It started with the news of start-ups shutting shops and a looming distress in the ecosystem due to the Covid-19 pandemic; then we read about start-ups pivoting to defeat cash crunch, survive and stay significant.
Most start-ups were forced to innovate and reimagine their business models since Covid, and guess what? It looks like they have done a pretty good job.
At least, the news of start-ups entering the illustrious unicorn club, every other day, would convince one to believe so.
After overcoming a crisis that threatened to engulf them a couple of months ago, as many as 31 start-ups have emerged as unicorns in 2021 so far. A start-up turns unicorn once it reaches $1 billion valuation.
According to Entrackr’s monthly funding report, start-ups in India collectively raised $3.4 billion in September alone.
This included 41 growth stage deals and 114 early-stage deals, while investment in 40 start-ups remained undisclosed.
The driving force
What exactly is driving the unicorn boom in India? Ankur Bansal, Co-founder and Director, BlackSoil, says low interest rates in the US, with the Federal Reserve printing money, has created excess liquidity.
This, according to him, has led to an abundant supply of capital and dry powder for most venture capitalists and private equity managers, which has coincided with a rise in high-quality start-ups.
“Apart from this, public markets have stayed buoyant which has resulted in bumper gains for investors, hedge funds and family offices, driving investments in new-age businesses.”
Talking about his outlook on the start-up space, Bansal says BlackSoil is bullish on new-age businesses and believes that Fintech, SaaS, AgriTech, Edtech and E-commerce sectors will continue to grab the bulk of investments.
The e-commerce sector, in fact, has dominated investor interest in 2021, receiving $11 billion and accounting for 23% of the total investments this year, according to a September report by consultant EY and the Indian Private Equity and Venture Capital Association. Bansal attributes the sentiment to the increasing digital penetration.
“With the next 500 million internet users coming from smaller cities, the penetration of digital business is just at the tip of the iceberg,” says Bansal.
The Blacksoil Director explains that the start-up ecosystem has evolved dramatically after Jio, as digital adoption has grown significantly, unlike the previous decade, where companies had to spend a lot on consumer education and adoption.
“This has previously led to the commoditisation of offerings and unsustainable unit economics. This is not the case currently and companies now are focused on strong unit economics and sustainable growth coupled with macroeconomic tailwinds and favourable consumer behaviour,” Bansal adds.
Managing Partner of Orios Venture Anup Jain’s view resonates with Bansal’s argument of digital penetration assisting the unicorn boom in the country.
“One of the biggest reasons for the unicorn boom in India is that tech start-ups have now become household names and are thus scaling over a shorter period than earlier. This has been helped by increased smartphone penetration and digitisation of commerce in various aspects of life during the pandemic,” he says.
Digital adoption and smartphone penetration have crunched what would have taken place in 4-5 years into 1-2 years due to the pandemic, adds Jain, noting that these rates have not become irreversible, thus, large companies will continue to grow alongside greater digital penetration in their respective categories.
According to a report (October, 2020) by TiE- Delhi, a not-for-profit promoting entrepreneurship, and Zinnov, a management and strategy consultant, India is expected to host as many as 62,000 start-ups, including 100 unicorns by 2025.
If things go well for the start-up ecosystem and the current investor sentiment persists, the numbers could be above and beyond what one can possibly imagine.
The Zomato effect
The bumper listing of Zomato and its excellent performance on the exchanges is another reason why VCs are pumping money like never before.
“India’s equity market is flooded with cash and Zomato’s bumper listing shows there is a big appetite for tech-based companies even if they are running in losses. IPOs/listings are giving good opportunities for VCs to exit with big gains,” said an analyst at a leading brokerage firm.
Zomato’s IPO was oversubscribed 40 times, and it got listed with a 53% premium on its IPO price of Rs 76.
Numbers highlight the pace at which start-ups are becoming unicorns increased drastically post-Zomato’s listing, including the latest name in the list Rebel Food.
As many as 15 start-ups became Unicorn in just two-and-half months. During this period, India’s equity market too had a bull run that saw firms such as CarTrade going public and big internet companies such as Paytm and Oyo applying for approval from market regulator SEBI.
Earlier, this was not the case as firms had to be a profitable concern to become a publicly traded company in India.
However, in recent years, Sebi made big changes in criteria list that allowed loss making companies to go public.
“India is emerging as a preferred destination for investing capital. With global grey zones in terms of interest rates and return potentials, and the turmoil in the Chinese investment ecosystem, the relative attractiveness of Indian start-ups has gone up manifold in the past year - valuations are definitely on an upward trajectory, but nowhere near a peak. So, we should expect room for growth. The litmus test for private valuations will be the public market performance of recent IPOs. If they hold value, private valuations will continue to remain attractive,” said, Utkarsh Sinha, managing director, Bexley Advisors — a boutique investment bank focused on early stage deals in tech and media.
However, it will not always be a one-way ride as the stock market can easily deteriorate the value of a firm, a phenomenon currently seen in China after policy tweaks wiped out hundreds of billions of dollars from tech-based companies.
Lack of concrete future plans to scale up, innovate and turn profitable is another reason why many start-ups, including few unicorns, had to shut shop here or are struggling to survive.
“Almost all the unicorns are in losses. The ones which have survived recent disruptions and are showing signs of turning profitable will thrive. Then there are start-ups which have become unicorn in just a year’s time with no business fundamentals. There is one big loss making fintech firm, now unicorn, which solely relies on advertisement to raise money. It may make big money for the celebrity founder but investors’ stands a chance to lose their investment here and in similar ventures,” the analyst quoted above said.
