Whichever way one looks at it, 2021 was a golden year for Indian unicorns. Some flattening apart, experts estimate this success trajectory will continue
BY SUMAN TARAFDAR: The writer is a Delhi-based business and lifestyle journalist, and author of the Penguin India Cinema Quiz Book.
A single year — 2021 — saw the emergence of just over half of India’s unicorns: 43 out of 85. Whichever way one looks at it, it would be hard to dispute that 2021 has been a breakout year for Indian unicorns. This meteoric rise has been attributed to a multiplicity of factors, coming at a time when the Indian economy, as indeed most of the world’s, faltered, with many of them in recession for some quarters. India was not an exception.
Of course, the term ‘unicorn’, referring to the mythical beast, has been repurposed and is now usually used to designate a privately held technology start-up with a valuation equal to or over $1 billion (around ₹7,500 crore). There is now a race to be a ‘decacorn’ or a firm with a valuation of over $10 billion!
According to The Hurun Global Unicorn Index 2021, India added the third largest number of unicorns last year just after the US and China. “India is in the midst of a start-up boom, more than doubling its unicorns,” according to Anas Rahman Junaid, founder and MD, Hurun India. You will have encountered them – Flipkart, Ola, Zomato, Byju’s, Swiggy, Oyo, Lenskart and many more. Others like InMobi, Billdesk, Pine Labs, Groww operate behind the scenes.
“The recent growth in the number of Indian unicorns has been driven by opportunity, which, ironically, has mushroomed in the backdrop of relative uncertainty ushered in by the pandemic,” says Monish G Chatrath, Managing Partner MGC Global Risk Advisory LLP. “The opportunity in itself has been further accentuated by the enhanced utility of digital businesses in various facets of our life and the new era of entrepreneurship in India, where bootstrapping is being viewed as a relatively short-term via media with increasing emphasis on innovation to fast-track revenue generation.”
Arun Natarajan, founder and MD, Venture Intelligence, providing further perspective, points out that the ‘unicorn phenomenon’ is about the deepening of the business adoption of the digital space combined with money / liquidity that is available globally. Indeed, in 2021, for India, equity markets leapt in value by 20 percent, compared to fixed income instruments such as savings deposits in banks, and the like which yielded at best about 5-6 percent returns while gold prices declined by 7.5 percent. “A lot of the liquidity has come to India, leading to a huge rise in the number of unicorns last year. What we saw would have happened regardless of Covid – except that Covid crunched what would have happened in, say, five years into just two years.”
Natarajan also notes that India had been on the radar for global liquidity, “which had to find a home somewhere”, combined with China’s recent shutting of doors to global capital and its trade war with the US. “Another contributor to the tipping point came when Jio raised billions of dollars globally for its retail and telecom businesses in 2020.” Global liquidity, hitherto a little hesitant about the Indian market, suddenly poured in.
Incidentally, India had seen considerable interest from Asian economies with companies such as SoftBank, Alibaba and Tencent, among others, investing in India from the middle of the previous decade, competing with US VCs.
Girish Vanvari, founder of Transaction Square, too is bullish about the growth prospects, though he points out that B2C ones will do especially well. “All those who could deliver at home during Covid are flourishing.”
Is this the new trajectory? Initial figures from 2022 (upto the first week of February) have seen four new unicorns, indicating the bull run is not done. Experts urge caution, though, as almost all of them agree that 2021 was a period of opportunity-based growth, when a combination of factors, seemingly unrelated, intersected, from ever-growing adoption of technology to the pandemic and the increased availability of
global liquidity in search of safer shores to park money.
Most experts agree that the outlook, even in the near term, is not as rosy, though almost all remain optimistic about India’s growth potential. Just that it is unlikely to be as fast as in the previous year. Several unicorns have put off their IPOs, and it is uncertain that they will list at all, most probably due to the global stock market corrections. “Many companies were slated to go public, we can see they put their IPOs on hold, even withdrawing the issues if the correction goes on for a long time,” says Natarajan. “Some of these IPOs may never happen as the Securities and Exchange Board of India (SEBI) has a shelf life of 12 months. However, some fundamentally sound companies that have filed could choose to go public, but may not get the price they would have got last year.”
