TABLE OF CONTENTS

S. PARTICULARS Pg. No.

NO.

1 EXECUTIVE SUMMARY 1

2 CAUSES OF THE START UP BUBBLE 1

3 ESTIMATE OF WHEN THE BUBBLE WILL BURST 3

4 TRIGGERS THAT WILL BURST THE BUBBLE 5

5 IMPACT OF THE BURST ON THE E-COMMERCE INDUSTRY 6

STEPS GOVERNMENT SHOULD TAKE TO MINIMAL THE IMPACT
6
ON PEOPLE 7

1
EXECUTIVE SUMMARY

Its been seven years since the subprime mortgage crisiss financial meltdown, and

investments have preferred start-ups. Since the world has emerged back from the last
meltdown, start-ups have flourished. More so, tech start-ups.

These start-ups have seen early success with valuations upwards of $1 billion. And thats

given them a name unicorns. Among the popular companies that qualify as unicorns since

the last bubble, are Uber, Xiaomi, airbnb, Snapchat, Flipkart, Pinterest, Dropbox, Spotify,

Square, Jawbone, Slack, Snapdeal, Lyft, Olacabs, Evernote, GitHub, Quikr, Zomato and a list
of several more.

The list of billion-dollar plus companies is a long one. And to avoid missing out of the rush,

investors have heavily invested funds in emerging tech startups. Turns out, not all is really
well with this arrangement. This is where start-ups bubble started.

CAUSES OF THE START UP BUBBLE

Rising valuations around the globe:

India is experiencing a wave of prefix investing, which involves a market bias

for companies. India is experiencing a wave of prefix investing, which
involves a market bias for companies with an e- as a prefix or .com as a
suffix. There are lot of methods of valuations which have come up. Many e-
commerce companies like snapdeal and flipkart are valued at more than 20
times their net revenue.

A possible build-up of an Asset bubble:

An asset bubble, a periodic phenomenon, is when the value of assets increases

much faster than its real underlying value.

2
 New valuations methods adopted:

The accounting methods adopted by some companies. They are amortizing

discounts that they provide on sales as capital expenditure, instead of
accounting for this in the year of sale. This leads to inflation of their balance
sheets. Valuation is no longer a metric that denotes the absolute true & fair
value of the company. Even the e-commerce companies are valued on the
basis of their Gross Merchandise Value instead of Net Revenue. Current
valuations of these companies are driven by sentiments and speculations rather
than market fundamentals and earnings potential.

Mind share is the main game being played:

A lot of investors these days, just because of the e-commerce tag are funding
business model without actual revenue model. Some immature investors are
not just funding without revenue model but also pre-matrices and even pre-
launch. In India, we saw a huge wave of investments into Housing.com. Then
for various reasons, the company was the most sought after news. Now, there
seems to be an uncertain calm. In August 2015, it was reported that Housing
would complete the layoff of about 600 employees within 3 months, due
November.

Momentum investing has led to an epidemic of flawed valuations:

There are close to 142 companies in the Unicorn Club (valued over $1
billion) and 50% of which are 2015 entrants only. While many of these
companies have great ideas and potential, the euphoria has surged their
valuations to unsustainable levels and the Fear of Missing Out (FOMO)
syndrome has led investors to play along.

3
 Easy Fund Raising:

Over the past few years, it has been relatively easy for startups to raise money
from venture capitalists. Some of them have raised hundreds of millions of
dollars just to keep their companies afloat. But behind the scenes, they're
ploughing through that money either on marketing, overhead, or some other
expense, which results in high cash burn rates.

ESTIMATE OF WHEN THE BUBBLE WILL BURST

While startups may be the future, the present scenario is a bed of roses with the thorns untrimmed.
Recent layoffs at start-ups like Zomato, TinyOwl and Housing.com have led rumours that the
start-up scene in India is about to collapse. The bubble which was supposed to survive few
more years has already started straining and is about to burst.

By 2017,

Investors start exiting smaller players to corporate houses & other HNIs because
Planned & strategized growth to show maximum underlying value to be able to
get listed
Smaller players will eventually run out of cash and shut operations.

By 2018,

Upon going for an IPO, companys listed price shall not match the companys
valuation at the last round of funding. This is going to cause a major crash where
early exits will be lauded & a lot of investors are going to be an unhappy lot.
Though, one or two major players will make successful IPO exits for their investors &
founders and eventually turn into Industry stalwarts

On the basis of the above analysis and the current scenario, by Q1 of financial year 2018-19
the bubble is going to burst.

4
TRIGGERS THAT WILL BURST THE BUBBLE

Small players will eventually run out of cash and shut down operations
Declining valuations of startups like Uber and Dropbox
Companies may start struggling to raise further rounds of funding
Startups may get acquired by bigger players in the long run, with only three-four major
players existing in the market.
Industry saturation and consolidation underway.

5
IMPACT OF THE BURST ON THE E-COMMERCE INDUSTRY:

1.) Market saturation:

The start-up bubble will make the markets to reach saturation level that means
demand of the volume of product or a service in market level is maximized. This will
happen because of start-up level because there is abundant of supply of the service or
the product but the demand remained stagnated.

2.) Smaller players shut down:

In the initial stages of funding the entrepreneurs can be funded by angel investors but
when it comes to the stage of the venture capitalists the concept of proving the point
comes into the picture. Wherein most of the smaller to fail to do and shut down there
operations

3.) Market crash:

Upon going for an IPO, companys listed price shall not match the companys
valuation at the last round of funding. This is going to cause a major crash where
early exits will be lauded & a lot of investors are going to be an unhappy lot. Though,
one or two major players will make successful IPO exits for their investors &
founders and eventually turn into Industry stalwarts.

4.) No further investments:

Due to a bubble like this the investors will choose the risk free investments over
investing in start-ups. And also the start-ups which have a good scope of business will
also find hard time in getting investments. And also the start-ups which were funded
by source a type of funding wont be funded further.

5.) Bankruptcy:

Most of the start-ups will file bankruptcies due to the burst. world over, which is
bound to blight the Indian success story Valuation is no longer a metric that denotes
the absolute true & fair value of the company, but a plethora of macro & micro
factors.

6
STEPS GOVERNMENT SHOULD TAKE TO MINIMAL THE IMPACT
ON PEOPLE

1.) Increase in the interest rates:

Increase in the interest rate on the deposits can decrease the investments in the start-
ups. Rising interest rates normally push investors toward more cautious assets like
bonds instead of riskier bets on high-growth, cash-burning companies typical in the
unicorn crowd. These interest rates mainly help the non-mature investors to play safe
sided game.

2.) Revenue models:

Lot of the investors invest in pre revenue also pre metrics at times. We have great
amount of money which funded to too many businesses which dont have revenue
models. Twitter, Facebook and WhatsApp didnt have revenue models when they
became public although they didnt fail but still they are considered as overvalued
share.

3.) Start-ups going Public:

The minimum revenue a company to be listed as a public company minimum can be

as less as 30 - 40 cr .so this will influence the companies to go public and they high
risk of failing. The government should lift the minimum revenue rules so that it will
safeguard the investments of the people up to some extent. They should at least raise
the minimum revenue to 100 crores.

4.) Training the amateurs:

Successive rounds of fund raising to be done through venture debt & through more
mature investors. According to the studies more than 60% of the investors who invest
in start-ups are not professionals.so by training them the will make wise decisions on
the investments they make preventing the bubble to happen.