India's unicorn ecosystem, ranked the third-largest globally, hasn’t had any additions for over eight months and there is no indication of any startup achieving the qualifying $1 billion valuation milestone any time soon. This follows significant declines in the valuations of technology companies over the past year, following the exuberance of the Covid era.
India has almost 50 startups valued at $500 million or more, commonly referred to as “sooincorns” or soon-to-be-unicorns. However, a majority are not expected to secure funding at a $1 billion valuation, at least not for another three months, as startups look to achieve milestones such as profitability while grappling with a deteriorating funding winter, bankers and investors told Moneycontrol.
“In 2021, the entire ecosystem, including investors, founders and the media, overdid the whole ‘unicorn’ or ‘soonicorn’ tag on a startup,” said Tarun Davda, Managing Director, Matrix Partners India.
“Today the unicorn tag has lower significance; no one cares or talks as much about it. Every founder today, is talking about building profitable businesses and the ones that aren’t, are talking about how soon they will be profitable.” Davda added.
SoftBank, Sequoia Capital and Tiger Global Management, investors which played a major role in shaping India's startup landscape with over 107 unicorns, have cut down on deals this year, prolonging the scarcity of new unicorns.
Funding drop
In May, Moneycontrol reported how SoftBank, Sequoia and Tiger Global, three of India’s most active startup investors, participated in only 11 deals in the first four months of 2023 compared with 59 last year. Tiger Global and Sequoia cut their investments sharply, while SoftBank has yet to make an investment.
“SoftBank is evaluating about four to five deals but the deal talks are at fairly early stages. I think none of the deals SoftBank is evaluating is a unicorn deal,” an investment banker aware of the matter told Moneycontrol.
SoftBank did not immediately comment.
“There are other deals also happening, but at valuations between $500 and $700-odd million. Mostly, soonicorns are looking to protect their valuations of the Covid era. Very unlikely for any company to double their valuation at this stage, especially considering how there’s very little funding activity.”
Others too have reduced their investments significantly this year. Startup funding dropped about 60 percent to $11.1 billion in the first five months of 2023 from the same period last year. This figure also represented a drop from funding levels before the onset of the Covid-19 pandemic.
According to data compiled by Moneycontrol through Tracxn, the funding amount recorded was the lowest since 2015, when startups secured $10.5 billion from January to May.
The sharp drop in funding has prompted founders to change their investment metrics during pitches over the past 12 months as investors look beyond vanity measures.
“In 2021, anything and everything was getting funded and that too sometimes at quite extraordinary valuations. That has moderated, people have come back to the valuations we used to see in 2019 and 2020. Investors are also being more discriminating in what they invest in, people are asking more questions, seeking more data points,” said Kannan Sitaram, co-founder and partner, Fireside Ventures.
“If they thought at Rs 100 crores something was investable, now they are saying please come to Rs 150 crore because we want to see a bit more success, more conviction around the unit economics. I think it is a restoration of equilibrium in the market and we are fully supportive of the new situation as we think that India requires sensible and rational investing which is sustainable and not these bubbles we saw getting formed,” he added.
With investors looking at more fundamental investment metrics, industry observers feel that startups, especially those in dire need of capital, might have to settle for down rounds. This is because these companies were unable to grow into their valuations, said Davda and Rajinder Balaraman, Managing Director of Matrix Partners India.
A down round refers to the lower value of a business at the time of investment compared with a previous financing round.
According to the two, about a third of India’s unicorns might have to settle for down rounds as these companies fell short of their projections, while a third might be able to raise money at their previous valuations. Then there is a third, who have or will soon grow into the valuations, have strong economics and will raise up rounds also.
The fate of India's startups hangs in the balance, waiting to see how many will emerge resilient from these challenging times. The outlook on valuation appears bleak and only time will reveal how many companies come out stronger.
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