Anushruti Singh
As the fifth month of 2021 ended, India’s newest unicorns equalled their tally with those from 2020. Zeta, a banking technology provider became the 14th unicorn this year at a valuation of $1.45 billion.
With the current pace that the Indian start-ups are setting on their way into the $1 billion club, with an average of one unicorn per week in just four months; we can say—It’s been raining unicorns in India.
Despite battling with a dwindling economy, India already has 14 unicorns in its kitty in just five months into 2021 (At the time of writing). Its more than what NASSCOM had predicted in January about the country having at least 12 unicorns by then.
From another perspective, 14 unicorns are more than what India collectively had from 2014 to 2018 (13 unicorns). In fact, the total number of unicorns that India had last year is 14.
Also, in the next few months, we may see 35 more start-ups joining the unicorn club.
Expectedly, investors are quite elated due to the present scenario.
“Yes, it is a good time for the right idea that the right set of founders and investors are ready to invest in,” says Ankur Mittal, co-founder, Inflection Point Ventures (IPV) which aims to double its investment in start-ups to around Rs 155 crore this year.
“Investing in start-ups is basically a futuristic investment. We are taking the bet on how things will shape up in the next 3-5 years in the future, sometimes even longer. And what we are witnessing since the last one year is good for India,” he said.
India, being the third largest start-up ecosystem is currently on a roll, and start-ups, irrespective of sectors, are mushrooming like never before. In 2020, about 7,000 new start-ups were founded, with a more than 10 per cent growth in seed stage deals. As per the Economic Survey 2020-21, the government has recognised 41,061 start-ups as of December 2020.
Meanwhile, a Credit Suisse research report says that there are 100 unicorns in India which have created a $240 billion market capitalisation. “Fast-growing and innovative (unlisted) firms are sprouting up in new sectors as well as locations across India, rapidly gaining scale as they ride unique growth opportunities from digital public infrastructure and partnerships,” said Neelkanth Mishra, Co-Head of Equity Strategy, Asia Pacific, and India Equity Strategist at Credit Suisse in the report.
In terms of the number of unicorns, India ranks a distant third after the US and China, which indicates the passion for success that our Indian start-ups have. And despite the challenges brought forth by COVID-19 and low investments, it only seems to be growing day by day.
“I think 2020 is just the beginning of the Indian start-up ecosystem. The transition that happened in the last 10 years in China and 20 years ago in Silicon Valley is expected to occur in India over the next 10 years. The next decade is going to be the golden decade for India-based start-ups,”
opines Vivek Bhargava, Head – Dentsu Performance, Group Co-Founder, Profitwheel & Chairman, IAMAI Start-up Council.
India is spawning unicorns
As start-ups continue to make headlines in India, there are many reasons as to why these start-ups have been breaking all previous records lately. For an in-depth insight into this phenomenon, we spoke to several experts.
Mittal of IPV elucidates upon one of the many reasons as to why India is spawning unicorns, “The start-up ecosystem is coming of age,” he says.
“A lot of start-ups are going through their natural growth cycle, where they will first build the business, attract the customers and then start monetizing. Whereas many have reached their inflection point. These start-ups have improved a lot in terms of unit economics, profitability and visibility. Thus, these businesses are able to get past the unicorn valuation,” he continues.
He further points out that the start-ups pivoting to unicorns, are here for a long time, and have already captured the market in their respective fields, thus becoming profitable, which investors like. For instance, Gupshup, a conversational messaging platform is a 15-year-old company and the tenth unicorn this year. Its last funding round was in 2011 but over the intervening years, it was profitable. Among the other unicorns are 6 to 4 year old companies, such as Urban Company, Moglix, Sharechat, Innovacer, Infra.Market, Zeta etc. “I mean to say that these are not the companies that started yesterday and become a unicorn today. These start-ups have been there for a quite a long time. They have been able to acquire customers, build processes and now they are profitable and continue to grow. So now they demand a higher valuation,” he opines.
Gone are the days when Indian start-ups were considered rip-offs of some western apps. That perception about Indian start-ups has undergone a drastic change, and it has taken many years to achieve that.
