A venture capitalist’s perspective on the Zomato’s markdown
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While I braced myself to collect my thoughts around Zomato’s markdown by HSBC, fresh news hit the ether of Flipkart’s markdown valuation by few more of its smaller investors. I wondered where to start first.
I tried to go through Zomato’s CEO letter to the public with sufficient amount of sympathy, but the initial question I had in my mind still remained unanswered — was that a letter of justification for its own present and future investors or a calm down call for its own employees? Because Deepinder is categorical about almost reaching profitability in most of the markets Zomato is present which discard the need of licking future investor’s booths and if that prompt letter was meant to calm down employees, we should really ask ourselves whether expectations of stocks to be cached is the strongest thing that keeps its employees on board in the absence of something else.
First of all I do not believe that HSBC didn’t bother to acquaint themselves with the field before putting up their report.
Devaluation of stake in a private company is one of the toughest decision an investor or a financial institution could possibly make because it hits down their own success metrics. An abundance of such write-downs could impede their ability to raise their next fund. So an anxious investor would in fact do anything they can to prevent a down round.
The CEO’s bias
Bill Gurley masterfully observed that modern day founders have never really experienced tough times before. This results in a strong belief that any sign of weakness (such as a down round) will have a catastrophic impact on their culture, hiring process, and ability to retain employees. Rather than making long term decisions, individuals optimize for short term dynamics.
Their own ego is also a factor — will a down round signal weakness? It might be hard to imagine the level of fear and anxiety that can creep into a formerly assured mind in a transitional moment like this. Many modern entrepreneurs have limited exposure to the notion of failure or layoffs because it has been so long since these things were common in the industry
This might explain Deepinder’s unusually quick and anxious need to respond to the HSBC’s anti-unicorn report. After all he did decide to abhor commenting on the company’s current valuation as this WSJ article reports.
However a down round or a markdown is not necessarily the most ultimate evil for a CEO. Many world class CEOs have had experiences with markdown experience one of them being Marc Benioff from Salesforce. Reed Hastings at Netflix also raised money in a high profile down round as a public CEO. So it really isn’t the end of the world if Zomato is valued lesser than its previous round. If you cannot handle a down valuation you should seriously consider abandoning the CEO position. Being a great leader means leading in good times as well as tough ones.
Macroeconomic conditions
While here at EVC Ventures we too opted to partake in the high level of exuberance and expectations that saturated the tropical Indian air, we must acknowledge that not all expectations have played themselves out the way we have imagined. The Indian middle class, the engine of growth and consumption didn’t flourish the way we expected. Some recent analyses have also demonstrated that the unusual potential in India in comparison to China is not as great as we tapped our backs to be thanks, to the openness of the Indian economy. Of course India is not the only market where Zomato operates but it still holds the major chunk of it’s revenues.
All said and done the thoughts above bring me to a conclusion that the HSBC report might not be as unreasonable as Deepinder would like to suggest. He rightfully claims of the opportunities for growth still untapped within the existing user base but unless his fast response to rumors of markdown is executed for the sake of calming down distressed investors he might want to sit his ass and do twice as much as before.
As it appeared on Tech in Asia
