The retail giant Reliance Retail gobbled up another startup Urban Ladder by acquiring 96% stake for Rs 182.12 crore, yesterday. But this time it wasn’t a regular run-of-the-mill acquisition.
This is neither the first nor the surprise move made by Reliance to have a startup under its umbrella. In August we first reported about the possible acquisition of Urban ladder by Reliance. Still, the acquisition has dropped many jaws as it raises a lot many serious questions about the country’s startup ecosystem.
The Bengaluru-based UrbanLadder, since its inception in 2012, raised close to 800 crores (US$114.9 million) from investors such as Sequoia Capital India, Kalaari Capital, and Steadview Capital. At its absolute peak in January 2018, the startup was valued Rs 1,200 crores which then later dropped to Rs 750 crore (a little over $110 million) in 2019. Fast forward 2020, Reliance found it worth nearly Rs. 195 crore only – a sharp decline of valuation by 84% in just 2 years.
So, the two questions that arrive here are –
- Why would a startup with such an inflated valuation sell for a mere 182.2 crore?
- Is this the indication of a larger underlying problem with valuation in the startup ecosystem of India?
Urban Ladder: Crippled Growth, More Competiton, Outstanding Losses & Debt
Spearheaded by Ashish Goel and Rajiv Srivatsa, Urban Ladder, the inventory-led model of selling furniture and decor witnesses a lot of traction and made heads turned when it started in 2012. However, it had to keep raising funds to fuel their growth to compete with the competitors such as Pepperfry and the Swedish giant IKEA which invaded this space in 2011 and 2018, respectively.
Until the mid of 2018, the company raised nearly $112 million from various investors. Since then the company has been struggling to raise funds to stay afloat. Despite putting all the best efforts, Urban Ladder could raise only $2 million in November 2019.
It started discussing the possibility of acquisition which players such as Flipkart, Fabindia, Livspace and WakeFit but none of them led to any fruition.
Urban Ladder, in FY19, even though the company minted a profit of Rs 50 crores, it had stacked up losses which stood at Rs 846.87 crores at the end of last fiscal which they needed to make up for.
The company kept it hope!
In February 2020, when COVID-19 hit India, Urban Ladder came extremely close to shutting doors as their offline stores remained closed for months like all other businesses and their products remained undelivered.
Urban Ladder had 40 crores in debt on its books which it borrowed from venture debt firm Trifecta Capital, and their revenues stooped to 15 crores which then brings us to the acquisition by Reliance Retail.
Now, the obvious shortcomings in Urban Ladder’s operational capabilities are something that their investors must surely have known. However, the fact that they kept pouring more money into the firm like gasoline and prop up its valuation suggests there’s definitely an underlying problem in the entire ecosystem which needs to be highlighted.
Profitability and Valuation: Out of Sync
The latest acquisition is a perfect case study of how VCs and investors in India view long term profitability and valuations. It seems like there’s barely any sync between them at all.
A company, which has so far raised over Rs 800 crore with a paper valuation of over Rs 1,200 crore falls like a house of cards when Reliance decided to do the due diligence of the startup’s financial book. The india’s largest publicly traded company, apparently, rejected all the insane metrics and calculations done by Urban Ladders’ investors and founders before finding it worth no more than Rs 200 crore only.
The huge dependency on investment dollars and strategy to keep acquiring the market at any cost are to blame here.
While it is understood that a budding and promising startup need all the cash it can get for its initial lift-off, it doesn’t necessarily mean they need to keep relying on the same throughout their entire lifecycle.
A well-structured startup, instead of depending on VC money for long, would definitely shift gears towards relying on their cash flow as soon as they can and turn profitable.
However, that’s never really the case with most Indian startups.
Indian startups and startups abroad alike are often seen to be raising several rounds of funding for expansion. At the same time, they keep posting losses consecutively for several years before they turn profitable, something which is a huge red light.
The chase for growth more often than not ends up overlooking the state of financial health and as a result, many startups die a brutal death.
TinyOwl, Stayzilla, JustByLive, PepperTap, Voonik are just a few to name who solely relied on investment money, boasted paper valuation and finally got shutdown as soon as investment dried up.
Therefore, all in all, both parties – investors and startups need to acknowledge that huge valuations are no proof of smooth sailing in the future even though they are needed for brand projections and display of stature. Hopefully, Urban Ladder’s acquisition becomes an eye-opener for the entire startup ecosystem of India.
What’s your view on the the acquisition of Urban ladder by Reliance, do let us know in the comment section below.