India's unicorn party is just getting started

The venture capitalist now breaks down the demand side of the unicorn story. “The demand for high-quality companies is at its peak,” he reckons. Beyond the traditional investors, there is a new crop of entrants—global private equity, VC and hedge funds—who are keen to take part in the Indian growth story. “They have been quick to move and offer attractive valuations, which has positioned them as top suitors for the best companies,” he adds.

What has also added rocket fuel to the unicorn growth is excess flow of the American dollar. “Capital is cheap and interest rates are low, especially in the US,” explains Vaibhav Agrawal, partner at Lightspeed Venture Partners. Capital, therefore, is chasing growth.  “This has made internet companies very attractive,” he adds. Add to this the fact that India is perhaps the last internet market—with over 1 billion users—that is completely open to internet and technology entrepreneurs globally. “This creates a perfect storm for capital inflow,” he says.

The factor, though, that has triggered a surge in unicorns is the pandemic. Covid-19 has expanded the total addressable market for the internet across many categories such as ecommerce, SaaS, education and healthcare. The technology investor community has gone from looking for $1 billion outcomes to $10 billion or maybe $30-$50 billion outcomes within a matter of months. This explains high-priced rounds, and companies getting valued over a billion. The positive side of the boom, Agrawal underlines, is that the best startups haven’t wasted the opportunity in the pandemic crisis. “They’ve improved businesses models, cut discounts, worked on order frequencies and take rates, and emerged leaner,” he reckons.

Some analysts point towards the maturity of the startup ecosystem to explain the mushrooming of unicorns. Every growing market has an inflection point when it gets into high gear and accelerated growth. “India is going through such a phase,” says Anup Jain, managing partner at Orios Venture Partners, a venture capital fund. The tech startups, he underlines, have been buoyed by two things. First is the infusion of capital investments into the country. With Tiger Global and Softbank having raised fresh funds with allocation to India, startups are grabbing investments. Secondly, accelerated digital adoption means that companies with even $300 million in valuation are now ready to jump to the next level. “The US has 135 unicorns, China a 115 and India has some 48,” he says. Forget overcrowding, the unicorn club is yet to get crowded.

What the easy flow of money into the startup ecosystem also means is an impending phase of consolidation. “The fact that capital can create market leaders is well established,” says Radha Kizhanattam, partner at Unitus Ventures. What the pandemic has done, she explains, is to accelerate this phenomenon in sectors which are ‘new normal’ ready. While investors are now looking to partner with some of the best entrepreneurs who have a head start in being new-normal-relevant, several good companies who don’t manage to attract sufficient capital are left with the option of sub-optimal or stagnating growth. The newly-minted unicorns, she stresses, are likely to take the inorganic route to rapid expansion leading to some much-needed participation in the merger and acquisition markets beyond the very few in the ecosystem today. “This will lead to some liquidity for early investors as well,” she adds.

Easy liquidity also means that startups are getting into the ‘bumping up valuation’ game. Does it create a bubble in the long run? Well, there definitely is a flip side. K Ganesh points out one of the threats. “Currently, the valuations are at a stratospheric level, which is untenable. Some amount of realism needs to come in,” reckons the serial entrepreneur and promoter of startups such as BigBasket, Portea Medical and HomeLane. Like in any bull cycle, Ganesh explains, many not so fundamentally strong models are born, and even get funded in the hype. But when the realism sets in, they all fold up. “This is part of the cycle. I fear the same may happen to some of the startups and entrepreneurs,” he sounds a word of caution. “We need to be prepared for this. It is not bad, but just that we must be aware,” he adds.

Another potential pitfall could be that unit economics might go for a toss. There will be a few founders who will miss the point in the financing frenzy and get busy ‘buying growth’. “Such businesses will hit a wall eventually,” avers Agrawal of Lightspeed Venture Partners. This is a real opportunity for investors to engage founders in rich conversations around goals, trade-offs and priorities. “With more capital comes more responsibility,” he says.

The focus must be on enduring companies, and not unicorns. “Just because you become a billion dollar company, doesn’t mean you will automatically become an enduring company,” says Rajan Anandan, managing director at Sequoia Capital India. Though turning unicorn is a good marker, it in no way implies that the startup will become an enduring company. “We want enduring companies,” he stresses.

For now, though, the Indian startup ecosystem is cheering the enduring, and galloping, unicorn story. There is no stopping the funding bus, which has replaced ‘Horn OK’ with ‘Unicorn OK’ please.