Unicorns: Beyond their wildest dreams

They might be a myth as far as popular culture goes, but in the business world they are nothing short of legends. We’re talking about unicorns, not single-horned horses with magical powers, but companies that have achieved a valuation of $1 billion. For years, unicorns were synonymous with Silicon Valley tech startups such as Uber and Airbnb. Today, they’re everywhere, including India where the billion-dollar club has grown at a rapid pace in the past year.

India might still lag the U.S. and China when it comes to the number of unicorns and many of them still aren’t making a profit, but that hasn’t stopped global investors from writing large multi-million dollar cheques for them. The list of Indian startups feeling the love from big investors is expanding. With giants like SoftBank, Naspers, Tencent, DST Global, and Alibaba pouring money into India, at least eight new startups have entered the elite unicorn club this year, the highest in a 12-month period in the country. The list includes insurance aggregator PolicyBazaar, popular e-commerce site Paytm Mall, hotel aggregator OYO, food technology companies Swiggy and Zomato, and educational technology firm Byju’s.

“Most of these companies that are getting funding today are working towards bringing an aspect of technology to an unorganised market,” says Pankaj Chopda, director of consulting firm Grant Thornton India LLP. “When an investment discussion happens today, it is clearly on—is it a scaleable business? Is it addressing a need which is currently there in the market? Is it capitalising on a particular business opportunity which has not been converted from an unorganised to an organised manner?”

Whatever the rationale, unicorns look like they’re here to stay. When U.S. venture capitalist Aileen Lee coined the term in 2013, only 39 startups made the cut across the world. Today, there are at least 260 unicorns, according to an estimate by CB Insights in August. The U.S. has the largest number, 126 (47%), followed by China with 77 (30%) unicorns. India has 18, including e-commerce giant Flipkart, Ola, and MakeMyTrip, according to Nasscom’s Indian Startup Ecosystem Report 2018, in collaboration with management consulting firm Zinnov. Flipkart became the first Indian ecommerce startup to join the coveted club in August 2012, nearly five years after it was founded. And many others are waiting at the door.

Though India’s pool of unicorns seems small, it has increased significantly over the past year. Unlike China, where Internet services, e-commerce, and online finance companies dominate the club, India’s unicorns are in businesses ranging from food delivery and education to hospitality and digital payments. In the past few years, a large chunk of funding in new-age Indian companies has come from investors such as SoftBank, which has invested $8 billion in local companies, and Alibaba, which has pumped in $2 billion here so far.

“We have seen in markets like China and the U.S. that when Internet penetration hits 40-50%, companies that launch into a large ‘ready’ market with the right proposition can scale very rapidly,” says Bejul Somaia, managing director at Lightspeed India, a venture capital investor. “India is now at that point. What’s happening now, compared with three-four years ago, is that companies are getting to scale much, much faster than before, and that’s one of the reasons this capital is coming in.”

Three of Lightspeed India’s portfolio firms—Byju’s, Udaan, and OYO—hit the $1 billion valuation mark this year. We ask Somaia if he sees this as a milestone of sorts but he downplays the nomenclature, saying there is still a long way forward for these firms. “The capital being invested in these companies is coming from smart, sophisticated global investors and reflects a belief that there are high quality entrepreneurs in India going after very large opportunities,” says Somaia.

Joining the unicorn elite is a slow journey. Uber, now one of the largest car-hailing firms in the world, reached $1 billion valuation in more than four years, while Mark Zuckerberg-led social network giant Facebook took nearly three years to reach the milestone. The journey is definitely long but the large deals in India highlight the confidence of investors in the country’s potential to produce high value, venture-backed companies.

However, PolicyBazaar co-founder and CEO Yashish Dahiya, isn’t impressed. Earlier this year, when the insurance aggregator decided to raise a fresh round of funding, the Gurugram-headquartered firm had not one, but multiple term sheets. One of the investors even offered a cheque that valued the company at $1.5 billion. This would be music to the ears of many entrepreneurs but Dahiya was not thrilled. He wanted an investor with expertise in technologyenabled financial services who could help his company grow even bigger.

In June, PolicyBazaar along with PaisaBazaar raised $238 million from the world’s largest technology investor, Japan’s SoftBank, in its Series F round that catapulted the company into the elite unicorn club. “We were very clear that we wanted to have SoftBank on our side as an investor. We were not interested in anyone else. Also, the experience that SoftBank has in leveraging technology for financial services is unparalleled. We have a clear market leadership position and we want to maintain it and grow. Hence, we wanted an active investor,” Dahiya tells Fortune India over a call.

The jump in the number of unicorns has also directly impacted the overall deal flow this year in a positive way. Investments in startups have increased by over 100% to $4.2 billion in 2018, from $2 billion in 2017, according to Nasscom’s estimates. Funding in late stages (such as Series C, D, E, F) also grew 250%— from $847 million in 2017 to $3 billion in 2018. While seed-stage funding stood at $151 million, the number of late-stage investments rose sharply, indicating renewed investor confidence in the Indian startup ecosystem.

The investment flow this year also comes with its own share of fears about over-capitalisation and undisciplined deployment of capital. Experts are divided on this issue: Some say such fears are real and these valuations are not sustainable, others say companies often need to increase investments if their model is panning out successfully. What they are not divided on is the need for discipline and prudence to keep unicorns from losing their horns so to speak.

Caution is always wise in any business. But that doesn’t mean the unicorn party in India could be over. If anything, the country is expected to see more unicorns in the future, as a new breed of industry leaders is still growing and looking to ramp up their share, especially in large markets such as grocery, food, apparel, furniture, mobiles, and electronics. For instance, companies such as BigBasket are next in line to join the unicorn club. For its founders, the focus, however, is not on pumping valuations but to raise capital to grow.

“At BigBasket, all our fundraising is towards growth only. And that includes acquisitions, new businesses and investments in marketing, infrastructure, and technology. We don’t need funding to fund our business model,” says Hari Menon, cofounder and CEO of the Bengaluru-based online grocery store. According to several media reports, BigBasket is in talks with investors to raise $300-400 million that could value the company at $1.5-2 billion.

Experts feel as long as these global investment firms remain hooked on to the Indian market, the deal momentum will continue. “If investors from the East decide to make India a battleground for themselves, we will see more companies getting valued at $1 billion or above,” says Sanjeev Krishan, private equity and deals leader at PwC India. The legend of India’s unicorns isn’t about to fade anytime soon.