In a disconcerting turn of events, the Indian startup landscape has been beset by two significant crises. Some of its major players, including ed-tech giant Byjus, food delivery startup Swiggy, and social commerce platform Meesho, are confronting significant valuation slashes and mass layoffs, precipitating a profound shift in the ecosystem.
Let’s ascertain the causes behind the current fall in the valuation of startups, and why the likes of BYJUs, Swiggy and Meesho are going to have a tough time ahead.
The great fall of BYJUs
Byju’s, once hailed as an ed-tech behemoth, has recently made headlines as it laid off around 1,000 employees across all departments amidst a restructuring process. This move coincides with the company’s ongoing legal struggle with US lenders over a staggering USD 1 billion term loan B. The situation seems all the grimmer given the fact that the company has successfully raised over $5 billion throughout its lifetime but is now grappling with repaying its debts.
Critics are quick to highlight the company’s alleged detrimental impact on the broader ed-tech ecosystem, and for a rare moment, they are right as well. Accusations of fraudulent sales practices and deceptive policies related to payment terms and refunds have swirled around Byju’s, further denting its credibility and leading some to question its business model.
Also read: A bigger scammer than Hera Pheri’s Raju: BYJUs
BYJUs not alone
However, the turmoil isn’t limited to Byjus alone. In May, Invesco, an American investment management company, slashed the valuation of food delivery startup Swiggy by 33% to 5.5 billion to accurately reflect its shareholding. Market pundits speculate that this downturn could be further aggravated by the advent of the Open Network for Digital Commerce (ONDC), a government initiative aimed at promoting open networks for all stakeholders in the digital commerce ecosystem.
Among the most significant blows to the Indian startup landscape was Blackrock’s recent decision to write off over 60% of Byjus valuation in its quarterly filing. Other startups have not been immune either, with companies like Ola, PharmEasy, and PineLabs also facing considerable devaluations.This wave of valuation cuts by prominent investors and venture capitalists is sending shockwaves across the Indian startup ecosystem. One of the most recent casualties is Meesho, whose valuation was significantly reduced by Fidelity Investments. This economic reshuffling is casting long shadows on the value of Employee Stock Ownership Plans (ESOPs) that employees of these startups hold.
The significance of ESOPs
ESOPs have become a crucial component of the remuneration package in the startup world, often used as a means to attract and retain talent. Gaurav VK Singhvi, an angel investor and the founder of We Founder Circle, shed light on the impact of decreased valuation on ESOPs, explaining, “When a startup experiences a decrease in valuation, it directly affects the value of ESOPs granted to employees.
“The strike price of the ESOPs, which represents the price at which employees can purchase company shares in the future, is typically set based on the company’s valuation at the time of grant and remains constant, irrespective of market fluctuations. When the valuation decreases, the market value of the shares plummets, leading to a reduction in potential profits for the employees when they exercise their ESOPs.
The repercussions of these valuation cuts extend beyond financial implications. As Aditya Narayana, MD of CIEL HR, warns, “A drop in the company’s valuation estimates reduces the value of the ESOPs held by the employees. This not only impacts the retention rate but also dents the attractiveness of the employer brand.” In essence, a slashed valuation could discourage talent from associating with the company and lead to higher attrition rates.
Tough road ahead
Adding to the woes of the startup sector, mass layoffs have become a common occurrence. So far, 2023 has been a challenging year for the Indian startup community, with nearly 70 startups having laid off around 12,000 employees. Combined with valuation cuts, this trend has created an atmosphere of uncertainty and decreased morale among employees.
To sum up, the Indian startup ecosystem is currently grappling with a formidable set of challenges in the form of sweeping valuation slashes and mass layoffs. These developments bear far-reaching implications not just for the viability of these startups but also for the value of ESOPs, the attractiveness of these startups as employers, and their ability to retain and attract top-notch talent.
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