Who will be the next Unicorn?

A recent report by CB Insights revealed that ventures like health-tech start-up Practo, fintech start-up ClearTax, payment solutions provider Razorpay, car search venture Cardekho and news and content application DailyHunt are in line to become the next set of Indian Unicorns. This week, logistics start-up Delhivery entered the coveted club by securing $413 million in funding.

What is interesting to note is that apart from Razorpay, which started in 2014, the rest of the ventures are almost a decade old. The journey of Indian start-ups towards the attainment of the Unicorn tag has so far been fascinating, albeit at a gradual pace.

“Indian Unicorns have taken on an average at least six to seven years, as against the four to five years taken by Chinese start-ups,” says Pankaj Karna, managing director, Maple Capital Advisors.

According to serial entrepreneur Bala Parthasarathy, CEO and co-founder of MoneyTap, in India, a company takes around 7 years, “if it makes it, to become a Unicorn. China sets the record at four to five years.” Experts say business-to-business(B2B) marketplace Udaan was an exception as it became a Unicorn in 2018, within two years of setting operations.

Experts believe a quick turnaround time in terms of attaining the Unicorn status is a clear marker of not only the success of the venture but reflects majorly on the maturity and coming-of-age of the start-up ecosystem in a country.

“The first wave of start-ups started over a decade ago when the ecosystem was not fully evolved. From worrying about raising venture capital funding to hiring capable people and the ability to acquire users and consumers, all were challenging tasks. That is perhaps the reason Indian start-ups like InMobi, Flipkart, Ola, etc, took about five to eight years' time to attain the Unicorn status. Now with market dynamics, digital connectivity and payments in place, the new batch of start-ups can get to this status much faster,” says Amit Gupta, co-founder and CEO, Yulu Bikes.

Currently, India has 21 Unicorns out of the approximately 270 that exist globally. While China has 120 Unicorns, the US has about 85. Last year, about eight Indian start-ups including Swiggy, BYJU's, OYO, PolicyBazaar, Freshworks, attained the $1 billion-plus valuation required to become Unicorns.

Experts like Karna believe the Unicorn tag is actually an attestation of the shared value created. “So businesses need to remain focused, demonstrate the speed of scale up and have investors that have the ability to stand by through the journeys of multiple fund-raises that span out over the years to get desired valuations.”

According to Karna, the Unicorn tag is driven strongly by the kind of investors backing new economy players, often focusing on opportunities that have the potential for market domination, at the expense of profits in the near term.

Becoming a Unicorn, by definition, means getting a high-profile investor like SoftBank, Sequoia Capital or DST Global to invest a large sum of money, somewhere in the range of $200 million in the venture, says Parthasarathy. Last year, OYO is said to have raised $1 billion in a round led by Sequoia Capital, SoftBank and others, while Swiggy raised $1 billion from investors like Tencent, Naspers and others.

“There are not more than a dozen such investors with that kind of purse sizes. The question of why a company needs so much money also arises. Given that these type of investors invest in hot tech start-ups, how do other ventures justify the need for such amounts of capital and what kind of returns do they promise investors”, asks Parthasarathy. He further adds that there exist many good and healthy businesses that will be profitable over the long-term, but don't need that kind of capital, and hence, will never make it to the Unicorn club.

But for those start-ups that seek heavy doses of funding and actively eye the Unicorn tag, working with organised investors early on in their journeys is necessary to drive in better traction, feel experts. Organised early-stage investors such as angel networks, accelerators, etc, are better positioned to advise and assist, says Karna.

Says Parthasarathy, “One key factor which often gets overlooked is the quality of early investors. Most entrepreneurs, who have the luxury of getting multiple investors chasing them early on make the mistake of going for the highest early valuation. What they don't realise is that they are short-changing their future. The big investors usually fish in the pond of early investors, and getting the right type of early investors matters big in attracting the big ones later on.”

TIME TO GROW

Around 7yrs Indian start-ups take to become Unicorn

4-5yrs Time taken by Chinese start-ups to attain that status

A key factor which often gets overlooked is the quality of early investors. Most entrepreneurs, who have the luxury of getting multiple investors chasing them early on make the mistake of going for the highest early valuation