Start-up boom and the coveted Unicorn Club

The past couple of years have indeed marked a watershed period for the Indian start-up landscape, as evident from the huge bout of funding raised by the home-grown start-ups. Changing consumption patterns among the millennial and Gen-Z Indian population, digital boom in the Indian ecosystem, expanding network of smart phone users, and the comfort of online shopping (particularly amidst the work from home period), have propelled the germination and growth of smart business ideas in fintech space, D2C segment, data analytics, logistics industry and various tech-driven arenas (food tech, health tech, ed-tech, gaming, etc.). Innovative business offerings and the ever-increasing demand have translated into soaring valuations for Indian start-ups, so much so that almost every week, the media is abuzz with the story of some start-up or the other joining the coveted unicorn club.

Well, if you ask what is a unicorn?

For the unversed, unicorn is a term used in the venture capital space, to describe a privately held start-up company that has touched a billion $ valuation. Unicorn, as a term for start-ups, was coined in 2013 by a venture capitalist, Aileen Lee, inspired from the mythical creature “unicorn”, because in those days, $ 1bn valuation for a start-up was considered a rare success. Today, times have changed and joining the billion-dollar club has become a vanity metric for start-ups. In fact, statistics state that in the present times, a new unicorn is born every third day. Until the previous decade, an IPO listing was considered as the prime yardstick of a business’ success and popularity. While this holds good even today, yet with mega funding rounds and multiple series of investments from VC’s and PE’s, start-ups choose to stay private for long to reach the envied 10-digit valuation measure.

Let’s look at some interesting facts about unicorns!

With a start-up boom in Asian markets, especially China and India, USA is no longer the only unicorn land in the world. In fact, as per statistics, out of 1,979 funded unicorns globally, only 1,036 are based out of USA, followed by 252 in China, 100 in UK and 98 in India. 

Bangalore is the unicorn capital of India. Out of 98 unicorns in India, 34 are domiciled in Bangalore, followed by 16 in Mumbai, 17 in Gurgaon, 5 each in Chennai and Delhi, and sundry others in various cities across the country. The latest valuation of Indian unicorns aggregates to USD 361bn, of which unicorns commanding 47% of the value hail from Bangalore.

While it may be raining unicorns in India, not every part of the country is equally drenched. Certain states, including the likes of West Bengal, Punjab, Kerala and Madhya Pradesh, have not bred any unicorns, probably because of limited industrialization and a very nascent start-up ecosystem.

Further, expert reports indicate that start-ups in Tamil Nadu find it difficult to scale up to cross the billion-dollar threshold, and often find it tough to compete with neighbors like Karnataka, which offer greener pastures and lead to brain drain.

Interestingly, 12 of the Indian unicorns are domiciled in the United States and command an aggregate valuation of USD 33bn as of April 2022.

Indian unicorns operate in the fintech segment, followed by SaaS that has bred 17 unicorns so far and the marketplace arena that has witnessed 15 start-ups joining the coveted unicorn club. 

Marketplace aggregators command an aggregate valuation of USD 78bn, followed by USD 68bn in the fintech / fin-serv space, USD 40bn from SaaS and USD 32bn from the ed-tech segment.

Marketplace and fintech are obviously acing the unicorn race because the new age population finds comfort in online shopping using digital money or plastic money, and their experience is enhanced by SaaS based start-ups through use of meta data, analytics, CRM, artificial intelligence, machine learning and cloud infrastructure.

In fact, the digital and tech boom marks the birth of the new age India, that is not willing to settle only for the conventional brick and mortar stores and is always on the lookout for innovative, efficient and time-savvy modes of availing products and services. 

Flipkart (an e-commerce marketplace start-up) is presently the most valued unicorn in India, with a valuation of USD 37.6bn, and within 5 years of joining the unicorn club, it has witnessed 3,600%+ appreciation in valuation. In fact, Flipkart is presently a decacorn (a privately held start-up company whose valuation has touched USD 10bn threshold). Byju’s is an ed-tech start-up that has appreciated 2,100% after becoming a unicorn.

