The Indian Unicorn Landscape

The Indian Unicorn Landscape

  • Reading time:9 mins read

By Aryaman Rawat

Entrepreneurial culture has managed to make significant transitions in the Indian landscape. There was a time when starting a new venture was thought of as a waste of time, money, and effort with potential and unwelcomed risks. However, in the last decade, the graph has gone nowhere but up while making several marks in the national and global markets. Driven majorly due to modernism, they have created niches of their own among the masses.

Privately owned billion-dollar rare companies are called “Unicorns” (named rightly so), and they represent the Indian start-up ecosystem, which not only bloomed through the Covid-19 pandemic but made numbers like never before. With the funding growing by almost three times in 2021, we witnessed the birth of 44 unicorns and a total valuation of $89.17 bn. We replaced UK in being the 3rd leading country which is home to such ventures. We saw 5 startups sprouting up in two weeks and one April week saw upto 6! Let’s talk about how the Indian market gave birth to such record-breaking numbers.

Covid and other outbreaks

The Covid-19 pandemic came as a shocker for the global economy, and in response to easing the damage, the RBI tried to generate excess liquidity. They did this by keeping the interest rates at moderate levels. Since more money was coming into the market, this resulted in the market rates going up. The bullish trend in market rates resulted in massive gains for investors, venture capitalists, and hedge funds, coinciding with the increase of innovative startup ideas in India.

Companies wanted to adopt new marketing strategies to stay lucrative during the pandemic. The ongoing pandemic led to an increase in the demand for at-home and accessible services, and to seize this opportunity, and companies began digitizing their inventory. More accessible methods of online payments and increased screen times furthered such agendas and attracted investors.

As a result, India gave birth to many start-ups in FY 2021.  As stated in the Economic Times, in a report by Hurun Research Institute India, it was said that India had added almost three unicorns per month so far last year. This has nearly doubled the total no. of unicorn companies in the country to 51 as of August end, 2021.

With India becoming an appealing option due to its developing technological infrastructure and a large pool of entrepreneurs, first-world countries and significant multinational companies reduced their sourcing from China. They shifted operations to other Asian countries, where China’s Tencent, Japan’s soft bank, US-based Sequoia Capital, and Tiger Global were amongst the major investors. After the pandemic, China’s “Plus-One” strategy helped the sprouting of startups in India as well in the past year.

Now, you can stop calling your neighborhood kiryane wale bhaiya for last-minute deliveries and fix up your dinner with just a few taps on your screen (or maybe you can make Shah Rukh Khan do it for you!)

The successful sectors

Fintech, Ed-tech, and programming as assistance (SaaS) came out as the top three contenders by achieving 47% of the total capital. All-out startup subsidizing has crossed $10 billion in a quarter in the long run. Fintech alone made a record $4.6 billion in interests by the third quarter of 2021, around 300% more than the $1.6 billion made in 2020. A sum of 53 arrangements worth USD 2.5 billion occurred in the area in the last quarter. Pranav Pai, Founder, and CIO, 3one4capital, opined that an acceleration of adoption of digital financial products and services in the country had given much support to the thesis that India will have several prominent fintech value creators.

Remember the times when rushing for tuition immediately after coming home from school was a norm? Well, that doesn’t seem like the case anymore! 2021 saw a boom in Ed-Tech-based startups like never before as upGrad, Eduditus and Vedantu emerged as top Ed-tech unicorns last year with valuations of $1.2 bn, $3.2bn, and $3.4bn, respectively. Vaibhav Tamrakar, the senior vice president at a consultancy firm called PGA Labs, during an interaction with the Business Insider, said that the Indian ed-tech domain is said to boom after China has asked all school curriculum live tutoring ed-tech startups to go non-profit. He also credited the ed-tech boom in India to the New Education Policy (NEP). He said that “the lockdowns did to edtech what demonetization did to the fintech sector in India (in 2016).”

Regardless of administrative vulnerability, India additionally saw two crypto unicorns in CoinDCX and CoinSwitch Kuber. The B2B trade space also raised support accessible for all with Infra. Market, Moglix, business, and Zetwerk turning into unicorns.

