Unicorns Lose Bragging Rights Amid Funding Drought
A unicorn, by definition, is a mythical creature known for its rarity. This term has been fittingly adopted by the startup ecosystem to describe companies that reach a valuation of $1 billion or more. Despite India becoming the third largest home for unicorns globally two years ago, these once-celebrated entities are now becoming rare again. Many have experienced down rounds, losing their unicorn status, while others avoid even acknowledging their status. The term “unicorn” no longer signifies an achievement that founders or investors celebrate. In 2021, India minted 58 unicorns, reaching a total of 100 by May 2022.
The Changing Perception of Unicorn Status
Business Insider engaged with experts from the startup ecosystem to understand why the term ‘unicorn’ is losing its luster. Amarjeet Makhija, a partner at PwC India, notes that reaching unicorn status used to call for celebration and drew significant attention. This attention also attracted regulatory scrutiny, leading to increased taxes in sectors like gaming, as the unicorn status implied deep financial pockets. Consequently, startups are now cautious about publicizing their unicorn status.
India’s Booming Startup Ecosystem
India boasts the third largest startup ecosystem globally, with nearly 100,000 startups and 110 unicorns that have collectively raised $100 billion and have a combined valuation exceeding $350 billion. India’s first unicorn emerged in 2011, with the highest number created between 2020 and 2022. The rapid value creation in recent years contrasts starkly with established corporations like Infosys, which took 18 years to reach a billion-dollar valuation.
The Role of Easy Money in the Unicorn Bubble
The influx of easy money into the startup ecosystem led to the funding of mere ideas lacking sustainable business models. While India has a significant number of unicorns, this is no longer seen as a cause for celebration. The valuation bubble has burst, with blame attributed to both founders and venture funds that pushed for unrealistic growth metrics. Anas Rahman Junaid, founder of Hurun India, highlights that investors once backed grand visions of growth, which are no longer sustainable.
The Issue with Cash-Guzzling Unicorns
The problem lies with loss-making unicorns, which negatively impact market sentiment. Abhishek Agarwal, managing partner at Rockstud Capital, points out that founders are avoiding publicity due to negative profit and loss statements. He describes the current period as a “funding winter,” where investors and founders have shifted focus from growth at any cost to more sustainable fundamentals.
The Fall from Grace
The word “unicorn” has come to symbolize the excesses of the pandemic era, where hype often overshadowed substance. Many startups, like Byju’s, have faced significant challenges, including legal troubles, high-profile exits, and valuation cuts. The performance of newly listed companies in the public markets has also been disappointing, with stock prices of companies like Nykaa and PB Fintech falling substantially post-listing.
Public Listings and Their Challenges
Public listings have proven to be a critical test for startups, with many failing to meet expectations. This has led to a reassessment of how these companies are valued, emphasizing sustainable profits over mere growth. Vivek Singla of Incred Alternative Investments notes that the pandemic years saw a frenzy of unicorn creation, but the subsequent down rounds have led many to reconsider the sustainability of these valuations.
The Shift Towards Profitability
According to Redseer, 20% of India’s unicorns may face a bleak future, but half might turn profitable in the next three years. The focus has shifted from unicorn status to profitability and break-even. As investors now prioritize profitable growth, startups are recalibrating their priorities accordingly. The earlier mantra of “growth at any cost” has shifted to “profit after all costs.”
The New Reality for Startups
Startups, initially celebrated for their disruptive nature, are now expected to demonstrate financial prudence. Investors are no longer willing to chase mirages of potential, but rather demand tangible, profitable growth. Consequently, the once-vaunted unicorn status has lost much of its significance, reflecting a more sober and realistic approach to startup valuation and success.
