India witnessed a historic week in its tech industry. The segment minted the country at least six new startups with a 1 billion USD or more valuation, what we call unicorns, because of their rarities.
While the weather is sunny in April and the likelihood of a downpour towards the fag end of the season is rare, the forecast at the beginning of the year clarified that 2021 would be an exceptional year.
A joint report by Nasscom and Zinnov, a global management and strategy consultancy company, boldly predicted in the first week of January 2021 (1), ‘India would have at least 12 unicorns this year.’ And we can say that the report’s makers were optimistic realistically.
Here are our reasons. Last year, India witnessed 14 startups entering the unicorn club against ten in 2019. Hence, another 12 over a year’s span is a no-brainer.
Even though January did start on a rainy note, by mid-month, Digit Insurance became the first unicorn of the year a week after the prediction (2). And, by the end of March, India added three more.
On the first of April’s Monday, Meesho, a social commerce startup (2.1 billion USD valuation), stormed into the coveted club. The next day, CRED, the fintech startup, followed suit (2.2 billion USD valuation). On Wednesday, PharmEasy, an online pharmacy firm, took a turn (1.5 billion USD valuation). And over the next few days, it started raining.
ShareChat, a social media app, Groww, an online investment platform (over 1 billion USD valuation), and Gupshup, a messaging startup (1.4 billion USD valuation), gatecrashed the party (3).
In the initial nine days of April, the country witnessed a staggering six unicorns. One can put things in perspective, as the number is equal to what India logged cumulatively in four years from 2014 till 2017. We also have another way to slice the data. The unicorns India has witnessed so far in 2021 are more than the total numbers in 2017 and matched the count in 2019 (see the infographic above).
With eight long months still to go, the unicorn club is set to get crowded. According to Deep Kalra, the founder of MakeMyTrip, an online travel aggregator, which took over a decade to foray into the unicorn club (4), ‘it is great for the Indian ecosystem; these startups are coming of age.’
A Steep Uptick in The Rise of Unicorns in India
The reasons for a steep uptick in the rise of unicorns are not that difficult to find. Prem Pavoor, a partner at Eight Roads Ventures India head, a venture capital firm (5), explains that it results from a supply and demand confluence. The venture capital firm also happens to be among the backers of API Holdings, the parent firm of PharmEasy, one of the freshly-minted unicorns of the month.
Another portfolio investment of Eight Roads Ventures, Icertis, a contract lifecycle management SaaS company, has almost tripled its valuation to 2.8 billion USD since it turned into a unicorn in 2019.
On the supply side, Pavoor explains that there have been significant tailwinds driven by the coronavirus pandemic around consumption and penetration of digital content and enabled services. The resultant lockdown also catalyzed an accelerated uptake of enterprise software, where Indian firms are rapidly rising as global leaders.
Now on the demand side of the unicorn story, the venture capitalist underlines that the demand for high-quality firms is at its peak. Beyond the conventional investors, there are new crop entrants, VC, global private equity, and hedge funds. They are keen on taking part in the Indian growth story. He reckons that they are quick to move and have offered attractive valuations, positioning them as top suitors for the best startups.
The Critical Factor
What more has also added fuel to the Indian unicorn growth? It is the excess flow of the US dollar. Vaibhav Agarwal, a partner at Lightspeed Venture Partners (6), explains that, at present, capital is cheap and low interest rates, especially in the United States. Hence, it is chasing growth.
He further adds that it has made internet companies especially attractive, with India being perhaps the last internet market with more than one billion users, which is entirely open to internet and tech entrepreneurs across the globe. It creates a perfect storm for funds inflow.
The critical factor which has triggered the rise in unicorns is the coronavirus pandemic. It has swelled the total addressable market for the digital across several categories including, SaaS, ecommerce, education, and healthcare. The tech investor community has gone from seeking 1 billion USD outcomes to over 10 billion USD or maybe even 30 to 50 billion USD outcomes within months.