InMobi became India’s first unicorn, way back in 2011 and around 11 years down the line, it is currently valued at USD 12bn. Zomato and Nykaa are among the 10 most valued Indian unicorns, who have traced their path to public listing on the Indian stock exchanges.

While everything looks so fancy about unicorns in India, it is undeniable that the Rome was not built in a day!!

The journey of being a unicorn, howsoever fancy it may look, is not an easy game for everyone. For some, it takes years of perseverance and multiple rounds of funding to become a unicorn, while few are able to do so soon after conception. And yet, there are many start-ups that aren’t lucky enough to feature in the coveted club ever during their life cycle.

In India, 2021 was a bumper year for the unicorn crop and as many as 47 start-ups joined the unicorn club. In 2022, so far, 15 have already made it to the club already till March. However, given the year-wise trajectory of Indian unicorns from 2011, it is safe to say that the unicorn phenomenon has picked up fervour among the Indian start-ups only in the recent years. This phenomenon has been rampant more so, after the COVID-19 induced lockdowns and work from home periods. 

However, despite the recent frenzy, start-ups making it to the unicorn club are only a miniscule proportion of the total start-up density of India.

As per a report published in Business Standard in March this year, India has a total of 65,681 registered start-ups, of which slightly more than 100 start-ups could make it to the club so far and only 98 (0.2%) of them survive today. 

About 62 of such 98 start-ups have taken 2-8 years since inception to join the unicorn club. Only 4 could touch the billion-dollar threshold within a year of incorporation, while 6 start-ups took more than 16 years to become a unicorn. Mensa Brands (a fintech start-up, Bangalore) and Global Bees (an investment start-up, Mumbai) have made it to the unicorn club in less than a year of being founded, while Five Star Business Finance (a Chennai based fintech start-up) took as long as 37 years to achieve this feat.

15 start-ups have become unicorn in the past 12 months, and on an average, they have witnessed 11% appreciation in valuations. 59 start-ups have been 1-2 years old after joining the unicorn club and they have seen 75% surge in their valuation, over and above the entry level value. 3-5 years old unicorns have appreciated more than 290%, while 5-8 years old Indian unicorns have, on an average grown by c. 340% above their entry level values.

Flipkart became a unicorn 10 years ago and has since grown by more than 3,600%, while Mu Sigma (a Bangalore based SaaS start-up) has barely appreciated 50% in value. Therefore, on an average, the surge in valuation appears diluted at 1,855% in the 8-10 years segment presented above. InMobi, India’s first unicorn, has grown by c. 1,100% over 11 years post becoming a unicorn.

You know what? There is something common between a lot of these unicorns!

Almost every unicorn in India is funded by investments from private equity players or venture capitalists. In fact, Zerodha is among those few bootstrapped Indian start-ups who have made it to the unicorn club.

Interestingly, a lot of these start-ups are backed by leading investment funds, including SoftBank Group, Tiger Global, Sequoia, Accel, Lightspeed Ventures, Trifecta etc.

Some of the unicorns have more than 1 such leading investment fund on board, including the likes of OLA cabs, OYO rooms, Freshworks, Moglix, Zetwerk, Blackbuck, ShareChat, DailyHunt etc.

What next after entering the unicorn club?

After entering the unicorn club, start-ups strive to enter the decacorn club. In India, 6 out of 98 unicorns have exceeded USD 10bn valuation mark, 1 of which has now gone public.

These include 5 Bangalore based start-ups (viz. Flipkart, Byju’s, InMobi, Matic Network and Swiggy) and the Mumbai based start-up, Nykaa. Globally, USA and China are homes to even decacorns and hectocorns (viz. privately held start-up companies valuing above USD 100bn). 4 of the Indian unicorns (viz. Zomato, Nykaa, Paytm and Policy Bazaar) are listed in India, while Freshworks is listed on Nasdaq. Certain Indian unicorns including the likes of OYO rooms, Ola cabs, InMobi, PharmEasy etc. are likely to come up with initial public offerings in the next couple of years.

