Skyrocketing unicorn valuations set to start heading south

By Salman Hameeth & Tushar Goenka

With veterans of the financial world calling out the accounting practices of startups, the sky-high valuations of unicorns could start heading south. The way revenue is recognized at some companies, including Byju’s, has raised eyebrows, as has the practice of adjusting Ebitda (earnings before amortization of interest, taxes and amortization).

TV Mohandas Pai, chairman of Aarin Capital and former CFO of Infosys, pointed out that providing adjusted Ebitda can be misleading.

Companies, Pai observed, could adjust Ebitda in any way that would lead to a lack of comparability and reliability, ultimately leading to “deception and distrust”.

“Startups should follow accounting practices established by regulators and make disclaimers available.

“If they have a set of metrics that is judged by investors and gives them the previous valuation, they should disclose it,” Pai told FE.

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India’s most-valued start-up, Byju’s, reported a dramatic rise in losses and weak revenue growth for FY21, in results that were reported to the Registrar of Companies (RoC) 18 months late.

The edtech major made changes to its revenue recognition accounting practices in FY21.

Ankur Bansal, co-founder and director of venture debt firm BlackSoil Group, pointed out that the principle of accrual accounting has often been a methodology for playing fast and loose with revenue figures.

“Since Ebitda is typically negative, earnings are often the primary driver of valuations,” he explained. Businesses are therefore incentivized to increase revenue through creative accounting practices.

It is now feared that the poor performance of some companies after their listing is linked to the fact that they followed different accounting practices before the IPO, which led to an overstatement of their revenues and profits.

The CFO of a large private sector company pointed out that startups should be asked to disclose past deviations from accepted standards so that investors in the IPO can get a true picture.

“PEs may be willing to invest at exorbitant valuations, but the rest of us would like to value the company properly,” he said.

Driven by fear of missing out (FOMO), private equity and venture capital (VC) funds don’t care too much about the price they pay, much to the delight of founders.

A managing partner of an early-stage VC focused on the consumer internet said: “When the basis of valuation, a mathematical formula, separates from reality, then you make it all up and the people there believe,” he said, speaking conditionally. of anonymity.

Early warnings of the slump in tech stocks on US stock markets late last year didn’t stop investors from paying the highest valuations.

Hotel aggregator OYO, which is preparing for an IPO, recently reported a net loss of Rs 350 crore in the first quarter of FY23, despite posting a positive Adjusted Ebitda of Rs 7 crore with an annual margin of 40%.

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