It explains high-priced funding rounds, and startups are getting over a billion in valuation. Agrawal adds that the positive side of the boom is that the best startups have not wasted the opportunity in the crisis. They have improved their business models, worked on order take rates and frequencies, cut discounts, and have emerged leaner.
Several analysts have also highlighted the Indian startup ecosystem maturity to explain the rise of unicorns. Every emerging market has an inflection point when it gets into high gear and expedited growth. According to Anup Jain, managing partner at a venture capital fund, Orios Venture Partners, India is going through such a stage (7).
He underlines that two things have buoyed the tech startups. First, the capital investments infusion in India. With Softbank and Tiger Global raised fresh funds with allocation to India, startups are clocking investments. Secondly, accelerated digital adoption means that firms with even 300 million USD in valuation are now ready to jump to the next level.
He reckons that the United States has more than 135 unicorns, China has about 115, and India has some 48.
Forget about overcrowding. The Indian unicorn club is yet to get crowded.
The Phase of Merger and Acquisition
An easy capital flow into the startup ecosystem means that there is an impending consolidation phase. Radha Kihanattam (8), a partner at Unitus Ventures, underlines that the fact that funds can build market leaders is quite established.
The coronavirus pandemic has, she adds, is to accelerate the phenomenon in sectors ready for the ‘new normal.’
While investors presently seek collaboration with some of the best entrepreneurs with a head start in the new-relevant, several good companies who couldn’t attract sufficient fundings are left with the suboptimal or stagnating growth option. She stresses that the newly minted unicorns are likely to take the inorganic route for rapid expansion. It would lead to some much-required participation in the merger and acquisition markets beyond a handful in the ecosystem today.
She adds that it would lead to some liquidity for early investors too.
Easy liquidity would also mean that companies are getting into the ‘bumping up valuation’ game. Would it create a bubble in the long run?
The Stumbling Blocks
There is a flip side. According to K Ganesh, a serial entrepreneur and promoter of startups like BigBasket, HomeLane, and Portea Medical (9), currently, the valuations are at a stratospheric level, which is indefensible. There is a need for some realism. He further points out the threats that, like in any bullish cycle, several startups don’t have fundamentally strong models, and yet they receive funds in the hype. It is a part of the cycle, and he fears that the same may happen to some of the entrepreneurs and startups.
Ganesh sounds a caution that we need to prepare for it. While it is not bad, we need to be aware of it.
Another potential pitfall is the unit economics going for a toss. There would be few entrepreneurs who would miss the point in the funding frenzy and get busy ‘purchasing growth.’ Agrawal of Lightspeed Venture reckons that such businesses are likely to hit the wall eventually.
On the other hand, it is a real opportunity for investors to engage founders in conversations about goals, priorities, and trade-offs. He avers that with more fundings comes more responsibility.
Rajan Anandan, the MD of Sequoia Capital India (10), stated that the focus must be on enduring firms and not unicorns. He points out that just because a startup has become a billion-dollar firm, it does not mean that it will automatically become an enduring business. He stresses that, while turning unicorn is an excellent marker, it doesn’t imply that the startup would turn into an enduring business. And ‘we want more enduring firms.’
The Unicorn Rush
Despite the potential pitfalls, venture capitalists and money managers say that these numbers may seem relatively small by the end of the year.
India is currently home to more than 40 tech startups that are unicorns. Even after the ten robust unicorns that have cropped up, there are several more in the line. It includes Urban Company, the home services company, Zeta, the neo-bank, among others, which are currently clocking funds over a billion-dollar valuation.
Industry bodies such as TiE and NASSCOM have been bullish about the Indian startup ecosystem and its growth. They believe that India is set to hit 100 unicorns by 2025. However, the recent surge suggests that it would get there much sooner.
Lathika Pai, venture capital and private equity partnerships, country head of Microsoft, stated in a conversation with Business Insider that in the upcoming few years, India would hit 100 unicorns (11).
Haresh Chawla, a partner at True North (12), has added to the enthusiasm as he believes that India would do 3x of the past year, and it would have more than 30 unicorns in 2021 alone.
