At the beginning of January when the world was still celebrating the new year, hundreds of employees of Mohalla Tech, which runs the social media platform ShareChat and short video platform Moj, stared at an uncertain future. The company had laid off around 20% of its workforce. Some key executives also parted ways later. The Bengaluru-based company also shut down its fantasy sports platform Jeet11 (revenue Rs 14 crore) in December 2022 and terminated the services of around 100 employees. The company blamed the fiasco on “external macro factors” which allegedly impacted the availability of capital. The sudden layoffs by such a big player shocked the industry. After all, only a few months ago, ShareChat had raised $520 million (approx Rs 4,250 crore) from Google,

Times Group and existing investors at a valuation of $5 billion (approx Rs 41,000 crore), as per the company’s own announcement in June 2022. Meanwhile, it acquired a short video app MX TakaTak as well.

The company’s valuation stands 117-fold of its operating revenue, which was Rs 350 crore in 2022, as per its consolidated financials procured from Tofler. It posted a whopping Rs 3,000 crore of losses in the same year.

Similar was the case of VerSe Innovation, which operates news aggregator Dailyhunt and short video app Josh. It laid off 5% of its 3,000-strong workforce in November 2022 following a “mid-year performance review to cut costs and streamline operations”. The company had raised $805 million (approx Rs 6,600 crore) in April 2022 from Canada Pension Plan Investment Funds, projecting its valuation at $5 billion (approx Rs 41,000 crore). This was when its revenue was Rs 964 Cr and losses amounted to Rs 2,460 cr in FY22.

Microblogging site Koo, which positioned itself as the Indian alternative of Twitter, laid off 5 percent of its employees last September just before entering into the second round of funding. The Bengaluru-based company was reportedly valued at $275 million (approx Rs 2,250 crore) after receiving $6 million (approx Rs 490 crore) in the second funding round in November 2022.

Its operating revenue in FY22 was barely Rs 14 lakh, better than the previous year’s Rs 8 lakh, but losses mounted 5.6-fold within a year. Importantly, the company’s expenses were in the range of Rs 202 crore, of which two-third were the marketing and promotional expenses, as per Entracker data.

Valuation hype

Over the past decade, Indians have celebrated the success of homegrown startups with multi-billion dollar valuations. However, lately, the steep valuations of those startups are becoming a cause for concern. Such is the crisis that many startup founders fear running out of funds after investors cautioned about the funding winter last year.

The series of valuation fiasco also raises a big question mark over the valuation hype in the media sector, an issue that has been simmering for long but remained under carpet as stakeholders are not willing to speak on record.

Are such valuations sustainable?

Industry leaders wonder whether hefty valuations of startups are sustainable.

Calling this a usual market correction that the investment cycle goes through every few years, Harish Tibrewala, Joint CEO, Mirum India, noted, “When there is a new opportunity, everyone rushes in to get a piece of the pie and valuation numbers are not really linked to growth or profit. Tell a good story and chance is someone is willing to invest money. Once saturation comes in, the market starts looking at hard numbers: revenue/growth/profitability. And obviously in most cases the valuation tumbles. A solid business which either has a road map for profitability or has an IP that can get acquired, continues to remain in the game. The rest eventually fall out.”

Ashish Bhasin, Co- Founder and Chairman of RD&X Network, feels marketing strategy of startups coupled with global economic situation have led to this crisis.

“Besides the controversial financial strategy of startups, a combination of macroeconomic factors, such as the global economic constraints and the Russia-Ukraine war, reduced capital flow globally which is bringing a sense of rationality to startup valuations,” says Bhasin.

Bhasin, however, insists that high valuation by startups is not an aberration and technology companies often have to project high valuation. “Tech companies have to spend upfront to build the product based on which they project growth and their valuation. Things usually move as per plan until markets hit roadblocks.”

Karan Taurani of Elara Capital echoes the sentiments. “There is nothing wrong with the steep valuation of startups which are in the growth phase. Sometimes their growth stagnates for reasons beyond their control.”

Given the fluid situation, how much devaluation is likely for such startups in the next fiscal? Tibrewala opines, “I don’t know their business well enough. But a $5bn valuation for a business with $50 mn in revenue and $500 mn in losses just does not seem sustainable.”

Valuation figures are meaningless until the company goes for another round of funding, says a highly placed media executive. “Valuation is significant only for funding rounds. Fund seekers often project their future growth in anticipation to continue their momentum and a good business environment. However, things often may go awry. In such a scenario, companies either quote a lower valuation in the next funding round, or else investors themselves cut them down,” he said.

ShareChat’s response

A company spokesperson stated, “Since our launch eight years ago, ShareChat and our short video app Moj have seen incredible growth. However, even as we continue to keep growing, there have been several external macro factors that impact the cost and availability of capital. Keeping these factors in mind, we needed to prepare the company to sustain through these headwinds.”

“Therefore, we had to take some of the most difficult and painful decisions in our history as a company and had to let go of around 25% of our incredibly talented employees who were with us in this startup journey. This included Jeet 11, which was a separate business unit. The layoffs affected employees across the spectrum,” he added.

“As capital became expensive, companies needed to prioritize their bets and invest in the highest-impact projects only. Over the last few months, we had aggressively optimized costs across the board, including in marketing and infrastructure, among other cost heads and ramped up our monetisation efforts. The decision to reduce employee costs was taken after much deliberation and in light of the growing market consensus that investment sentiments will remain very cautious throughout this year. At the same time, we are doubling down on our efforts behind advertising and live-streaming revenues. With these changes, we aim to sail through the uncertain global economic conditions over 2023 and 2024 and come out stronger,” the spokesperson said.

Koo’s response

Defending its position, a Koo spokesperson stated, “Like most startups, Koo also built in a workforce to account for spikes. Given the current market environment and external realities of a global slowdown, we get affected too. Some of the most profitable companies in the world have shed tens of thousands of jobs. We are a young startup with a long way ahead of us. While we are well capitalized, it’s important for businesses of all sizes to adopt efficient and conservative approaches to see this period through.”

“In line with this, we have made some roles across certain teams redundant over the course of the year and have supported them through compensation packages, extended health benefits and outplacement services. As history has proven, there will be better times for all of us collectively and we are most positive about what we are building for the world and what Koo means for India’s foray in the world of social media,” the spokesperson said, without sharing the number of sacked employees.

“The revenue figure you have stated is for FY22 before we began our monetization efforts and is income from non-operational activities. Koo started its monetization experiments in September 2022 and within 6 months we had one of the highest ARPU per DAU compared to Indian social media companies. We have over 100+ brands advertising on the platform today and we will continue to experiment with monetization as we look to build a sustainable business.”

VerSe Innovation silent

Verse Innovation chose not to respond. At the time of layoffs last November, Umang Bedi, co-founder was quoted as saying “Given the current economic climate, like other businesses, we’ve evaluated our strategic priorities. Considering the long-term viability of the business and our people, we have taken steps to implement our regular bi-annual performance management cycle and made performance & business considerations to streamline our costs and our teams. This has impacted 5% of our 3,000-strong workforce.”