Unicorns 71* – New Pride of India, Conglomerates of the future?

Unicorns, Startup

Prologue

Centuries ago, India was the golden land on the earth. The civilisations flourished as we were blessed with nature on the land, valuable resources beneath, and the weather above. We were ahead of the world. However, the greed to conquer land and rule a larger landscape led India to a declining state where though we were naturally blessed, we couldn’t make the most out of it. The British empire took the benefit of the poor state of affairs and after gaining dominance, drained India to benefit Europe. We gained our freedom in 1947, however, it took many decades to recover and re-establish our country, with a distinguishable presence on the world map. There’s a common thing about the current global superpowers – the United States, Russia and the Republic of China – they all started early! While these countries were working on development, we were still struggling for our freedom. It’s was a race where a few participants were allowed to begin even before others could be get set. However, we eventually worked our way out, without the unfair advantage, committing some grave mistakes on the way, but riding on our terms and principles. We may not be a superpower today, but we have the human power – the skill, the brains and the passion to lead the human race, not by dominance, but by intelligence!

Background

India has been an agrarian country and still is. However, with the rising population, the challenges for the country increased, however, the solutions too became intuitive. It’s almost as if we are born with those skills to face the challenges and come out victorious every time. Besides, the billion-plus population means billion-plus choices and preferences, and thus, we are the epicentre of the world’s demand – everyone wants to sell here and make a profit. However, it isn’t easy to lure the odd Indian public through the western ideas – we have already been there, faced it, got independent and now stay vigilant. The Indian market needs the Indian mindset. Though we don’t have the money to build large scale businesses in every segment, at the same time, nobody understands the huge Indian market better than us and this has led to the emergence of ‘The Indian Startup Inc.’ The genius Indian minds pitch the ideas and the global conglomerates fuel the funding. This model has led to the fast-paced development of startups in India. The Governments have realised the importance of this sector and thus, doing everything possible to support their growth. It solves all their problems – 1) enhancing forex reserves, 2) creating employment opportunities, 3) higher revenue in tax collections, 4) supporting the overall development of the country. With support from everywhere, India is now the fastest-growing startup hub in the world. We have not only nourished the startups but also made them big and successful in a very short time. A similar boom decades ago led the United States to where it stands today. It is a pride to see so many young, creative and brilliant Indian startups flourishing. However, the real question is, can they make India glorious again? Are we looking at the global conglomerates of the future?

The Unicorn club

In the venture capital industry, ‘Unicorn’ refers to startups that reach the valuation of USD 1 billion. The term was first coined by Aileen Lee, founder of Cowboy ventures who referred to 39 such startups as unicorns. It is a term used only for startups, to highlight the rarity of such startups. The definition has remained the same, however, the number of unicorns across the globe have gone up significantly. India is amongst the top churning out many of them. There are still two months left in 2021 and a record-breaking 30 startups have joined the precious unicorn status in India. India is third in the list of countries having the most Unicorns 71*, trailing the US (396) and China (277), however, stands ahead of the UK (32) and Germany (18). Bengaluru continues to be India’s Silicon Valley with 9 of this year’s unicorns coming from there, while Mumbai has been the hub to 7 and Gurgaon to 3 unicorns.

The entire concept is based on approximate valuations of the startups, roughly estimated based on the price at which the investors are buying the stake in the company. So, if a venture capitalist buys a 10% stake in a company for USD 1 million, the valuation of the company (i.e. of the 100% stake) would be USD 10 million. This is only for the media and general public while the real valuations and their basis are hidden somewhere in the confidential documents which justify why the investor must pay such a value to buy the stake, and involves deep analysis of the prospects of the business.

Valuations are subjective and some investors may see more value in a certain business while others may not find the same value. Venture capitalists have a huge pool of money to invest and therefore, they create a portfolio of investments in startups that they think could be the next big thing. At the initial stages, the valuation is low and thus, it is easy to get a stake paying a low price and if the startup succeeds, they could fetch capital gains from selling the stake later at price in multiples of the original price paid. However, at the same time, the risks also are high. There’s no guarantee that every startup would succeed. In fact, out of 10, probably 1-2 would flourish, while 3-4 stay mediocre and other fails. However, given the returns the top 1-2 churn out, the entire portfolio investment pays off. Venture capitalists pool funding from various wealthy and invest the same in a portfolio of such startups.