The pandemic’s role in this success story
Meanwhile, the latest reason for the unicorn boom in this country is the pandemic. COVID-19 in many ways has expanded the availability of opportunities for start-ups and surely, they are leveraging it.
Professor Anil K Sood, Co-Founder at The Institute for Advanced Studies in Complex Choices (IASCC) comments on how this works, saying, “Given that a dominant share of start-up activity (e-commerce, digital payments, online education and healthcare) in India is focused on consumer services that have benefitted from the pandemic-driven lockdowns, it is not surprising that the Indian start-up ecosystem is creating unicorns at a faster rate during 2021 than it did in 2020.”
As an economist he further explains this phenomenon.
The current scenario is such that there is the need for lowering the cost of living or cost of production, when earnings are not growing, “This encourages people to shop for price rather than value. At the same time, we have seen Indian start-ups, like anywhere else in the world, being focused on acquiring and retaining customers through deep-discount business models,” he says. This is increasing the revenue and hiking the value of these start-ups.
The current pandemic has enabled many start-ups in the tech, finance, e-commerce, services and other sectors to take giant strides towards profitability and success.
Mittal thinks likewise, although he places more emphasis on the growing internet economy and digital adoption as the reasons for start-ups securing more valuation, because of the increasing demands for their services especially in the B2C category. “Look at the rate of digital adoption in the past one year. People are heavily dependent on online services, e-commerce or banking or something else. If this is not the hockey stick growth, then what is?” he asks.
The pandemic has disrupted the demand for digital services and other solutions for daily use or to continue operating businesses. Mittal believes that this has contributed majorly to the growth of these start-ups, which makes them investment worthy.
That is why new emerging companies with innovative solutions and technology are attracting investors like never before. As per US based research firm PitchBook, in only four months of this calendar year, start-ups have raised $7.8 billion in funds. While a Bain & Company insight states that 2020 also saw strong deal flow, with close to $10 billion in VC investments. In India, focused fund-raising activity stood at $3 billion last year—40 per cent higher than in 2019. Marquee funds including Sequoia, Elevation Partners, Falcon Edge, and Lightspeed, all closed new funds for India investments in 2020 despite the pandemic.
“Internet services and adoption has triggered the investments in the tech start-ups. If the start-ups have the potential to become big, or if they can make an opportunity out of black swan events such as this, investors will give them money, even though it’s a risk and there is no guarantee. However, there are no free lunches and start-ups have to make sure that their investors are making money,” says Mittal.
Even though the pandemic was challenging, start-ups did not let go of the opportunities that came with it. “Instead, they improved themselves and transformed their business models. They even stopped giving discounts, expanded their portfolios and services, and order frequencies. It was all to make businesses more viable. And if this trend continues, in my opinion, a lot more businesses will become profitable tomorrow and that’s the bet we VCs take,” Mittal avers.
Most of the experts SME Futures spoke to said that VC funding will continue to see momentum in consumer tech and software as a service (SaaS).
They have become resilient
Bhargava of IAMAI Start-up Council adds that over the years, Indian start-ups have become more resilient.
According to him, the Indian start-up eco-system is now more mature; is more product focused, and investors are keen to invest in it, “The start-up ecosystem has grown over the years. Today there is product management talent, a venture ecosystem, accelerators – all leading to entrepreneurs making less fatal mistakes as compared to earlier. There is flow of capital, with many investors out there. Though, product companies are exponential, it takes time before they start delivering revenues, so they require much more capital as compared to services companies,” he said.
Besides that, the experience of the founders of these businesses also counts in making a company more resilient. Citing his own experience, Bhargava tells us that second time entrepreneurs have an easier time while raising funds. “I started my first company 22 years ago – our product endeavour never got funding. Ultimately, I had no choice but to build a digital marketing services company. Six months back I started a product company and was able to raise capital before even starting the company. There are thousands of second time entrepreneurs who are able to build more resilient companies,” he avers.
Businesses are transforming
Another factor that can be attributed to the success of start-ups is that Indian businesses are reshaping themselves from linear to exponential growth models. If you have ever watched Shark Tank or Dragon’s Den—it’s the first thing that they look for in a business for any potential investment in it, then you can certainly understand what we are talking about.
