Ola’s ‘private’ valuation becoming palatable for public market investors, but can it hold?

Venture capital funds are often blamed for inflating the valuation of technology startups beyond their fundamentals. This, of course, is subjective and debatable.

The valuation of a startup that is disrupting a legacy business can indeed be high enough and yet justifiable given the possible rocket-like growth trajectory enabled by digitisation of consumption patterns.

Over the last six months, however, there has been a sharp correction in technology stocks globally. This is yet to percolate deep into large privately held technology companies.

But what does this mean for technology startups that have been eyeing the public markets?

If the performance of Indian tech ventures that went public over the last one year is taken, then the experience of Paytm, Nykaa, Policybazaar, Zomato and Freshdesk paints a rather grim picture for the others sitting on the fence.

To be sure, there is no dearth of companies who have been on the verge of floating public issues. Droom, Mobikwik and Oyo for instance had also filed documents with SEBI.

Some or all of these IPOs could be now pushed back given the sentiments around technology ventures.

That said, one of the more keenly awaited public market journeys in the startup world is the proposed IPO of mobility venture Ola. The cab-hailing company has not formally made a move to float an IPO but it can take some comfort from what public market investors think about its prospects.

Valuation swing

An Ola investor, which had sawed its fair value estimate of the ride-hailing company’s valuation by more than half over a 15-month period starting from the onset of the Covid-19 pandemic only to see the rosier side of the business a year ago, has increased the value of the shares it holds in the company.

Ola, operated by ANI Technologies Pvt. Ltd, was one of the worst-hit technology startups in India as many companies switched to a work-from-home routine and physical distancing norms curbed demand for travel.

The company’s revenue plunged around 95% after India imposed a lockdown in late March 2020, co-founder and CEO Bhavish Aggarwal had said at the time. This even forced the company to cut costs and lay off staff.

This likely prompted a public fund managed by US-based investment firm Vanguard Group to slash Ola’s valuation from $6 billion to around $3.3 billion between December 31, 2019 and June 30, 2020. The fund again knocked down the value of its investment in the second half of 2020, to around $3 billion and then even further to $2.4 billion in early 2021.

Ola’s global peer, Uber Technologies Inc, had also seen its share price halve due to the pandemic. But New York-listed Uber later more than recovered.

Uber’s share price had tripled from the lows of March 2020 by April 2021. The company, however, has lost all of the gains since then partly due to the global selloff of tech stocks. It is currently trading at half its pre-pandemic level.

Bouncing back

The Vanguard fund increased its estimate of the share price for the period ended September 30, and then more than doubled it for the period ended December 31, 2021. Thereafter, it stayed put for the period ended March 31, 2022.

The latest mark-up means the public market investor believes Ola was valued a little over $6.3 billion as of March 31. For perspective, some reports had suggested Ola was looking at a valuation of as much as $8 billion in its proposed IPO this year. 

A markup by a public investment fund of what it believes is the correct valuation spells some relief for Ola as the previous markdowns raised doubts of the company’s performance as and when it goes public. It would also be banking on its electric vehicle arm’s success to provide relief to investors eyeing an investment in the company. Ola Electric raised $200 million in January at $5 billion valuation.

Investors, however, make their own estimates according to different valuation models based on cash flows and other operating metrics. According to the Vanguard fund managers, their estimate of Ola’s share value is based on ‘significant unobservable inputs’.

India had begun opening up its economy after two months of hard lockdown in May 2020. Most restrictions on businesses have been lifted, barring a few advisories to prevent the virus from spreading. While the swift spread of the third wave early this year had led to additional curbs, authorities have since then relaxed them due to a sharp fall in cases, partly due to vaccination suppressing the severity of the cases.

But Covid cases are on the rise again. A funding squeeze for tech startups and stock market volatility make matters worse. It would be interesting to see how the Vanguard fund values Ola in coming months.