EVEN as the economy struggles to recover from the double whammy of the Ukraine conflict and rising global interest rates, there is a rapidly growing segment seemingly unaffected by external developments. And that’s the unicorn ecosystem. India passed the 100 unicorn milestone this year. This comes more than a decade after the first start-up company became a unicorn in 2011. The country now ranks third in total unicorn numbers, after the United States 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 that has achieved a valuation of $1 billion. These companies started being described as the mythical beasts of old about a decade ago to emphasize their rarity. But now, with the US having around 487 unicorns and China 301, the terminology extends to decacorns, or start-ups with a $10 billion valuation. Even India already has a few, including Flipkart, Nykaa, Byju’s, and Swiggy.
What is interesting is that the unicorn push happened from 2020, that is, after the pandemic. As many as 11 unicorns have emerged that year, followed by a record 44 in 2021. Another 16 have been created in 2022 so far, according to Inc42, and predictions are that these will hit 250 from by 2025. Funding would slow down. down due to the impact of the war in Ukraine as well as aggressive rate hikes by the US Federal Reserve, but the innovation and start-up ecosystem remains quite vibrant in 2022. Despite funding worries , many other start-ups seem ready to join the club this year.
As for the reasons for the surge in unicorns over the past three years, the key factor has been the change in work environment during the pandemic. From the norm of physically going to the office, life has shifted to working from home (WFH). The WFH culture has pushed innovation towards the internet and digital platforms. Internet use became a much bigger part of people’s lives in 2020 and 2021 when there were constraints on leaving home. Thus, making retail purchases, carrying out financial transactions, operating a business or learning has become an online activity. Digital payments have spread through fintech companies like Paytm and Mobikwik, while e-commerce through Flipkart, Amazon, and newer startups like Big Basket has quickly spread to Tier 2 and Tier 3 cities.
Easy funding has been another reason for the rise of the unicorn universe. Investors are aware of the enormous potential for the expansion of the digital ecosystem in this country. Internet penetration here remains at a relatively low level of around 41%, so the potential for growth is huge. Surveys have also shown that although online shoppers seem to have taken over the market, a measly seven percent of 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 shop online. In this context, venture capital funds make investments based on long-term projections for the next five to ten years.
Interest has also increased following tougher regulations on tech companies in China since last year. Venture capitalists are thus taking a fresh look at the development of this country and want to invest in it for the long term.
Ultimately, however, investors will only bet their money on viable ideas. And the countless start-ups that have been created in recent years have selected problems to solve, whether in the categories of fintech, e-commerce or software services. It’s this savvy identification of issues that need to be addressed or areas that have a void that needs to be filled that has really captured investors’ attention.
It would be hard to pick just a few, but Nykaa, for example, found a gap in the online beauty market, while Meesho found that small businesses needed a marketplace. Fintech companies that include a large number of unicorns – around 33 – have raced to meet the digital payments needs of retail consumers as well as businesses. Software-as-a-service (SaaS) start-ups have come to help fill the gaps in online businesses. Education, or so-called Edtech businesses, has led to the flourishing of the decacorn Byju, among others. Health is another area that has gained attention during the pandemic and the increasing use of technology has given 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 boiling and growth is hampered by inflationary pressures. But exuberance over buoyant performance must be tempered by the fact that their growth is unlikely to solve some of the key problems currently facing the economy, such as unemployment. While some unicorns are stepping up their hiring, the volumes involved in such ventures are not large enough to make a big difference in the overall employment scenario.
At the same time, you have to have a long-term vision of start-ups, unicorns and even decacorns. In the long term, these are companies that will bring the country more quickly into the digital age and could, in the long term, contribute to reducing inequalities. The digital divide between rich and poor could be bridged by these tech start-ups that aim to bring the benefits of the internet to the masses. In fact, it’s encouraging that unicorns are gradually emerging from Tier 2 and Tier 3 cities.
Unicorns cannot be considered in isolation. They will ultimately be catalysts for positive changes in the country’s business climate. Tech-based start-ups are disruptive, but they drive innovation even in traditional brick-and-mortar industries. Big Tech was born out of overseas start-ups. A similar path is likely to be taken here since unicorns are the future of commerce and industry in India, as they have been across the world.