The companies are moving from services organisations to product organisations, Bhargava says while further elaborating on this, “India is rapidly shifting from linear companies where revenues were directly proportional to the people employed, to exponential organisations that can grow exponentially without exponentially growing their teams.”
To put it in simple words, linear businesses use raw materials to produce or offer a service, distribute it to consumers, and get paid for their products/services. Then, the business moves on to another client or consumer. In India, the majority of start-up founders prefer to develop their business with this pipe model, where everything occurs sequentially and flows in the same direction. WeWork is a good example of this model.
But even if this model is intuitive, its drawback is that it is time consuming and needs consistency. Whereas the current business scenario does not allow you that—either you are in the game, or you are out.
Hence, start-ups are preferring the platform style, as they can scale quickly, and grab market shares more efficiently compared to linear businesses.
“The biggest differentiating factor to consider is that earlier companies were created in a scarce economy, and now they are being created in an abundance economy. Amongst the most successful companies in India, Infosys for instance has a market cap of about US$ 50 billion and employs 250 thousand people. Compared to that, Microsoft employs 150 thousand people and is valued at US$ 1600 billion. 30 years back building companies like Infosys was critical, however, building companies like Microsoft over the next 30 years is equally essential,” Bhargava explains.
Investment flow for start-ups
Indian start-ups were able to crack 1,200 deals and are estimated to have received $10.14 billion in funding in 2020 during the COVID crisis. Even though this figure is lower than that of 2019 (USD 14.5 billion), the number of deals was higher by 20 per cent, as per consulting firm HexGn.
Which only points towards an abundant flow of VC money into the companies who have potential. And currently, innovative Indian start-ups are attracting unprecedented VCs and angel funds irrespective of geographical boundaries, as they match their criteria.
Commenting on the investment scenario, Bhargava enthusiastically says, “I think this is the most exciting time for the investment scenario in India, both from the investor’s and the entrepreneur’s points of view. I think that in the next 10 years, thousands of start-ups will increase 100x in value, which makes it very exciting for angel investors like me. I have invested in 20 plus companies, a few of them have already increased 10 x – hopefully, some of them will achieve 100x growth too. Start-ups are finding it much easier to raise capital as they have access to the second time entrepreneurs in India.”
It gets more interesting…according to statistics by YNOS Venture Engine, around one-third of the angels investing in Indian start-ups are from foreign shores. Bengaluru, Delhi NCR, and Mumbai accounted for 90 per cent of the start-up investments in the country, signalling the concentration of angel investors and appetite in these regions.
“This is the best time to be an entrepreneur in the country. And it’s the best time for the investors too because the wealth creation that happened in the internet and exponential economies of China and the US in the past, is expected to occur in India now. Start-ups have access to a lot more accelerators being launched by private equity companies. There is a lot of capital available for even the series E and D entities like Tiger, SoftBank, etc., who are willing to write half a billion-dollar checks to potential companies,” says Bhargava.
However, in many instances, businesses are not able to make money and raise investments in the current scenario. For those businesses, Bhargava has only one advice, “I think the modus operandi that needs to be followed is creating a roadmap for their projects to identify their potential for growth in order to find the investors. I have invested in three companies during the pandemic, out of which two have been completely through virtual meetings. This has been possible only because the projects were aligned to the current needs of the businesses, showed the growth graph and also due to the trust that has been built over the years while working closely with these associates,” he elucidates.
Programs and accelerators are aiding start-ups
The early entrepreneurs and start-ups did have hard times. We can say that many have tasted success only after numerous trials and errors. But today, we have various platforms which are pushing entrepreneurs to reach their maximum potential.
These are commonly known as accelerators, incubators and mentors.
They have been aiding companies at various levels, right from pitching to entering the market with a viable product. And more importantly, they help in fundraising…
Bhargava, who is spearheading IAMAI’s Circle Program, a mentor program for start-ups, believes that these are imperative in a start-up’s journey as they can get directions from the industry stalwarts who have experienced it all first-hand.
