business plan across various sectors. The start-up ecosystem is no exception. Founders are trying to combat the crisis by conserving cash through various means ranging from pay-cuts to furloughs and re-evaluating expenses in a bid to extend their cash runway. They are now ready to accept funding at reduced valuations, said investors.
“Valuation is a function of the business’ growth prospects, quality of management and quality of business. And in the current times, growth prospects across the industry have diminished. This has led to a correction in pricing for start-ups wanting to raise capital. Valued on annual recurring revenue (ARR) basis, the average multiples have declined by 30-40 per cent,” said Pankaj Raina, Managing Director, Research and Investments, Zephyr Peacock India, a private equity firm.
With the road to recovery seeming long, even profitable firms are witnessing a similar diminution in value, investors said. According to a recent Nasscom report, approximately 90 per cent start-ups in India are facing a decline in revenues due to the pandemic. Furthermore, nearly 30-40 per cent of them have temporarily halted their operations or are in the process of closing down and 70 per cent firms have a cash runway of less than three months.
Raising bridge rounds
To stay afloat, many of these start-ups have started pivoting to new business models, diversifying their offerings, reaching out to their existing investors for immediate access to working capital. Many start-ups have also been raising bridge funding to keep their businesses up and running.
