The availability of capital

I recently came across the tweet below highlighting changes in the valuation of three leading internet startups in India.

Flipkart is one of India’s largest horizontal e-commerce sites (similar to Amazon), Snapdeal is a leading online marketplace (similar to EBay), and OlaCabs is a leading on demand transport booking app (similar to Uber). The chart shows that Flipkart’s valuation has increased 11 fold in 7 months, that of Snapdeal has increased 5 fold in 3 months, and that of OlaCabs has increased 14 fold in 9 months.

One of the reasons for this increase may be an increase in the company’s liquidation stack. So investors may be accepting an increase in the headline valuation of the company in exchange for greater downside protection. This is a risky practice as I wrote in yesterday’s post on liquidation preferences.

A second reason is likely the fundamentals of each company. The companies are likely growing fast and hitting their targets.

However, the increase in the valuations of the companies in less than a year’s time seems too high to be justified by increases in the size of the liquidation stack and company fundamentals. These are already very large companies so they’re unlikely growing at the very fast rates which we usually associate with startups.

The very fast increase in valuations is most likely driven by the availability of capital. India has become a very hot market for international VC investors who are following each other into the country. This capital needs to be placed and it’s safer to bet on a large company that already has a lot of international funding together with other international investors than to invest smaller checks into multiple earlier stage startups on your own.

Valuations are not only a function of company fundamentals and, more recently, liquidation stacks, but also the availability of capital. Entrepreneurs should pay attention to this and, if they have the luxury to do so, raise as much money as possible when their market is hot. This can be in the form a hot geography, as in the case of India right now, or a hot sector, like today’s on demand space.