Decoding Unicorn – A start-up ecosystem gaining pace

“Every dark cloud has a silver lining” is a very popular proverb which indicates that every bad situation holds the possibility of something good. Today on one hand, India is facing the threat of second wave of the covid-19 wherein the rising number of infections is raising concerns about pace of the economic recovery.  On the other hand, unicorn – a start-up company with a valuation over $1 billion is making the headlines.  In the first four months of 2021, 12 new companies got the unicorn status in India while in the pandemic hit 2020, 12 companies were valued at $1 billion or more – highest ever for a year in India.  The momentum is likely to be stronger wherein rapid digitalization and tech adoption is likely to boost Indian technology start-up ecosystem according to report by National Association of Software and Services Companies (NASSCOM), in partnership with Zinnov, a global management and strategy consulting firm. The industry body also stated India ranks third the total number of unicorns globally. India added 2nd highest number of unicorns (12) in 2020 after USA and India is on track to have 50+ strong Unicorn club by 2021.List of unicorns of 2020 and 2021 are as follows:

Source: ETtech research and NASSCOM

As seen above, most of these start-ups in India are not just restricted to IT or e-commerce but spread across different sectors such as education, gaming, logistics, healthcare, financials, food tech, insurance according to Credit Suisse.

Functioning of the Unicorn and how it is likely to lead the economy

The term ‘Unicorn’ was coined in 2013 by the venture capital investor – Aileen Lee referring to start -ups which were valued at more than $1 billion. The valuations of these companies are derived from the growth potential by the venture capitalist and private equity players who finance these companies.  Valuation depends on the long-term forecasting models and governed by host of other factors that enable these start ups to attain the unicorn status.  Some of these factors are as follows:

• Start-ups have disruptive innovative product idea which is typically first of its kind for instance, Groww – a fintech company set up few years back with an aim to simplify investing got the unicorn status recently after the company received $83 billion by the Tiger Global. Messho is the social commerce startup is founded by IIT Delhi graduates allowing businesses and individuals to start their online stores via social media platforms. Start-ups typically have scalable models where they aim for user’s growth or some other kind of growth.
• Quantum of funding has also increased where many global investors such as Softbank Group Corp., Naspers, Tiger Global are keen on investing huge amount of capital in these start-ups in India. There has 64% surge in the private equity and venture capital investments in India during the January-March period at US$8.3 billion compared to the year-ago period according to the report by the consultancy firm EY and industry lobby India Venture Capital Association. In addition, Union commerce minister Piyush Goyal unveiled a Start-up India Seed Fund Scheme (SISFS) to handhold and financially support early-stage start-ups. A sum of Rs 945 crore has been allocated for the fund and likely to benefit around 3,600 start-ups and boost the start-up ecosystem, particularly in tier-2 and 3 cities. This will help in further boosting the start-ups ecosystem and inspire more innovation in the country.
• Majority of the start-ups are driven by technology which enable to increase their reach among the customers. The covid-19 pandemic has given huge boost to digitalisation and we have seen massive adoption of the online culture which has enabled these start ups to leverage on opportunities and enhanced their product reach.

Rise of the Unicorns in India has definitely given opportunities to several enterprenurs who initially not able to launch their ventures either due to lack of funding,  dominance of the big businesses and also regulatory challenges.  Like for instance, in India capital market regulator SEBI has strigent conditions for the companies wishing to go to primary market to raise money via intial public offering (IPO) and get listed on the stock exchange.  One of them is to make the profits in the three out of five precedding years which was difficult for the unicorns. With increase in globalisation and integration many of these start ups were able to raise money from the global investors who sees potential in these companies.  While we need to wait and watch in the years to come, but in case many of these unicorns turn into profitable ventures they are likely to be key drivers of economic growth along with many big Indian conglomerates.  In addition, many of the fintech start ups are working with banks, NBFCs which has helped in changing the financial landscape including wealth management, lending, investment and insurance products and expanding its reach to larger section of population.

Way forward

Unicorns are riding high currently by attracting money from foreign investors. But in order to get large market share, maintain the growth trajectory these unicorns offer product at lower rates which might enable investors of these start-ups to make profitable exit but often hampers the ability of the Unicorns to make profits and at times they might have dismal listing performance as evident in case of Uber and We Work globally in 2019. Note majority of investors in Unicorns make exit via an IPO and many Unicorn in India continue to face challenge in meeting the regulatory guidelines making it difficult for them to list.  In addition, there are also questions raised in terms valuations of these companies and underlying fine print of the financials raising concerns about the manner in which companies are operating.   However, on the flipside the brighter economic prospects of Indian economy and diverse innovative domains of new Unicorns resulting in many global investors seeing India as an attractive investment destination and willing to park more funds in the start-up ecosystem.