All the Pretty Horses 🦄
The fabled unicorn becomes elusive again
“The world is quite ruthless in selecting between the dream and the reality, even where we will not.”
44 unicorns in just one year. 2021 saw an average of 3+ unicorns being born every month in India. In what was one of the most frenzied investing periods globally, India minted more unicorns in a single year than it did in the entire decade leading up to 2021. According to Entrackr, Indian startups raised ~$38.0 billion in 2021 or over 3x more than the $11.1 billion they raised during 2020.
But how has India fared since then? As the euphoria of 2021 wore off and the reality of the Ukraine conflict, newer Covid-19 variants, supply chain inadequacies, rising inflation and interest rates set in, the supposed-to-be-uncommon yet increasingly seen unicorns started becoming invisible again.
The year 2022 saw the admission of only ~23 companies into the coveted billion-dollar valuation club. This is almost half the number seen in the previous year. Indian startups failed to create a new unicorn in the October-December quarter this year. Molbio Diagnostics was the last unicorn for 2022.
Global headwinds caused by war, viruses and shortages mentioned above were the key reasons for souring of investor sentiments. The reversal was sudden enough to cause anxiety for most startups and the phrase “funding winter” quickly entered common parlance. Expected IPO filings failed to materialize and funding rounds either took longer to close or became smaller in size, if they happened at all.
The month-on-month funding chart below clearly shows PE/VC funding in a tailspin for most of 2022. The top two sectors continued to remain FinTech and Saas (Software as a Service) and to some degree helped prop up the overall number by repeatedly attracting funding. Investments in sectors with Covid-led tailwinds such as EdTech dropped or remained largely stagnant.
The average ticket size also reduced across all funding stages, with the late stage seeing the biggest fall from $142 million in Q3 2021 to $42 million in Q3 2022 as per ET. Q4 2022 data is pending and may see a further fall.
Despite this, India remained the third-largest ecosystem for startups after the US and China. Despite the funding winter, new venture and debt funds continued to launch with many new India-dedicated funds. This is significant and indicates not only the resilience of the Indian economy but a high level of VC/PE “dry powder” implying latent demand.
Thankfully, India also continues to have “soonicorns” or companies on the cusp of becoming unicorns. These are those with positive or soon-to-be positive unit economics, enough cash runway and a solid execution not reliant on the “burn to earn” model adopted by some of their peers. As investors revise their evaluation criteria and move to a more comprehensive diligence model, these soonicorns may yet join the billion-dollar club.
Where do we go from here?
The pace of unicorn creation is likely to remain slow given the macroeconomic conditions and the overall investor sentiment. The “funding winter” will take some time to dissipate and the earliest we see an uptick in pace is probably after mid-2023. It is unlikely there will be many tech IPOs in 2023. Startup founders will need to stop focusing on growth and start focusing on cash conservation, aggressive burn reduction and (unfortunately) “right sizing”. Those who are successful in this will survive. Those who fail, may need to evaluate emergency bridge rounds or venture debt. A repricing among startups (unicorns and non-unicorns alike) is a distinct possibility as performance starts to lag and bloated valuations become increasingly unsustainable. Consolidation will definitely be on the cards in many industries as well.
While all this sounds painful (and it will be), the silver lining is that it will bring in some much-needed discipline that was hitherto lacking as profitability took a backseat to growth. The year 2023 will remain challenging but we are confident the Indian ecosystem will emerge stronger from this ordeal and continue on its growth journey. Just more sustainably this time.
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