However, the IPO route is not as easy as it appears!

The IPO frenzy in the recent times has led market participants to witness a period of PE / VC exits from start-ups amidst crazy stock valuations for the public offering, followed by a slumpy stock performance post listing. This has cautioned the market watchdogs to tighten listing standards, so as to prevent IPOs from becoming a mode of easy and profitable exit for private equity investors and venture capitalists from cash trapped loss-making start-ups.

Such tightened regulatory scrutiny led to the halt of Ant’s USD 37bn float in China, followed by unprecedented withdrawals from several IPO-bound Chinese companies, including Shanghai's STAR Market and Shenzhen's ChiNext. Crackdown by the Chinese watchdog roused spookiness among investors, who in turn, started diverting a portion of their investments to the next populous Asian economy, India.

The situation in India has been no exception. 63 companies went public in 2021 and saw exits from existing investors at crazy IPO valuations, followed by a subsequent downtrend in stock prices. To protect the innocent retail investor from getting duped, SEBI has tightened listing norms including disposal of shares by promoters and major shareholders during offer for sale, lock-in period for anchor investors, application of IPO proceeds and stipulations around lower and upper price band in an IPO.

Not everything is rosy even after entering the unicorn club!

While becoming a unicorn is a commendable achievement, joining the unicorn club is not a rarity today, and definitely, not the be-all-and-the-end-all for any start-up. In fact, more often, becoming a unicorn is only considered as a vanity metric among investors. Unless a start-up is able to sustain its valuations through robust fundamentals, it is vulnerable to decline and diminution. History bears testimony to the fact that such Indian unicorns which were unable to stride on steeper slopes and survive competition, eventually ended up going defunct or being acquired or otherwise losing their unicorn status.

After joining the unicorn club in 2015 at USD 1.5bn valuation, Quikr lost its unicorn status in 2020. Back in 2016, Hike was the youngest Indian start-up to join the unicorn club within 3.7 years of incorporation, but it could not sustain its market share amidst the ever-increasing competition from WhatsApp and finally announced a closure in 2021. Snapdeal which enjoyed a valuation of about USD 6.5bn in 2016 was in talks to be acquired by Flipkart at a valuation of only around USD 1bn in 2017. While the deal fell apart before closure, Snapdeal could never regain its unicorn status thereafter. Even Shopclues, that once claimed itself to be India’s largest managed marketplace and was hailed as the 4th Indian unicorn, subsequently collapsed and started languishing in the common dust, and was later sold to a Singapore company at a valuation of USD 70-100mn.

The way ahead…

As per a report published by Iron Pillar, India is expected to give birth to more than 250 unicorns by 2025. Therefore, it appears that analysts are bullish about the future of Indian start-ups. This is primarily driven by increased leveraging of AI-ML, blockchain, cloud infra and meta data etc. by Indian start-ups to understand customer behaviour and apply the learnings to enhance customer experience. Further, China Securities Regulatory Commission’s crackdown on IPO-bound Chinese tech and other start-ups, has flushed investor interest to Indian markets. With SEBI’s regulatory measures in India directed to securing investors’ interest, Indian economy is likely to witness the evolution of various sunrise industrial segments that would give further impetus to the start-up ecosystem and nurture more unicorns and decacorns in the process. Of course, how the path ahead would pan out for Indian unicorns is something that time would tell. 

~ CA Nidhi Chandak, CS ~

About the author:

This author of this article is associated with a leading global consulting firm in transaction advisory and due diligence services. The information, research and analysis presented in the article are based entirely on information available in public domain. While data presented in the article has been sourced from authentic public sources, the author has relied on the credibility of the source and has not independently verified the factual accuracy of any of the facts stated herein.

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