Imagine having run with everything you’ve got in a race for seven years. Crossing every chasm, surviving every fall, beating off every challenge. Only for someone to come in front of you and say, “Stop! You took a wrong turn around two and a half years ago. Go back and start from there again.”

That’s what Flipkart’s recent “down round” was like, in some sense. Amidst the joy of having gotten another $1 billion from powerful and strategic investors like Tencent and Microsoft (both of them are said to have invested $500 million each), was the bittersweet feeling of having raised money at a valuation that was surpassed somewhere towards the end of 2014.

From $6 billion in July 2014 to $11 billion in December 2014 to $15.5 billion in July 2015.

Back to $10 billion in March 2017.

Down rounds are tricky. Unless managed proactively and communicated positively, they can be the beginning of a death spiral for startups.

The clock is turned back on a company’s valuation, replacing investors gains with losses. New investors get more shares per dollar invested as compared to the ones already around. Older investors either end up owning even lesser of the company than they already had or thanks to “anti-dilution” clauses they manage to extract their pound of flesh from the company in terms of more stock. Employees and other equity holders are left with options with negative worth. Bitterness and ennui everywhere.

To Flipkart’s credit, it seems to have pulled off its down round rather well. Normally in down rounds, when a newer investor comes in at a lower valuation, older investors are issued additional stock at no extra cost so that their earlier shareholding levels aren’t “diluted”.

But hectic behind-the-scenes discussions between Flipkart’s older investors (there are 15-16 of them) convinced them to not exercise their anti-dilution rights when Tencent and Microsoft invested $1 billion.

No Indian investment bankers were learnt to have been involved in the deal. Instead, the deal was orchestrated by a heavyweight Goldman Sachs’ partner, Pawan Tewari, who’s based in San Francisco.

And when the dust from the discussions settled, Flipkart had done a “clean reset” of its overvalued past and established $10 billion as its new valuation benchmark. $5 billion of notional gains had been erased without much acrimony.

If that hurt Tiger Global, Flipkart’s biggest investor, staunchest backer and largest shareholder, it didn’t show it publicly.

Even tigers get the blues

In January, Tiger Global emerged from the shadows from where it was alleged to have controlled Flipkart, and took centre stage. It did this by installing Kalyan Krishnamurthy, previously an MD at Tiger Global itself, as the new CEO of the company, formally marking the passage of Flipkart to being an investor-run company. Sachin Bansal and Binny Bansal, the founders of Flipkart, were both, in turn, shunted out of the hot seat of CEO and given respectable sinecures.

AUTHOR

Rohin Dharmakumar

Rohin is co-founder and CEO at The Ken. He holds an MBA from the Indian Institute of Management, Calcutta and an engineering degree in Computer Sciences from the R.V.C.E., Bangalore.

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