Indian unicorns: Navigating the speed bump on the highway
After a record 2021, and a promising start to 2022 when India produced its 100th unicorn, the startup funding spree is finally slowing down due to the impact of global geopolitical and economic conditions. In this blog, IBT takes a look at India’s tryst with the unicorn club during these past few years leading up to the recent lull, to better understand the drivers of this growth, and the expected trajectory ahead.
- According to Nasscom, as many as 42 businesses achieved unicorn status in 2021. The momentum continued over the first quarter of 2022, but funding saw a decline in the second quarter.
- H1 2022 saw Indian startups receive US$ 19 billion in funding across 900 deals. Out of this, Q1 2022 contributed over US$ 11.7 billion, while Q2 contributed US$ 7.3 billion (as per data till June 25).
- With governments and central banks around the world striking a cautionary note for economic growth in the coming months, startups have already started preparing for a ‘funding winter’, which is estimated to last upto 1-2 years.
- However, the Indian startup story is viewed as extremely resilient despite this temporary setback. Market reports predict that India could add another 122 unicorns over 2-4 years and also overtake China.
India’s startup ecosystem has gone a long way since 2011, when it gained its first ever unicorn in the form of Inmobi, and has already crossed the 100 mark in a little over a decade. 2016 can be called a pivotal year, when, with the assistance of widespread digitalisation, more than 50% of Indian businesses achieved unicorn status within 5 years of their initial founding. Since 2017–18, the number of new unicorns has been growing at the constant rate of 66%, year-over-year.
The term ‘unicorn’ refers to a firm that has reached a valuation of more than $1 billion and since 2018, India has already seen an average of ten startups per year attaining this status. And the pandemic period only seems to have made them more attractive to investors. Following its best ever performance in 2021 India’s startup ecosystem has continued to defy overall market sentiment in the initial months of 2022.
According to Nasscom, as many as 42 businesses achieved unicorn status in 2021. The momentum continued over the first quarter of 2022, but funding saw a decline in the second quarter, due to global macroeconomic and market uncertainties, post the Russia-Ukraine war. According to Inc42, H1 2022 saw Indian startups receive US$ 19 billion in funding across 900 deals. Out of this, Q1 2022 contributed over US$ 11.7 billion, while Q2 contributed US$ 7.3 billion (as per data till June 25). This is the lowest quarterly funding amount over the past year. Ironically, the first half also witnessed 49 mega deals (over US$ 100 million), a record for any six-month period since 2014.
With governments and central banks around the world striking a cautionary note for economic growth in the coming months, startups have already started preparing for a ‘funding winter’, which is estimated to last upto 1-2 years. This may lead to certain rationalisation of valuations on one hand, and also compel a more extensive evaluation of fundamentals on the other. In this blog we take a look at India’s tryst with the unicorn club during these past few years leading up to the recent lull, to better understand the drivers of this growth, and also the business models that have been most attractive for investors.
|Funding in Unicorns|
Source– Tracxn, figures in US$ million
What makes up Indian unicorns?
In today’s frenetic and unpredictable economic environment, Indian unicorns have found a fertile environment to thrive. They are not only coming up with original ideas and cutting-edge technology, but also creating a significant number of jobs. Until FY 2016-17, roughly one unicorn was added every year. But post 2017-18, the figure has been growing at an exponential rate of 66% YoY. 11 unicorns launched their IPOs last year.
On May 2, 2022, Bengaluru-based neo-banking fintech portal Open became India’s 100th unicorn. As of 19th July 2022, India is host to 105 unicorn companies. Aggregate valuation of Indian unicorns was at US$ 535 billion by 2022, as compared to US$ 103 billion in 2015.
E-commerce firms dominate the category of unicorns in India with 23 unicorns from that sector. Moreover, a few of the unicorns are set to achieve decacorn status (valuation > US$ 10 billion), and a majority of these are from the fintech sector. Fintech is followed by enterprise tech (19), consumer services (9), media and entertainment (7) and edtech (6) With 217 unicorns, the SaaS industry is in second place among all startup categories.
If you contrast this with global trends, the financial technology industry is firmly in the lead. According to a CB Insights analysis of 1,170 companies released in July 2022, fintech takes a share of 20.8%, followed by internet software and services (19.1%), e-commerce and direct-to-consumer (9.1%) and health (7.8%).
