1Mby1M Virtual Accelerator Investor Forum: With Sasha Mirchandani of Kae Capital (Part 2)

Sramana Mitra: You mentioned the unicorn valuations of these e-commerce companies in India. The valuations are quite outrageous. How do you analyze what’s going on?

Sasha Mirchandani: There’s somebody paying for those companies that have taken them to big valuations. 2016 will be a very interesting year. It will be a year of reckoning. It will be a separation of the men from the boys. The jury is out on what will happen by the end of this year.

With capital now becoming far more difficult to source, I think there’s going to be more consolidation. It’s going to be very interesting to see what happens regarding the company that I just mentioned with Amazon also breathing down their necks. All the entrepreneurs are outstanding. I’m sure each of them has their own strategies to survive and thrive. I think 2016 will be interesting because capital is now much more difficult to source. Therefore, only the best companies will survive beyond this year.

Sramana Mitra: The trend that we are seeing in the US is that 57 unicorn companies in the last year have experienced significant down rounds. I don’t need to underscore for you how bad down rounds are for entrepreneurs. For the audience, I think we should explain a bit better about what down rounds mean.

Sasha Mirchandani: Down round is a company getting a lower valuation from the last time they got valued. That’s going to happen in India as well. I don’t want to take guesses on which companies. The ones that find it difficult to raise capital, they may have no choice but to raise down rounds to survive. In the US, public market companies are now less valuable than private market companies.

It doesn’t make sense. Therefore, it’s going to be difficult for them to become public. That’s why you’re seeing a choke in the US where a lot of these companies can go public. If they do, they have to face down rounds. It’s going to be pretty interesting to see what happens.

Sramana Mitra: What is your analysis of the exit scenarios on India? We haven’t seen any exits yet. The phenomenon of venture capital has been around now for a little while. How do you read that as a VC? You have to have exits. How are you and your peers analyzing the market in that sense?

Sasha Mirchandani: The Indian VC ecosystem has been promised exits from LPs. We always tell them that that has always been a challenge in India. Slowly but surely, things are definitely improving. We’ve had exits like MakeMyTrip, which has been a billion dollar company.

My own investment Myntra was an early exit to Flipkart. The IPO is always going to be much slower, but a healthy M&A market is created at the top end and the bottom end. Our fund has sold three companies in the last three months. These are all small exits, but at least there’s an opportunity for people where other companies are buying out our company.

Sramana Mitra: However, these are stock exits. These private-to-private exits are not cash exits.

Sasha Mirchandani: They are cash. FreeCharge is a lot of cash, if not all of it.

Sramana Mitra: You’re saying that people are raising capital. In the case of Flipkart and some of these other companies, they have raised a lot of cash and were in a position to do cash buyouts of other smaller private companies.

I think it’s been an unusually free-flowing cash availability scenario for the last year or year and a half, but the situation is going to change. This year onwards, that situation is going to change. My analysis would be private-to-private cash exits are going to be harder to do, at least, the big ones. The small ones are okay.

Sasha Mirchandani: You’re right. The big ones are still doing some, but this is the early part of the year. As the year progresses and cash becomes king, I do agree that a lot of the deals will move into more equity swaps. It’s not ideal, but it’s still an exit. That’s going to happen for a while until things settle down a bit. 18 to 14 months is my guess.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Sasha Mirchandani of Kae Capital
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