Recent down valuation of two of the biggest e-commerce firms has exposed the ugly belly of the great Indian start-up rush that everyone knew about but did not want to talk as long as the going was good. But with fresh funds drying up and stricter regulations, online retailers are having to face the reality that they cannot burn cash endlessly through a discounting model.

“This is the time to do a reality check on the business models of e-commerce companies. Earlier, they had enough money to burn, but now they will have to generate revenues to run their businesses. This will tell us the exact valuation of the companies,” said Vikram Gupta, founder of VC firm IvyCap.

While Flipkart’s valuation was slashed brutally by global hedge fund Morgan Stanley in March, HSBC devalued Zomato, raising doubts over the company’s business model. While both Flipkart and Zomato have contested the claims made by Morgan Stanley and HSBC respectively, clearly, the party is over for Indian e-commerce firms.

The recent guidelines issued by the Centre barring online retailers with FDI from offering discounts have added to the e-commerce firms’ woes. Harish HV, Partner at Grant Thornton said, “The recent government regulations are quite tough. It has a domino effect on every one at the macro level. We will see more companies getting down valuations in the coming months.”

‘Just the beginning’ Market experts are of the view that this is just the beginning of a bubble that is waiting to burst. They feel devaluations were bound to happen given the way the companies were raising funds and burning cash without focusing on profitability, over the last few years. However, with the global economic sentiments turning negative, global VC funds are cutting down their exposure in the Indian marke,t thus leading to a fund crunch.

E-commerce expert and founder of SeedFund Mahesh Murthy said current mark-down could also be governed by the US Securities and Regulations, which mandates full, early and fair disclosure of actual market values.

Others reckon the ongoing down valuation should not be taken seriously. Sanjay Mehta, a serial investor, said, “Many a times, these fund houses come out with a report to create excitement in the market. In case of Zomato, HSBC has not mentioned the source of its data. Why should one believe them? They do this at times to attract HNIs.”

According to SeedFund’s Murthy, the intermediate valuations do not matter. “What matters is the value at the exit. But the Indian e-commerce market is far from final exits. But this devaluation is an indicator that the exits might not be as enormous as once thought — so these interim valuations are more calibrated towards a more likely end-exit value.”