A counter point to the “I told you so” type comments on the down rounds and investor pressure on Unicorns and their discounting strategies.
Whether the valuations of some of the technology companies in India were unreasonably high has been a matter of great debate over the past few years, and certainly picked up after announcements of markdowns, down rounds and low-value sell offs in some of the star startups.
It must however be noted that investment committees in VC firms take well thought out decisions based on their perception of risks and rewards associated with the investment under the given circumstances and market conditions. Some of these investors were willing to put money behind their belief that to have a reasonable chance of creating a star performer in some of these categories, they will have to bet on teams that had what it takes to build a large, formidable business. These are categories which typically have a couple of dominant players – may be 3 – with others merely co-existing in the market. In such categories, unless the company they bet on became a dominant player, investors were unlikely to get good returns on their investments.
No one pays a premium for ‘also ran’ companies. They were, therefore, willing to make large investments in strong teams in the categories like e-commerce, housing, hotel room aggregation, cab aggregation, etc. I.e. Investors had identified the race they wanted to bet in, and put their money behind the horses they felt had the best chances of winning.
If you reflect upon this approach, it is not unreasonable for these investors to conclude that unless the likes of Flipkart, Snapdeal, Ola, Oyo, etc. had access to very large sums of money, they might not have had a chance to even survive in the market in the face of formidable competition from global giants with deep pockets and established organizational competencies.
Investors were willing to bet large sums to enable their investee companies to dominate the market. That goal was achieved. The companies and founders they bet on DID demonstrate their ability to execute well. The model of discounting and incentivizing may or may not be the smartest decision.
Without discounts, these Unicorns may grow slower, may even lose some customers. Some may lose quite a lot. But that they have built formidable businesses cannot be questioned. If they stop discounting, they will have a strong business. It may be smaller than their current numbers in the short to mid term. But profitable they can be.