India produces billion dollar startups. Now they have to start making money

This time last year, Indian entrepreneurs were in panic mode.

The government had Locked the entire population of the country in a dramatic step to fight against the coronavirus pandemic. The founders of the company feared the restrictions would leave them severe funding crisis it could hinder their ability to grow, pay salaries or even stay afloat.

The mood a year later is very different, despite a brutal rise in coronavirus case threatening economic recovery. India’s startup community found itself in an unprecedented fundraising windfall. In the first four months of 2021, 11 companies achieved unicorn status, meaning they reached a valuation of at least $ 1 billion, according to the data platform Tracxn. Five startups took this step in April alone. For comparison, there were 13 in all in 2020 and 10 in 2019. India’s ranks super rich tech leaders swell rapidly as a result.

The boom is largely thanks to the powerful investments of companies like Tiger Global and SoftBank, which are pumping money into India’s fast growing internet businesses – a price many investors find just too important to ignore. Not only are more businesses raising this kind of money than ever, they’re doing it at an all time high. And some of India’s most successful startups – including Flipkart and Zomato – are reportedly exploring potential listings this year. Zomato declined to comment and Flipkart did not respond.

But the Seemingly endless fundraising cycles can eventually produce diminishing returns, worry many industry experts, who say India’s startup ecosystem must start showing consistent profits and healthy exits for investors, and soon. Some observers feel that the enormous funding distributed makes being a “unicorn” less than a mythical achievement.

“It’s great that Indian startups are going through this funding boom. But they will have to find sustainable, money-making business models to survive, ”said Radhika Gupta, CEO of Edelweiss Asset Management Limited. “Even a Google or an Amazon cannot survive on the number of customers alone.”

First, the good news

The investment craze is due to the boom in India’s digital economy. There is more than 700 million internet users in the country and around half a billion to come online, creating huge potential in the market.

The pandemic, meanwhile, has encouraged of people outside major cities to spend money online, accelerating digitization businesses and opening up more opportunities to technology entrepreneurs.

Financial technology companies have been the biggest winners. At the end of 2020, India had 44 unicorns, and most were in the FinTech sector, according to a report by Orios Venture Partners. Retail and Software as a Service companies are as follows.

The venture capitalist also found that the time it takes for a tech startup to reach a billion dollar valuation has dropped significantly from almost 15 years in 2005 to 2.4 years in 2016 and 2017. .

This year alone, app developer Mohalla Tech, investment start-up Groww and The Gupshup messaging platform have all become unicorns – in large part because of Tiger Global’s big investments, according to data from Tracxn. The New York-based investment firm, which also made big bets early on on Flipkart – the e-commerce giant acquired by Walmart in 2018 – was more optimistic than other companies in the country.

Tiger Global did not respond to a request of CNN Business for comment, but the company has in the past praised business it has invested in well positioned in India’s growing internet market.

Risk of bloating

Some experts, however, have started to wonder how much money large investment firms are investing in the sector.

“They over-capitalize the company by giving 1.5 times or twice the amount needed, ”said Amit Ranjan, co-founder of presentation sharing service SlideShare. He is now working with the Indian government on a virtual locker project called DigiLocker.

“There is no justification for this except to bludgeon the competition,” Ranjan told CNN Business.

But Rehan Yar Khan, managing partner of Orios Venture Partners, does not see the influx of money as a “big worry”. After all, companies still need capital to capture the potential of the vast Indian market.

He cited PharmEasy, an online pharmacy company, as an example. Khan was an early investor in the company, which became a unicorn earlier this year.

“Electronic pharmacies only cover 3% of the Indian market,” Khan said. “… So they naturally need more money to develop.”

But there are other headaches to consider as well. What if a unicorn becomes overfunded and fizzes before they have an exit plan?

Flipkart is the only indian tech unicorn having been acquired at a value of over $ 1 billion. (E-commerce company Shopclues, valued at $ 1 billion in 2016, was acquired three years later by a Singapore-based company. But by that time, Shopclues’ value had plummeted to between $ 50 million and $ 80 million.)

Only a handful of Indian tech companies have maintained lists over the past two decades. And no tech startup worth more than $ 1 billion has gone public.

“By inflating valuations in the private market, you are delaying your ability to enter the public market,” said Karthik Reddy, co-founder of venture capital firm Blume Ventures. He believes Indian companies need to think about initial public offerings earlier rather that later in order to build a sustainable startup ecosystem.

“We don’t have big technology buyers, so you can’t wait for a Walmart to come and buy your biggest asset every time, ”he added.

Could this be the year?

There are murmurs in Indian tech circles about huge upcoming releases. Reddy is optimistic that 2021 will be remembered not only for its funding boom, but also for sparking a cultural shift in the industry.

Indian conglomerate Tata Sons is reportedly looking to buy BigBasket online grocer for more than $ 1 billion, the Mint journal reported last month. Asked for comment, Tata Sons referred CNN Business to BigBasket, who did not respond.

Other Indian media have reported in recent months that older unicorns may also consider listing them soon. And the Economic Times reported last week this several startups are scrambling to recruit senior executives with some IPO experience.

Should either Flipkart or food technology business Zomato complete an initial public offering, Advertisement could be a game changer, according to Reddy.

“India must release its technology companies on the public market,” he said. “At present, Indian citizens are hardly exposed to the unicorn boom.”

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