Does the fall of the rupee have an impact on the evaluation and financing of startups? Know what the experts are saying

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Impact of Rupee Fall on startups: As the rupee, which has fallen by around 7% in the current calendar year so far, has had a negative effect on India’s inflation rate by making imports more expensive, the depreciation of the national currency also has an impact on the valuation and financing of startups. Experts say the falling rupee, along with other economic factors, has also hurt startup funding. Know in detail:

Tarun Sharma, managing partner of India-focused mid-market growth fund MegaDelta Capital, said: “A vast majority of venture capital (venture capital) funding in India comes from dollar-denominated funds, assessing the value of their portfolio and obtaining potential returns from dollar outflows. Therefore, any sharp movement in the rupee-dollar exchange rate causes portfolio values ​​to change (everything else remains the same). “

He added that what is more important in the current movement of the dollar against the rupee is the backdrop of generally lackluster global economic sentiment, driven by concerns about growth and inflation in developed markets.

“This has led to sharp corrections in equity prices (particularly in technology) as global capital providers become increasingly risk averse. This has had the dual impact of falling public market valuations (which are generally seen as benchmarks for VC/PE trades and also to mark the current value of portfolios) and declining capital allocations to emerging markets,” he said.

So the overall combination of risk aversion, falling public market multiples and rupee depreciation is leading to less capital inflows into the venture capital sector and depressed valuations, Sharma said.

The rupiah, which closed at 79.65 to the dollar, has fallen around 7% since January 2022, due to the flight of foreign investments, the surge in crude oil prices, the states’ tight monetary policy States and the general strength of the dollar. This situation has been aggravated by global uncertainties resulting from a geopolitical crisis due to the Russian-Ukrainian war.

Foreign portfolio investors were net sellers since October 2021, which hit the rupee significantly. However, now REITs have started pumping money into the Indian market.

Amit Ratanpal, founder and managing director of venture capital firm BlinC Invest, said: “What we need to focus on is if there is enough cash for startups to grow the business. Valuations have already corrected and this is not only related to the depreciation of the rupee. Increased liquidity could actually boost valuations a bit as more capital will be available for deployment. »

He said there was more than $6 billion in cash available for deployment, but backers “are sitting on the fence as the general market corrects.”

Asked about the estimated valuation erosion of startups due to rupee depreciation, MegaDelta’s Sharma said, “It is difficult to predict how much of the decline in funding is solely due to the rupee-dollar change combination of factors (including economic sentiment and concerns about growth and inflation) leads to a sharp reduction in funding.

He said investors who invested heavily last year now have portfolios that are either in the red or suffering major declines. “For this reason, they are slowing down new investments.”

Due to financial difficulties, start-ups in India have resorted to layoffs to cut costs. Companies such as unicorn edtech start-up Byju’s, Vedantu, Unacademy, Ola, Trell and Cars24, among others, have laid off a total of over 5,000 employees in India this year.

According to data from Venture Intelligence, only 3.5% of startups that raised $100 million or more between January and June 2022 were profitable, compared to 29.2% a year ago.

Today, global capitalists focus on profitability rather than growth. Leading venture capital firm Sequoia Capital also recently told the founders of its portfolio companies that the era of rewarding hypergrowth at all costs is rapidly coming to an end, with investors turning to companies that can demonstrate their current profitability.

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