India's unicorn ecosystem, which is currently the third-largest in the world, is relatively much larger compared to its listed space than other countries, said a Credit Suisse report. This emphasizes the significance of startups valued at over $1 billion, especially at a time when the country hasn't witnessed a new unicorn in the last six months.
“The $357 billion value of 103 unicorns (in India) is 11 percent of the total market capitalisation in the Indian market, much higher than in China’s 7 percent and double that of the US’s 5 percent. This also reflects greater economic salience of Indian unicorns: not just in terms of wealth creation, but also economic growth,” the report titled India Market Strategy, released on March 20 said.
“In a country with low per-capita wealth, where there were enough entrepreneurs but not enough risk capital, private funding is filling an important gap,” the report said.
The Credit Suisse report comes at a time when funding to India’s startup ecosystem has slowed down significantly since the second half of last year. In January, funding to the country’s startup ecosystem fell to a five-month low, Moneycontrol reported. Earlier this month, Moneycontrol also reported how the unicorn drought of six months was the highest since August 2016, when it lasted for 17 months.
Late-stage deals were the most impacted, dropping 80 percent in terms of volume and 88 percent in terms of value in February 2023. According to the Credit Suisse report, weak listed market sentiment hurt the prospects of late-stage funding deals.
“While the late-stage private market had become frothy and a period of stabilization was necessary, weakness in public markets has been an important factor too. Despite headline indices flat-lining, while the Indian equity market did see 41 IPOs (second highest in the last ten years, the funds raised fell much more, particularly once we adjust for the LIC IPO. Ex-LIC, the average issue size of IPOs was the lowest since 2015,” the report said.
“Weak performance of the cohort of firms that had their IPOs in 2021 also affected market sentiment on late-stage investment transactions,” the report added.
Besides, the report also stated how the weak market performance of unicorn IPOs in 2021 hurt the overall sentiment, resulting in only one new-age technology company being listed in 2022, compared to seven in 2021.
“Once the initial post-IPO buying abated, and the market settled on how to value them, all stocks saw steep declines, and are now meaningfully below the listing price. Several are now at or below the last pre-IPO valuation round as well,” the report said.
“During their respective last pre-IPO funding rounds, these firms were valued at a combined $32 billion. This increased to $59 billion at the time of their respective listings, but is now $40 billion:$12 billion of that $19 billion fall is Paytm. Thus, public market investors have felt most of the impact of this weak performance, and VC/PE firms have not lost much. This is important from the perspective of continued flow of funds into the private market in the next few years,” the report added.
With increasing demands from public market investors to achieve profitability, many unicorns, particularly those in the late-stage, have begun prioritizing profitability. Moneycontrol reported earlier how just six of 51 unicorns that filed FY22 (2021-22) results until February, were profitable. Many startups, including the most heavily-funded ones, have also laid off thousands of employees and have undertaken other cost-cutting initiatives to achieve profitability.
“Private firms, especially those in late-stage growth, are now under pressure to improve their profitability. This is not just to extend the duration for which their existing cash reserves can last, but also to make them more attractive for public market investors,” said the Credit Suisse report.
“When interest rates rise as sharply as they have done, profit expectations need to be brought forward. As firms shift focus to profitability, their growth slows down, which further pressures their valuation. Slower growth also results from startups trying to preserve their capital, as incremental funding has become more difficult,” the report said.