India, the world’s third-largest unicorn ecosystem, has not seen a new unicorn in the last six months, the longest drought in seven years, in what is an indication of the unicorn frenzy dying with the much-talked-about funding winter tightening its grip on valuations of technology startups globally.
Molbio Diagnostics was the last company to achieve unicorn status in September 2022, after raising $85 million from Temasek and Motilal Oswal Alternates at a valuation of $1.53 billion, according to data by Venture Intelligence. Since then, no technology startup in the country has achieved the feat. This is the longest drought since August 2016, when it lasted 17 months, the data showed.
The data is in stark contrast with that of 2021 when India was adding a new unicorn almost every week. As many as 44 new unicorns got minted in 2021 and another 23 were added in the first nine months of 2022. But with central banks raising interest rates across the globe, the cost of money became expensive resulting in investors negotiating hard with founders and settling for much lower valuations compared to 2021.
“The frenzy of chasing vanity metrics is gone, I will not claim that it will never come back but the founders are a lot more pragmatic about chasing a slightly profitable growth or close to a profitable growth even though it may not be as quick as what they were trying 12-24 months back,” said Ashish Kumar, co-founder, general partner, Fundamentum Partnership.
“Indian venture capital ecosystem also sees a lot of funds coming from the west and these guys have been out of the market. So this suggests that they have also become a lot more pragmatic about how much to burn and how much to invest,” he added.
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India became the world’s third-largest startup and unicorn ecosystem in January last year, according to the Economic Survey of 2022, which showed the country had over 61,000 recognised startups and close to 80 unicorns and was only trailing the US and China. The tally of unicorns has now touched 108, while there are more than 81,000 recognised startups.
“Sanity has already returned to valuations and it will only grow this year. By the end of this year, you will see far more sanity than what you are seeing now,” said Shyam Sekhar, founder and chief ideator, ithought Advisory.
“It is very difficult for companies to have that exaggerated valuations. That era is good as over. In some of the spaces where you saw exuberance like SaaS (software-as-a-service), you are seeing how valuations are moving. I think that will spread to the rest of the sectors also one after another. It’s a matter of time before it spreads to other parts of the tech space. Unless a company is going to grow at a scorching pace to justify its valuation, it will lose valuation,” Sekhar added.
Sekhar's comments come at a time when most startups expect slower revenue growth in the coming quarters, with demand across the board expected to dampen due to macroeconomic headwinds. Startups may thus fall short of their revenue projections for 2021, when the majority of them raised funds at sky-high valuations with the expectation of hypergrowth in 2022 and 2023.
Moneycontrol reported in February that nearly half of India's 108 unicorns that had filed their financial reports for FY22 (2021-22) had a trailing twelve-month (TTM) multiple of 30, which was higher than most countries globally.
“With the general slowdown, what we are seeing is that the future earning will not grow as fast as what we all were anticipating over the last 12 months. If you look at other functions other than consumer companies, there has been a slowdown, so in general future earnings people are anticipating slower growth, and so you are seeing the frenzy of vanity metrics dying,” Kumar of Fundamentum added.
Companies may thus struggle to raise funds at higher or even at their existing valuations as investors will be more concerned about a slowdown in future earnings of companies, industry observers said. According to Sekhar, down rounds are inevitable and while there are none happening currently, India may see a few in the coming quarters.