scorecardA billion little pieces: Unicorns lose bragging rights as funding winter deepens
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A billion little pieces: Unicorns lose bragging rights as funding winter deepens

A billion little pieces: Unicorns lose bragging rights as funding winter deepens
Business7 min read
  • Unicorns that were once celebrated are now bearing the burden of their past valuations.
  • Chasing rapid growth, cash burn, low governance standards and troubled public debuts have become their undoing.
  • Few are hitting the $1 billion valuation status and even those who are achieving them are wary of declaring it, experts say.
A unicorn, by its very definition, is a rare creature only to be found in myths and fairytales. Not surprising then that the startup ecosystem decided to use the name of this mythical creature to describe companies that attained the exalted valuation of $1 billion or more. Two years after India became the third largest home for unicorns in the world, these entities are yet again becoming rare. Several have seen down rounds and have lost their unicorn status, while a few others are wary of even acknowledging their unicorn status. Suddenly, the word is no longer a feat or a milestone that founders or investors want to celebrate. India minted 58 unicorns in 2021 and the total tally went up to 100 in May 2022.

Business Insider caught up with experts from the startup ecosystem to understand why ‘unicorn’ is no longer a coveted title. Amarjeet Makhija, partner and leader of startups & unicorns, PwC India, says that hitting the unicorn status called for a lot of celebration and that attracted a lot of attention. “They (startups) also attracted regulator attention after flying under the radar for a long time. The result is taxes in the gaming sector as the unicorn status led people to believe that these companies have deep pockets. I would think even those who are raising money and attaining the status are being cautious about it and not declaring it,” he explains.

Here’s some context, India is now the third largest startup ecosystem in the world with nearly 100,000 startups and at last count India had 110 unicorns that collectively had raised $100 billion with a combined valuation of over $350 billion. India’s first unicorn was born in 2011 and the maximum number of unicorns were created between 2020 and 2022. Just to understand the pace of value creation, let’s look at Infosys, which took 18 years to become a billion dollar corporation.

Easy money that was sloshing around in the system did not do any favours to the startup ecosystem as investors funded mere ideas that did not have long legs. India is now home to the third largest number of unicorns in the world, but nobody thinks it is a cause of any celebration because it means nothing.

Who is to blame for the unicorn bubble?

Blame it on the greed of founders or willing suspension of disbelief on the part of venture funds that backed companies which had neither a sound business model nor path to profitability, but the truth is that the valuation bubble has burst. Anas Rahman Junaid, founder and chief researcher at Hurun India, says that some of the blame lies with the investors that pushed for unrealistic growth metrics. “It is very hard to be a unicorn today and investors are no longer buying into grand visions on growth,” he adds.

The problem is not so much with the word unicorn but the issue is with cash-guzzling loss-making unicorns. Abhishek Agarwal, managing partner at Rockstud Capital, argues that the market's sentiment is negatively impacted due to loss-making unicorns. Founders are, therefore, avoiding the press since their profit and loss statements are negative. He says: “This is a temporary phase when exuberance around unicorns is not as it was earlier. We are in the middle of a funding winter. The playbook during the pandemic was to chase at any cost ignoring fundamentals. Since then there has been a shift in investors and founders are now factoring that in."

Hurun’s Junaid adds that startups that do not have a clear path to profitability, it would be difficult to get a good pricing. “I wouldn’t just blame the startups for the grand vision. After all it’s some of the VCs and investors who pushed for unrealistic growth metrics. This unrealistic expectation to grow rapidly is not sustainable and could eventually burst. The flipside is some of these startups also start painting a picture of building castles in the air. Eventually, all this snowballed and became bigger until it burst,” he says.

Unicorn’s fall from grace – from aspiration to becoming a bad word

From being an aspiration, the word unicorn stands for excesses of the pandemic era, when talk mattered more than substance. And few of them made good use of the money that came too easy.

One venture capital investor cites a troubling example of a startup that was looking to raise funding without any business model or proposition but had a full customer care team in place. The investor says, “Which good company with good governance standards would have a customer and sales team without the product?” From being an aspirational goal, the word unicorn is now being seen as a dubious distinction by many.

There have been many fallen heroes. Byju’s was once a celebrated decacorn. But now it’s in all sorts of trouble after funding dried up — like legal troubles of its inability to repay a term loan, high-profile exits from the board, jobs cuts and valuation cuts. Extensive delays in declaring its financial earnings too added to people who view it with askance.

What has made matters harder for founders is the performance of some of these new age companies in the last three years in the public markets after they got listed on stock exchanges. Nykaa’s stock price had already fallen by 80% before it issued bonus shares in November last year. PB Fintech’s stock also lost a quarter of its value since it was listed, even after a recent run-up in the stock.

A few other listed companies like Zomato also angered investors and regulators alike for directing IPO proceeds towards acquisitions, without an indication of it in the DRHP.

In the last three years, there have been many public listings of startups that later became the litmus test for founders. “Going from private to public is the ultimate test for many celebrated startups. While there were many expectations, they turned into a poisoned chalice. It taught many lessons on pricing these companies, with sustainable profits and not just growth,” says Junaid.

Vivek Singla, Managing Partner and CIO - Private Equity at Incred Alternative Investments, does not think that the word unicorn has become an anathema in the startup world but he feels that it is nothing but a derivative and not a goal in itself. He explains: “The two years of the pandemic were heady for the startup ecosystem with two unicorns being minted almost every week. Everyone knew that the party would end at some point but nobody knew when, as everyone was only chasing valuations. The subsequent rounds that unicorns raised were at even higher valuations. Thereafter, we have seen the downrounds that have happened and many unicorns may not go back to their peak valuations in the foreseeable future.”

According to a report by Redseer, 20% of India’s unicorns may see a bleak future in the next three years but half of them might turn profitable. Several unicorns have lost their status after downrounds that happened in 2022 and 2023. The reason for this is because the era of easy money is long gone and Explains Makhija of PwC, “Even if a startup attains unicorn status, if a down round takes place in six months, are you even a unicorn? Earlier large players were writing big cheques where there was no need to raise funds for another 12-18 months. Now, they are not being written, which means they need money sooner.”

The real value is in ‘profits’

There was a time when every week saw the birth of at least two unicorns. This year has been fairly quiet with only Zepto announcing that it became the first unicorn of the calendar year after it raised $200 million in its latest round. While most unicorn founders have gone underground, the bulge bracket venture and private equity investors too have gone silent on valuations. Instead the attention is now on profitability and break-even. While most unicorns that are looking to tap public markets say that they are profitable both at the net and operating level, their profit pool will remain rather small in the foreseeable future as they will continue to be in the growth phase.

Incred’s Singla is of the view that now every other month there will be announcements on startups turning profitable. “The earlier mantra was ‘growth at any cost’, which has now changed to ‘profit after all the costs’. Founders have realized that investors are no longer chasing just growth, rather profitable growth and they have recalibrated their priorities accordingly,” he says.

Startups have always been operating in manner that were poles apart from family-run businesses or regular small and mid cap companies who veer towards cash conservation and value addition. Initially, startups that were led by young founders’ disruptive nature were cheered. Now that the dust has settled, investors refuse to see a mirage where there might be a storm coming. That’s how unicorns were left with little but their status — which now means little.