How do Unicorns differ from others?

Even though funding has become more accessible than it used to be earlier, reaching a USD 1 billion valuation for a business that has just begun is not easy. A few common traits amongst the startups that achieve unicorn status:

  1. Most unicorns have a disruptive business model for the industry they belong to. For example, Uber and Ola changed the way people commuted. Snapchat disrupted the usage of the social media network with its status feature. They change the way the industry has been operating so far.
  2. Sometimes, the unicorns create their market segments by tapping into new areas ignored by other businesses. They become the first to enter the market and thus, gain dominance over the entire sector. For example, CRED was the first app to tap into the credit card payment and reward segment – a model of their own. Such unicorns change the way people do things and gradually become a habit. They face the unique challenge of continuing to innovate and evolve continuously to stay ahead of the ‘future competitors’.
  3. The most commonly observed trait amongst unicorns of the past decade is that their business model is based on technology – either they run online or bring in the new technology of their own. For example, Zomato and Swiggy have taken the entire process of ordering food online which a decade ago didn’t exist. This was possible only with a friendly app for the users and the backend tech-based environment to run the entire system. Almost 87% of the unicorns products are software, 7% are hardware and the rest 6% are other products & services.
  4. 62% of the unicorns are Business to Consumer (B2C) companies – a difficult area to cater to, as the customers buy in small quantities, however, the preferences vary with each of them. However, with technology, the goal to simplify and make things easy for consumers and become a part of their day to day life has become possible. They make things affordable that are otherwise expensive. For example, JioSaavn and Spotify made listening to music easier to the world while Netflix made it easier to watch movies. With a small subscription fee, you get access to a vast library of music and movies.

Behind the curtains

While it’s great news to see entrepreneurship catching up in India, a simple assessment would tell you that the story doesn’t seem complete and logical. Out of the 71* Unicorn, 44* have gained the status in 2020 and 2021 – the period affected by the pandemic. Pandemic certainly helped the Unicorns grow their business, however, the flow of investment by venture capitalists has been unusual. Let’s rewind to the start of the pandemic.

When the pandemic struck India, all of sudden, the stock markets crashed, businesses were forced to be closed and everything came to halt. The businesses were in trouble as there was no flow of money and thus, stuck between pandemic and the loan defaults. Then, the Government pushed the interest rates to historical lows and also provided various debt resolution plans, financing solutions for working capital, etc. Thus, it became easier for the companies to acquire debt at attractive rates through the banks themselves. A low-interest rate would mean a low cost of capital for businesses and thus, higher profitability for the business owners.

Now, in such a situation, the investors who either invest in equity or debt instruments, all debt instruments such as bonds, commercial papers, etc were no longer beneficial as the interest rates were historically low. Businesses had liquidity directly from banks and thus, the debt investments didn’t seem like an investment anymore. The alternatives for institutional investors such as Insurance Companies, Mutual Funds, etc and other High Networth Individuals (HNI) became few. Thus, the money went straight into stock markets and thus, the bull run. This is the reason why companies like Paytm, Zomato, PolicyBazaar and many others have chosen to go for Initial Public Offering (IPO) as the markets conditions are perfect. Thus, these companies too went out of the scope of the venture capitalists who would have preferred to acquire stake directly, as the same gives them more negotiation powers. With no other option left, the venture capitalists have been forced to put their money in young and upcoming startups, as they seemed the most profitable option for their investments.

The bottom line

71* Unicorns in India – we have used the asterisk mark to denote that the number may increase at any point of time, given the speed at which the Unicorns are emerging – one startup has emerged as Unicorn every 9 days this year, that has been the strike rate. Whatever be the reason, it’s a pride that entrepreneurship has got a launchpad and it is rising in our country. Unlike traditional businesses who cater for the supply of physical goods demand, the startups provide creative solutions to the problems emerging in this process and also help in boosting the end sales. Thus, in turn, increasing the demand and supply in the country and the GDP. However, there are areas where India still needs Government, the Conglomerates and the Startups to work together and provide solutions – especially public infrastructure, manufacturing technical parts and production of renewable energy, as they are key to the future. Indian economy is in good space today and the rise of unicorns is a good sign. We never know, if things go well, a few of these 71* and others might become the future global conglomerates and establish India’s dominance in the world economy, as a supplier!

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