A maiden report by China-based Hurun Research Institute that has listed unicorn companies from around the world, has put India on the third spot after China and the US, for producing 21 startups valued at a billion dollars or more.
According to the report, while China has 206 unicorn companies, the US has 203 such companies, together accounting for over 80% of 494 billion-dollars plus startups globally. India is way too far behind with just 21 unicorns, but the pace at which startups are entering the prestigious club is what sets it apart from other markets.
It is to be noted that this report lists only those companies that got over billion-dollar valuation till June-end this year. India added four more unicorns between the month of July and September.
It took six years for 10 Indian tech companies to be valued at over USD 1 billion, but in just one year, 2018, investors valued eight startups at a billion dollars or more. This year, the performance has gotten even better as in just 10 months eight new companies got into the unicorn club. To be clear, three companies–Flipkart, Snapdeal, and Shopclues–that became unicorn companies between 2011 and 2017, are no longer a part of the elite group.
“The Indian startup ecosystem really took shape in the last decade, which saw some quality founders,” said Hari Krishnan, a fund manager at Astrarc Ventures, a Mumbai-based early-stage venture capital (VC) fund.
Krishnan told KrASIA these founders have seen the first wave of startups in the country and took early stages risks, mitigated them successfully and executed their ideas really well in the urban markets. “And some of those startups, which have now become large, are looking at the second set of markets–semi-urban areas and towns.”
According to him, better access to infrastructure including smartphone penetration, internet, and cheaper data plans beyond metros has made a larger part of the country a target market, which was not the case earlier. He believes behemoths such as Paytm, Flipkart, and Ola are able to go mainstream in tier 2, tier 3, tier 4 markets because of the infrastructural expansion.
“The third leg is the capital. Large exits have given confidence to the large funds, which are now focusing on India. So along with mature startups, mature founders, better infrastructure and a larger potential market; the availability of global money is also catapulting these startups (into unicorns),” Krishnan said.
In 2018, American retail giant Walmart bought Flipkart for USD 16 million giving latter’s investors a hallelujah exit. This lifted investors’ sentiments, and Indian startups received a whopping USD 10.9 billion in investment in the first nine months of 2019, according to data by research firm Tracxn.
“All these factors have contributed to the large funding rounds that are happening in slightly late-stage companies,” Krishnan added.
As per the data from research firm Venture Intelligence, investments in growth-stage startups, typically Series B and Series C, crossed the billion-dollar mark in the September quarter, hitting a four-quarter high. Overall, growth stage investments raised a total of USD 2.3 billion between the months of January and September in 2019.
The bigger cheques written in growth-stage startups have not only created unicorns, but have also prepared more than two dozen soonicorns (soon-to-be unicorns) to wear the much-coveted hat that is worth a billion dollars, so to speak. The list includes startups such as Pine Labs, Lending Kart, DailyHunt, CureFit, and ShareChat.
“Largely because of the abundant availability of capital and big enough Indian market, we are seeing a lot of startups growing at a fast pace,” said Sajith Pai, director, Blume Ventures.
According to Pai, there are about 100-150 million consumers in metro and tier 1 cities who actually spend money online, and about 100 million aspiring consumers in tier 2 and beyond cities, who have started adopting smartphones and online transactions. Except for India, there isn’t such a large market outside China, which is why a lot of investors are now looking at India, Pai said.
“Bulk of the companies, which have been around for five to 10 years, have created significant value for their users and have also grown as a business, which justifies their unicorn status,” said Alok Bansal, founder of 11-year-old digital insurance platform Policy Bazaar, which entered the unicorn club in 2018. According to him, compared to the companies that have been around for a while and got a billion-dollar valuation later in their life-cycle, a few unicorn companies are early-stage firms that have reached where they are right now due to their lightning speed growth.
Bansal said, although many unicorn companies have scored fairly as far as their growth is concerned, profitability is still a question mark for some of these. “If you look at unit cost and direct cost coverage, they have done pretty well. As these early-stage startups saw growing market adoption, investor’s interest also shot up. And since more often than not, a lot of investors are chasing the same deal, it results in high valuation investment,” he said.
It is the combination of these factors, he said, that has resulted in companies joining the unicorn list at a faster rate.
Industry experts feel there is a bit of overvaluation in specific areas but is limited to pre-series A and early series A territory. Mostly second-time founders based on their past track record have been able to raise money at high valuations without showing any traction or growth for their current startup.
“This happens especially when there are competing investors looking at getting into the same opportunity,” said Krishnan. He believes, in the late-stage market, overvaluation is a rarity.
However, similar to China, where most of the 200-plus unicorns are still not profitable, Indian unicorns are still in the growth-mode, and are not chasing profitability yet.
“Founders of large companies have the option to either go after profitability or growth,” said Krishnan. “When growth happens at a very fast pace, say 100% every year, generally, startups prefer to expand the market, and capture as much share as possible, during which they really don’t focus on profitability. But at some point in time, when growth matures and stabilizes, these startups will choose to go after profitability.”