“An entrepreneur at times needs a non-biased bouncing board while making a business decision. This is the biggest challenge that I had faced in my journey. IAMAI’s Circle Program provides a bouncing board of really accomplished mentors for young entrepreneurs to address such challenges through their reach experience and hands-on case studies. We have created an easy tunnel for reaching out to these mentors which otherwise would have been a tough process. It is like a Mentor – Leaders learning program,” he tells us.
Under this program, start-ups will be mentored by Dinesh Agarwal [IndiaMart], Nitin Kamath [Zerodha], Rajesh Jain [Netcore], Adhil Shetty [BankBazaar], Ameera Shah [Metropolis], Rajesh Magow [MakeMyTrip], Nigel Morris [Ad-mix], PK Gulati [Optimistix Ventures] and Tarana Lalwani [InnoVen Capital], he informs us.
What’s it like to be a start-up in India
If we look closely at the Indian start-up ecosystem, it has been gaining strength as observed in the global start-up ecosystem rankings. Delhi has entered the top 30 for the first time and Mumbai now ranks #1 among the global emerging ecosystems. While Bangalore has slipped by 8 positions, it is still in the top 30 ecosystems in the world. Bangalore’s decline during 2020 is largely caused by low levels of financing.
However, if we look at the key parameters defining relative positions, we find that Bangalore and Delhi score low on talent and market reach, compared to their global peers.
For a much stronger start-up ecosystem, it is therefore, imperative for us to invest in several parameters, suggests Professor Sood while talking about the scenario for start-ups in India. These areas are—
- raising the quality of science and technology education
- research and development and thereby contributing to creating knowledge
- leveraging technology to solve complex problems, which creates value for global consumers.
Going ahead, mentors and accelerator programmes have a much more significant role to play. Pointing out the directions that these programmes should take, Professor Sood further says, “Consequently, our programmes should not only focus on aiding the start-up firms, but they must also expand to strengthen the ecosystem. It will involve investing in technological innovation-led as well as business-model led entrepreneurship. We will need more and more start-ups to focus on value-creation and its delivery – not just on value-delivery that focuses on replacing existing brick and mortar intermediation processes. E-commerce would need to go beyond replacing the physical stores with warehouses or the consumers travelling to shops with the staff travelling to deliver. And, of course, look beyond discounts to acquire and retain customers.”
According to him, it must be about building and leveraging technology-based platforms that allow consumers and producers to make choices where low-price is not confused for high-value.
In the end, a start-up focused on value-creation and its delivery has a higher probability of sustaining a multi-billion-dollar valuation, compared to the one that focuses on value-delivery through disintermediation or convenience.
“A value-creating start-up will have higher resilience as it will attract quality financing (investors who are not looking at the timing of exit), committed superior talent (employees that are not looking at selling their stock on listing) and customers who are not basing their decisions on the level of the discounts offered. Given that the surveys have also identified marketing, team and financing to be the top three reasons for start-up failures, it is important for Indian start-ups to begin focusing on creating value and not just on delivering value or scaling up through deep-discount models,” Professor Sood explains.
However, all the analysts that SME Futures spoke to are confident about the growth of Indian start-ups and the growing number of unicorns. As Bhargava says, “It’s the best time to be an entrepreneur and the best time to be an investor. Hence the overall outlook is very positive. I think this is just the start of the boom. We will not only be having hundreds of unicorns, but also lakhs of 100-million-dollar companies in the near future.”
About the current tally of 14 unicorns in India, Mittal of IPV says, “I will not predict, but I will be very surprised if this number doesn’t double. I expect the number to be more than 20. There are still a lot of start-ups in the range of 600 to 900 million valuations and if they go for the next round, that will probably become a billion-dollar valuation.”
Professor Sood concludes by avowing his faith in the bright future of unicorns in India, “Given the size of our market, we will have more unicorns than most other countries. The challenge for the Indian unicorns is to sustain and grow their valuation by scaling up to become globally relevant players,” he avers.
With this, most experts expect Bangalore, Mumbai and Delhi to lead the development of the Indian start-up ecosystem, as has been the case with other global cities.