“Now things are likely to recede a bit on the liquidity front, so it’s a question of how many of those valuations are going to sustain. Maybe there will be a bit of flattening,” explains Natarajan. However, he points out that, regardless of Covid, SAAS, IT and BPO are likely to continue rapid growth, though he does attach a question mark to Edtech. “No VCC had made money on Edtech before Covid. When students are back in school, will parents still invest in the kind of screen time they were forced to during Covid – that will have a correction. Today, every flavour
of Edtech has been funded left, right and centre. Some gains will stay, but whether every company will continue to thrive is uncertain. Historically, the sector has not made money for investors, with Byju’s the only exception.”
The current business environment in India is unprecedented, bursting with opportunities and dynamic, says Chatrath. “Some of the traditional norms, means and timing of funding have started giving way to crowdfunding and revenue-based financing. Start-ups that are able to demonstrate potential for disruption are more likely to gain traction with a broader investor base for value creation. The robustness of the domestic demand and the tremendous ability of the Indian economy to rebound, possibly faster than any other economy across the globe, has set the stage for some of the Indian unicorns to define and create demand through invention and differentiation and the more successful ones among them to transition to decacorns in the near to medium term.”
Natarajan agrees: “As and when issues of liquidity are out of the way, I would think India will spring back from the radar very quickly because now there is more domestic money also available.” He cites the example of India’s sovereign wealth fund – the National Investment and Infrastructure Fund (NIIF), which traditionally has been investing in sectors such as infrastructure, and is now reportedly investing in e-commerce firm FirstCry, a first for it. He cautions, however, that domestic funding, despite having grown in recent years, is still only about 10 percent of the total funds. “The pool is growing but it cannot support the kind of mega funding these companies required in the past, and therefore will be more dependent on routes like IPO.”
Vanvari adds a word of caution about ‘duplicate’ SAAS (software as a service) platforms, describing them as a consumer company which has launched a portal and now calls itself a digital company. Taking the example of Paytm, he says, “Paytm can never do well. It’s a digital platform without access to money. They can’t raise money like a bank or NBFC can. A bank or an NBFC can become a Paytm, but a Paytm can never become a bank. Fintech will always struggle without access to capital. Those who are not genuine unicorns will see a fall.”
On the other hand, Vanvari says the opportunities for B2C and B2B are huge. “Those who are doing omni channel stuff are doing very well,” he says, citing Nykaa, which has experience centres as well as a digital platform. “That is where the future is.” Referring to B2B unicorns such as IndiaMART or Infra.Market, he says, “The competition is intense so there will not be that many unicorns as it’s economies of scale.”
THE PARTY IS OVER…
Natarajan, while acknowledging the dip in valuations several unicorns have seen in their stock valuations such as Zomato, PolicyBazaar and so on, says their business model is not in question but cautions that some of the statements by the founders of certain unicorns have not helped. “Corrections are already on as, once you go to the stock market, there is no hiding place.” He points out, however, that e-commerce is booming and here to stay. Some of the IPOs that were subscribed to phenomenally even though they were making huge losses will change the tune of the founders and companies. Without a path to profitability, they will be the first to get impacted. But this is more about the price and valuations, and there is no question about the fundamentals of these companies.
As Natarajan puts it, the key word is valuation. “Investors tend to get carried away when easy money is available. There will be correction in terms of valuation. Companies that have no path to profitability yet are getting fancy valuations. The party is over.”
CAN NRIs CASH IN?
Can NRIs partake of the unicorn growth story? Again, those in the know concur. “The India of today provides stability in terms of polity, policies and progressive economic growth, and, consequently, NRIs should gain more confidence and a greater sense of security while channelising their investments in funds and ventures promoting start-ups that can give birth to unicorns and other firms that are either well on course to becoming or are already unicorns
in India,” says Chatrath. “In addition to financial projections that must be backed by hard data, investors should assess proof of concept, scalability of the business model, ability of the concept to define and progress on the consumer value chain and skill sets to attain ground-breaking innovation and marketability.”
The recent inclusion of top Indian-origin tech executives Satya Nadella of Microsoft and Sundar Pichai of Google on the Padma list – India’s top civilian honours – has not gone unnoticed in the NRI space. “In the next 10 years, unless we do something really wrong, India can build on the past two years’ benefits, and NRI inputs in the form of information or money will be welcome with open arms,” says Natarajan. “India now really promises to deliver on the returns front. An NRI would look at India with a lot of suspicion in the past, especially with instances such as the Vodafone tax case. It has been a case of two steps forward, one step back, and NRIs have borne the brunt in terms of putting capital back here. For the first time, they are not just welcome with words, but real returns in both public and private markets.” Words to live by!