Top Unicorns in 2022
India created a total of 19 new unicorn companies during the first half of the year 2022. These companies include LEAD School, Fractal, DarwinBox, XpressBees Logistics, Cred Avenue and many others. Some of the businesses that achieved the landmark this year include:
Fractal, an artificial intelligence and advanced analytics technologies startup, became the first company to join the exclusive unicorn club in 2022 after receiving its most recent round of funding. During the Private Equity round, it received US$ 360 million from TPG Capital Asia, and additional share purchases were made by funds advised by Apax Partners.
Throughout five separate investment rounds, Fractal has successfully amassed a total of US$ 685 million. The new investment comes after it raised US$ 200 million from Apax Partners in 2019, roughly 2 years after it had previously raised that amount. In 2016, Fractal also received a funding injection of US$ 100 million from the sovereign wealth fund of Malaysia, Khazanah.
2. Darwin Box
Cloud-based Darwin Box is an integrated human resource management (HR) technology system that manages all HR-related needs, including recruiting, payroll, the employee lifecycle, employee satisfaction, talent acquisition, and people analytics. Chaitanya Peddi, Jayant Patel and Rohit Chennamaneni established the company in 2015.
In January 2022, Darwin Box, a SaaS-based platform, was successful in securing $72 million in investment during a Series D round of funding. Due to this, it was recognised as the first unicorn in the SaaS business. Technology Crossover Ventures (TCV) took the lead in the funding round, where existing investors such as Salesforce Ventures, Sequoia India, Lightspeed India, Endiya Partners, 3One4Capital, JGDEV and SCB 10X also participated.
Meesho’s entry into the exclusive unicorn club is undoubtedly one of the most momentous achievements in the social commerce space. In addition, it will have a substantial impact on the growth momentum of the segment.
Meesho is an online network of resellers that caters to individuals in addition to small and medium businesses (SMBs). It does this by selling things to people already in its network using social media sites like Facebook, WhatsApp and Instagram. It was established by IIT Delhi alumni Aatrey Barnwal and Sanjeev Barnwal in 2015.
DealShare is a social e-commerce startup that specialises in the delivery of groceries to hyperlocal areas. Vineet Rao, Rajat Shikhar, Sankar Bora and Sourjyendu Medda initially conceptualised and established the company. DealShare, which has its headquarters in Bengaluru and has been operating since September 2018, has logged 1 billion deliveries in over one hundred cities so far. Early on in 2022, DealShare was able to secure money from investors such as Tiger Global and Alpha Wave Global, bringing their total capital close to US$ 165 million.
DealShare will use the cash to grow into new areas and increase the speed at which its activities are carried out.
Pune-based rural B2B online commerce company ElasticRun became the seventh firm to join the exclusive club of unicorn companies in 2022. In a recent round of fundraising sponsored by Masayoshi Son’s SoftBank, the startup was able to bring in an additional US$ 300 million. In addition to that, Goldman Sachs, Prosus Ventures, Innoven Capital and Chimera Investment (a subsidiary of Abu Dhabi’s Royal Group), participated in the funding.
According to projections provided by Inc42, the valuation of ElasticRun after the Series E round was close to US$ 1.5 billion. It has been about a year since the company raised US$ 75 million in a Series D capital round that was headed by Avataar Venture Partners, and this fresh investment comes almost immediately following that. Other investors, such as Prosus Ventures and Kalaari Capital, took part in this round of funding as well. The valuation of the company in the round was approximately US$ 400 million, increasing by 3.75 times.
While we are in the middle of a funding winter, India’s unicorns have certainly beaten global benchmarks in the past few years. Post 2010, the average time to become a unicorn in India has reduced by 50%. A report by ASK Private Wealth Hurun India Future Unicorn Index 2022 predicts that India will produce another 122 unicorns in the next 2-4 years. A majority of these are expected to be in the software and services space, while on 17% are into physical goods. Moreover, the report predicts that 37% of these will be B2B, and 63% will operate in the B2C segment. Notably, India is producing unicorns faster than China, and is expected to overtake it over the next 3 years, according to Inc 42’s State of the Startup Ecosystem Report 2022.
While startups seem to be in for tough times in the coming months, tech-led businesses, in general, have a bright future ahead in a post-pandemic landscape. The current slowdown, on the other hand, may be a good time for a more careful scrutiny of business models and profitability roadmaps, led by much more hawkish investors. In the larger scheme of things, that can only be a blessing in disguise.