At the beginning of the pandemic, Indian startups feared that venture capitalists might hold on to their moneybags and think twice before pouring capital. However, with the digital acceleration and boom of edtech, fintech, health tech, and other startups, all fears are on the shelf.
In the first quarter of 2021 alone, the country witnessed 11.85 billion USD in private equity and venture capital and private equity funding (13).
Chawla believes that the coronavirus pandemic has pushed the consumer’s willingness to pay, and since distribution is no longer the challenge, it has brought back investors’ interests. He asserted that it had created a new landscape from what was a year ago. Several of these new firms are going to disrupt the market profitably.
Pai also agrees that the pandemic has been a boon to startups. It is no longer that vanity metric that VCs are talking about; people are transacting and downloading. There are startups, and the valuation they are getting right now is 20x more from a year ago for their series A funding round. She finds it phenomenal how their valuations have surged because the potential is now suddenly open like never before.
And since the demand is more than ever, their valuations are justified. According to Chawla, the unicorn tag does more than making the investors and founders happy.
He stated that if one is doing a deal at an 800 million USD valuation, one would instead do it at 1.2 billion USD and call the company a unicorn. It would signal to everyone that the company is now well funder and competing with it would be difficult. Some of the bubbles are because of the competitive signaling, he points.
Even though the numbers of unicorns emerging from India have doubled in the past few years, it is not a shocking factor anymore. It is especially true compared to markets like China and the United States, which witnesses unicorns emerging with crazy valuations every year.
There are more than 650 unicorns globally, with a cumulative valuation of over 2k billion USD. China and the US alone account for over 80% of the unicorns globally. It is also worth highlighting that China is also home to the world’s most valued unicorn, ByteDance, with a valuation of over 180 billion USD (15).
The surge speaks significantly of the Indian market’s depth. The market is growing remarkably, GMV is also growing (16), and that’s what is leading startups to become unicorns.
The Present Scenario
India, a country of more than 1.3 billion people, witnessed rapid smartphone adoption in the past few years, an explosive growth of inexpensive internet services, and a new generation of ambitious entrepreneurs.
Global investors like SoftBank and Naspers are seeing growing opportunities in India’s startup ecosystem. These large funds have huge capital amounts to invest, and Indian startups are now on top of their lists, says P. N, Sudarshan, a partner at Deloitte (17).
The country has long-tailed behind the US and China in the venture capital investment amount in startups. The total deal value in 2020 was 11.8 billion USD compared to 143 billion USD in the US, and 83 billion USD in China, as per researcher Preqin.
However, recently, several startups have emerged, which indicates the potential in the subcontinent.
Paytm, the digital payment giant, has reached a valuation of 16 billion USD, making it the most valuable in India, as per the CB insight. According to Bloomberg News, the edtech startup BYJU’s is also securing money at a 15 billion USD valuation.
Flipkart, the Walmart-owned ecommerce giant, targets an IPO in the fourth quarter, which can value the firm at over 35 billion USD (18).
The venture investments are aiding to diversify the Indian industry, long known for tech services firms like Infosys Ltd. and Tata Consultancy Services Ltd. Last month, a Credit Suisse report revealed that there are about 100 unicorns in the country with a combined market value of 240 billion USD in sectors from fintech to ecommerce, education to logistics, and food delivery (19).
The report stated that the Indian corporate landscape is witnessing a radical change because of remarkable changes in the funding, regulatory, and business environment over the past two decades. An unprecedented pace of new startup formation and innovation in different sectors leads to a surge in several high-valued and unlisted companies.
Like Silicon Valley, executives with experiences in leading startups like Paytm and Flipkart are now breaking out to set up their companies. And entrepreneurs who had successful exits are now turning to their second or third companies (20).
Such exits are further boosting investors’ confidence, increase capital, and fuel a new funding excitement.
Despite the potential trap, the Indian cheering the tenacious and galloping the unicorn story for now.
There is no stopping the funding frenzy.