According to a note from brokerage firm JM Financial, the majority of Sequoia Capital’s portfolio unicorns and soonicorns (soon-to-be-unicorns) in India are heavily concentrating on profitability and delaying or even cancelling new initiatives that typically have a protracted and uncertain gestation period for return on investment. This is because of an intensifying funding winter.
The existing funding climate and the response of the public markets since the start of the current rate hike cycle have clearly led to a greater emphasis on capital efficiency, according to JM Financial.
“Companies are being impressively open about their prospective profitability and timetable, and have delayed or cancelled (as appropriate) all ventures with a long and uncertain gestation period for return on investment. The brokerage business continued, “We hope that these companies maintain this kind of interaction to educate public market participants as well as themselves about the distinction between private and public market investors’ opinions.
The note from JM Financial comes against the backdrop of an event organised by Sequoia Capital called Sequoia Horizon. The event provided an opportunity for public market investors and equity research analysts to interact with various portfolio companies of the venture capital firm that are getting ready for a potential initial public offering (IPO).
The JM Financial note was published in the midst of Sequoia Horizon, an event hosted by Sequoia Capital. The occasion was a chance for venture capital firm portfolio firms preparing for prospective initial public offerings to connect with public market investors and equities research analysts (IPO).
The event gave brokerages a glimpse into the monetization potential and road to profitability of some of these intriguing startups while also helping to “demystify” their business strategies, according to the brokerage. Nine Indian startups from Sequoia’s portfolio were reviewed by JM Finance, including CarDekho, Cred, Dailyhunt, Gupshup, HealthKart, Ixigo, Meesho, Porter, and Turtlemint.
In August 2022, JP Morgan and SoftBank, another opportunistic startup investor in India, hosted a similar event where they introduced mutual fund companies to 10 of their portfolio companies’ unicorns that were considering going public in three years.
The decision by Sequoia Capital to work with brokerages on behalf of the companies in its portfolio comes at a time when the Indian IT IPO market has seen only one new listing since 2022, compared to at least five in 2021. Public shareholders have also recently sold off loss-making new-age technology firms and expressed doubts about their potential to turn a profit.
One of the significant findings from JM Financial’s meetings with companies, according to the firm, was that almost all of them provided guidance that went beyond operating profitability to include discussions of PAT (profit after tax) and cash flows. According to the company, Sequoia’s portfolio firms are separating successful business segments from business segments in the investment phase in order to avoid making large investments in enterprises that would take longer to take off.
In the note, JM Financial also noted that numerous Sequoia Capital portfolio companies have redirected their attention to their TAMs (total addressable market). The brokerage used Meesho as an example, pointing out that the social commerce unicorn, which is currently one of India’s most valuable startups, is focusing on tier 2 and lower cities, while Cred and Dailyhunt are both aiming to provide financial services to India’s top 1% of citizens, and Cred is creating engaging content for the country’s working class.
By curating tailored products and services, these businesses are able to reduce the cost of acquiring new customers and increase conversion rates, according to JM Financial.
According to the brokerage, many of Sequoia’s portfolio firms who are market leaders or in a close second place have found the funding winter to be a blessing in disguise. Market leaders are actually gaining from their stronger brand recall and further widening their scale moats through organic customer acquisition, according to JM Financial, while smaller peers are concentrating on cash conservation and refraining from engaging in aggressive disruptions to gain market share.
According to the brokerage business, Sequoia’s companies who engaged in negotiations with them showed that they had carefully considered their potential approach to a public market debut in terms of an investor pitch, operating and financial indicators, as well as cap table and timing.
Although equity markets may not be particularly supportive of growth firms at the moment, the brokerage noted that these businesses are preparing the basis for launching their operations as soon as market sentiment improves.
