100 Indian Unicorns Have Raised Rs 6 Lakh Crore From Investors; But Only 23 Are Profitable!
India, the world’s third-largest startup ecosystem, is now home to 100 unicorns i.e. companies with a minimum $1 Billion valuation).
New Kid On The Block
The new unicorn is Open, a neobanking platform for small and medium enterprises.
It raised $50 million at a valuation of $1 billion.
It is a landmark to be sure, but profitability has been lacking for most unicorns.
All 100 have aggressively raised funds at high valuations which they use to expand rapidly across sectors, verticals and geographies.
However, only 23 of the 100 unicorns have managed to achieve profitability for a financial year.
This data is provided by data analytics firm Tracxn Technologies.
These startups have raised over $80 billion from investors to date, creating a total market value of more than $300 billion.
Poor Track Record
However, some unicorns that have listed on stock exchanges last year have received backlash from investors for not achieving company-level profitability.
Shares of Paytm’s parent One97 Communications Ltd, Policybazaar’s parent PB Fintech Ltd, and Zomato Ltd have fallen below their initial public offering prices since they listed.
Unsustainable Business Model
Many analysts have criticized the high cash-burning models of these unicorns.
For instance, in February Macquarie Group said that Paytm achieving profitability is a “distant reality”.
This is because of its expensive employee stock option plans (ESOPs) and a “sub-scale” loan distribution business.
A K Prabhakar of IDBI Capital explained that stock market investors are FD (fixed deposit)-like investors.
They are okay with 10% returns but that 10% should be consistent.
They don’t understand risks and want “a 100% strike rate”.
So, if they invest in 10 companies, they want all the 10 to be profitable and give them “multibagger returns”.
All the unicorns that got listed last year might have bitten off more than they can chew.
The Paytm Example
He referred to Paytm founder Vijay Shekhar Sharma, saying that he charged a lot of premium for a loss-making company.
When he was questioned, he offered a lot of answers but the damage was done.
The Paytm fiasco will have an impact on future listings of new-age tech startups.
Chasing Absolute Profitability
However, private market investors are not as peeved and remain bullish on such companies.
Siddarth Pai of 3one4 Capital, which has backed unicorns including Open, said that investors and entrepreneurs should focus on paths to profitability rather than absolute profitability.
The two most important things are the pace of growth and whether the company is converging its path to profitability or not.
If the answer to both is negative, it becomes near impossible for anyone to actually make an investment case.
But if the company is turning profitable and growing rapidly, it becomes a highly attractive investment prospect.
Where Value Comes From
Promoter at BigBasket Ganesh said that new-age tech companies have different fundamentals than those of traditional companies.
As a result, their valuations may not always go hand in hand with key financial metrics like profitability.
Their valuability comes from the impact a company has made on consumers, changing the way they behave, buy, interact, consume information and make a choice.
This, coupled with the internet, the pandemic, adoption of digitization and unwillingness to go physically to places has given such companies a lot of value.
However, Prabhakar held a different opinion.
He said that a private equity investor has a different line of thinking.
They know that only 20% of their portfolio companies are going to be successful, but this is not the case with public market shareholders.
Here, they don’t have patience and want all their bets to become successful.
The full list of the 23 unicorns in question can be seen here.