Unicorn universe expanding in tough times

EVEN as the economy is struggling to recover from the double whammy of the Ukraine conflict and rising global interest rates, there is one segment growing rapidly, seemingly unaffected by external developments. And that is the ecosystem of unicorns. India has touched the milestone of 100 unicorns this year. It comes over a decade after the first start-up venture became a unicorn in 2011. The country now ranks third in terms of overall unicorns, following the US and China. Collectively, these 100 entities have raised over $90 billion in funding and have a valuation of over $333 billion.

A unicorn is a start-up company that has achieved a valuation of $1 billion. These ventures began to be described as the mythical beasts of yore about a decade ago to highlight their rarity. But now, with the US having about 487 unicorns and China 301, the terminology is expanding to decacorns, or start-ups with a valuation of $10 billion. Even India has a few already, including Flipkart, Nykaa, Byju’s and Swiggy.

What is interesting is that the spurt in unicorns has occurred from 2020 onwards, in other words, after the pandemic. As many as 11 unicorns emerged in that year, followed by a record of 44 in 2021. Another 16 have been created in 2022 so far, according to Inc42, and predictions are that these will touch 250 by 2025. Funding is reported to be slowing down due to the impact of the war in Ukraine as well as the aggressive rate hikes by the US Federal Reserve, but the eco-system for innovation and start-ups remains fairly vibrant in 2022. Despite the funding worries, many more start-ups look set to join the club this year.

As for the reasons behind the surge in unicorns over the past three years, the key factor has been the shift in the work environment during the pandemic. From the norm of going to office physically, life has changed to working from home (WFH). The WFH culture has driven innovation towards the internet and digital platforms. The use of the internet became a much bigger part of the people’s lives in 2020 and 2021 when there were constraints in moving out of the house. So, making retail purchases, carrying out financial transactions, operating a business or even education became an online activity. Digital payments became widespread through fintech companies like Paytm and Mobikwik while e-commerce through Flipkart, Amazon and more recent start-ups like Big Basket expanded rapidly to tier 2 and 3 cities.

Easy funding has been another reason for the rise of the unicorn universe. Investors are conscious of the enormous scope for expanding the digital ecosystem in this country. Internet penetration here remains at a relatively low level of about 41 per cent, so the potential for growth is enormous. Surveys have also shown that though online shoppers appear to have taken over the marketplace, a paltry seven per cent of the consumers are in the online space. Even those using online platforms like WhatsApp are still largely opting for physical retail purchases, according to the latest data. Out of 44 crore WhatsApp users, only 15 crore are buying online. In this backdrop, venture capital funds are making investments based on long-term projections for the next five to 10 years.

Interest has also been heightened in the wake of regulatory tightening on tech companies in China since last year. Venture capitalists are thus giving a fresh look at developments in this country and are keen to make long-term investments here.

At the end of the day, however, investors will only put their money on viable ideas. And the innumerable start-ups being set up in the past few years have selected issues that need solving, either in the fintech, e-commerce or software services categories. It is this savvy identification of problems that need resolution or areas that have a gap which needs to be filled that has really caught the attention of the investors.

It would be difficult to select just a few, but Nykaa, for instance, found a gap in the online market for beauty products, while Meesho discovered that small businesses needed a market place. Fintech companies which comprise a large number of unicorns — about 33 — have rushed in to fill the needs of digital payments by retail consumers as well as businesses. Software as a Service (SaaS) start-ups have come to help plug the lacunae in online businesses. Education, or what are known as Edtech ventures, have led to the blossoming of the decacorn Byju’s, among others. Healthcare is another area that has come into focus during the pandemic and the growing use of technology has given an impetus to unicorns like Innovaccer, Pharmeasy, Curefit and Prystin Care.

Unicorns are undoubtedly a healthy segment of the economy at a time when stock markets are roiling and growth is hampered by inflationary pressures. But exuberance over buoyant performance must be tempered with the fact that their growth is not likely to solve some of the key issues facing the economy right now such as unemployment. While some unicorns are stepping up hiring, the volumes involved in such ventures are not large enough to make much of a dent in the overall job scenario.

At the same time, it is necessary to take a long-term view of the start-ups, unicorns and even decacorns. In the long run, these are ventures that will take the country more rapidly into the digital era and could ultimately lead to reducing inequalities. The digital divide between the rich and poor could be bridged by these technological start-ups that are aiming to bring the benefits of the internet to the masses. In fact, it is encouraging that unicorns are now gradually emerging from tier 2 and 3 cities.

Unicorns cannot be viewed in isolation. They will ultimately be the catalysts in bringing about positive changes in the country’s business climate. Technology-based start-ups are disruptive, but they spur innovation even in traditional brick and mortar industries. Big Tech has emerged out of start-ups abroad. A similar path is likely to be taken here since unicorns are the future of the business and industry in India, as they have been around the world.