How long would the trend continue

The money inflow in the Indian Startups is at an unprecedented high, with stock markets also providing an overall positive response to startups that have gone public. Amidst this elatedness, there is also an element of caution on the valuation of startups. While one of the prominent startup players believes that the future is exceptionally bright for India’s startup ecosystem and the country poised to have more than one lakh startups creating a value of $1 trillion by 2025 and 200 unicorns creating 3.5 million jobs, it is not impossible to assume that these start-ups are sitting on a tremendous heap of misfortunes due to the absurdly high valuations.

These startups don’t reside on a roller-coaster that only goes up. To maintain an upward curve, startups should guard against excessive exuberance leading to high valuations. They should be cautious with extremely high optimism when it comes to growth as they need to understand that the economy is superior to everyone and humbles everyone over time. Nobody is more significant than the capital market or the economy.

Just like in every good relationship, two people need to work together to build something, founders and investors should always look at sustained value creation; this comes where there is growth. Also, over a while, these startups should show positive cash flows. Investors are willing to give time to the startups to grow, which can create market dominance, annuity streams of revenues. Unlike you in your last relationship, no investor wants to keep funding and work towards a common goal with no benefits; they want returns as well; otherwise, they will be more than willing to exit.

Large companies face pressures to innovate ever more rapidly in an increasingly uncertain and fast-moving business environment. Their challenge is twofold: to innovate increasingly to grow their existing business while understanding ongoing changes in their industry and making provisions for more breakthrough innovations. The latter is undoubtedly more complicated, and larger companies realize that they cannot simply rely on internally generated knowledge and build everything themselves.

The risk-takers drink Mountain Dew and jump at opportunities to put ideas into practice. Most startup founders in India have strong stimulus and say their passion drives them, which gives them the satisfaction of problem-solving and the desire to make a difference in society. Many Indian founders have previously worked in a corporate environment. Still, despite the stability in those jobs and the benefits of high salaries and other perks, they perceived those jobs as constraining their creativity. A lack of identification while working for a  corporate often leads them to create something on their own that enables them to define their values and control their direction.

Another aspect that the economy cannot overlook is how such ventures are causing the unemployment rates to grow, with a proportional increase seen in hours spent watching Netflix and money spent ordering cheap pizza. Likewise, new businesses veil significant issues for an economy attempting to give occupations to the 10 million youngsters entering the labor force consistently. Frantic for business, many take low-wage “gig economy” occupations, acquiring as little as Rs. 300 per day with next to zero professional stability and not-so-noteworthy LinkedIn profiles.

What next?

Investors indeed think that founders have focused on valuation rather than value creation- value creation from the valuation and the ability to raise capital that will not disappear. In the capital markets, valuation is the key to IPOs. The primary thing they must discuss is whether the value upon listing goes up or comes down. It should be done in such a manner that there is reasonable certainty that there will be an excess demand for the stock aftermarket listing where it quotes higher than the issue price. Leaving money on the table will not benefit the investor; all you are doing is ensuring that the value goes up for existing investors. Founders must price the IPO so that incoming investors make money and existing investors see the increased value upon listing. The investment must get good returns. Post the listing; founders should understand that the performance continuum is much more important than the listing price.

Investors do not decide to go public. There are various reasons for this. Companies go public to get liquidity and valuation for existing investors who have been with them for an extended period. Secondly, to raise more capital as the general market is better, and third to create value for founders. There are many benefits of going public.

It is a sign of maturity. In private markets, it is a deal between groups or individuals, but an IPO reflects how the economy and investors see the company. There will be times when valuation will go ahead of value creation, with prices falling and rising. But everything changed in the public market. What you see in terms of valuation is not new to anybody. It is only new to those who have not studied what Indian technology companies have done earlier. After the IPO gets launched, the company uses the capital raised from the investors to expand and grow and perhaps diversify into other business areas.

Ernst & Young, a top Consultancy firm reports that India’s  IPOs for domestic stock markets is poised to emerge as one of the leading initial public offer (IPO) markets in terms of proceeds as it mopped up a whopping $9.7 billion through initial share sales in the first nine months of 2021, this is the highest amount that companies have incurred via IPO proceeds for nine months in two decades.

2021 being the year of the unicorns, and 2022 beginning as the year of the Omicron, there’s a lot in store for what’s yet to come. Are these new unicorns set to achieve higher numbers, or would new ones make them run for their money? Only time will tell.