Impact of Rupee Fall on Startups: As the rupee, which has fallen about 7 per cent in the current calendar year so far, has adversely affected the inflation rate in India by making imports costlier, the depreciation in the domestic currency also is impacting the startup valuation and funding. Experts say the rupee fall, along with other economic factors, has also adversely the funding for startups. Know in details:
Tarun Sharma, managing partner of India-focused mid-market growth fund MegaDelta Capital, said, “A large majority of the VC (venture capital) funding in India is from funds that are denominated in the dollar, with funds evaluating their portfolio values and getting eventual returns from exits in the dollar. Hence, any sharp movement in the rupee-dollar rate causes portfolio values to be changed (everything else remaining the same).”
He added that what is more consequential in the ongoing dollar-rupee move is the backdrop of overall poor global economic sentiment, driven by concerns on growth and inflation in developed markets.
“That has resulted in sharp corrections in stock prices (especially in the technology space) with global capital providers becoming more risk-averse. That has had the twin impact of lower public market valuations (which are usually considered as benchmarks for VC/PE deals and also for marking the current value of the portfolios) and lower capital allocations to emerging markets,” he said.
So, the overall combination of risk aversion, lower public market multiples and the rupee depreciation results in lesser capital flows into the venture capital space and depressed valuations, Sharma said.
The rupee, which closed at 79.65 to a dollar, has fallen about 7 per cent since January 2022, due to the outflow of foreign investments, surging crude oil prices, tight US monetary policy and general dollar strength. This was aggravated by global uncertainties arising out of a geopolitical crisis due to the Russia-Ukraine war.
Foreign portfolio investors were net sellers since October 2021, which has hit the rupee significantly. However, now, the FPIs have started pouring money into the Indian market.
Amit Ratanpal, founder and MD of venture capital firm BLinC Invest, said, “What we need to focus on is whether there is adequate liquidity for the startups to grow the business. The valuations have already corrected themselves and this is not linked to the rupee depreciation only. Increased liquidity might actually drive up valuations a little as more capital will be available for deployment.”
He said there is more than $6 billion of liquidity which is available for deployment but that funders “are sitting on the fence as the general overall market is getting corrected”.
Asked about the estimated erosion of startup valuation due to the rupee depreciation, MegaDelta’s Sharma said, “It’s difficult to predict how much of the fall in funding is only due to the rupee-dollar change, as a combination of factors (including economic sentiments and growth-inflation concerns) is resulting in a sharp reduction in funding.”
He said investors who invested heavily last year now have portfolios that are either loss-making or seeing significant mark-downs. “Due to this, they are going slow on new investments.”
Due to financial stress, start-ups in India have been resorting to lay-offs to cut costs. Companies including edtech unicorn start-up Byju’s, Vedantu, Unacademy, Ola, Trell and Cars24, among others, have in total laid off more than 5,000 employees in India this year.
According to data from Venture Intelligence, only 3.5 per cent of the startups raising $100 million or above during January-June 2022 were profitable as compared with 29.2 per cent in the year-ago period.
Now, global capitalists are focusing on profitability rather than growth. Leading venture capital firm Sequoia Capital recently also told founders of its portfolio companies that the era of being rewarded for hypergrowth at any costs is quickly coming to an end with investors shifting towards companies who can demonstrate current profitability.
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