A unicorn report card is an idea whose time has come.
A unicorn report card is an idea whose time has come.

Opinion | Startups’ unicorn obsession in times of abundant capital

Too much capital can result in a valuation race that is not only an illusion externally, but also dangerous internally as it can lead to losing focus

Picture this. A startup still in its infancy. While talking about its expansion plans, it begins detailing the product evolution, headcount growth, fundraising plans, competition analysis and so on. For most startups that idolize the likes of Steve Jobs, one would expect the common phrase, or something along those lines, “We will change the world." However, soon enough, there comes the big revelation. “In the next two years, we will be a unicorn!"

Since the billion-dollar tech startup was once considered equal in scarcity to the mythological creature, endlessly sought but never found, it deserves to elicit some excitement. But not obsession. But becoming a unicorn has become the ultimate “nirvana" moment for both venture capital and startup founders. In investment parlance, $1 billion “valuation" elevates a private company to the status of a “unicorn". According to CB Insights, there are 260 private firms globally valued at billion dollars-plus as of August 2018. These firms are collectively worth approximately $840 billion and have raised a combined $201 billion. About 120 were added in the last two years alone. Such obsession led to India having over 20, including Flipkart, Snapdeal, Ola, Oyo, Swiggy, Udaan, Freshworks, Paytm Mall, Inmobi, Hike, Policybazaar, Rivigo, Byju’s.

At first blush, data tells you that the average age of startups joining the coveted club is declining. While Ola took three years, Udaan has taken less that two. The hype around becoming a unicorn should also cool off as it mischaracterizes firms, judging them by their capacity to raise funds rather than building long-term value. Snapdeal, for instance, became a unicorn in 2014, but is now barely afloat. Or Shopclues for that matter. The e-commerce firm is said to be grappling with sluggish growth amid top-level exits. Now, as new set of unicorns emerge, it becomes imperative to throw some questions again.

Can you burn your way to success?

Perhaps yes. But one trend is clear among the new set of unicorns—it is no more about domination in the home country, but about global ambitions. Both Ola and Oyo are looking at international markets. Such pursuits require huge cash burn and investors are okay with it. Besides, there is too much capital which helps significantly to mark up the valuations.

Large and disproportionate outcomes in tech investing have actually come from the top entity and not the second in the list. And, to be number one, you have to go capture the market before anyone else does. If it means you have to burn a lot of money to get there, be it so. Also, frugality is a virtue not appreciated by venture capitalists anymore. Leadership is not determined by operating metrics, it is benchmarked against how much capital can a founder attract. This is particularly true for startups competing in the winner-take-all space where they have no choice but to raise capital and burn to stay ahead.

Trying to be profitable or sensible is a huge gamble. The same is not true for companies where true MOATS define success. As branding has become more important for VC firms, the desire to be associated with winning companies has intensified. VC funds should be judged by the returns they generate, but, in the near term, success can be claimed through investments in hot companies.

Private or public?

The incentives for staying private has never been greater for startups—huge influx of late-stage capital from non-traditional sources chasing venture-like returns. They can afford to stay private for as long, to focus on long-term strategy rather than short-term quarterly earnings, retaining the competitive advantage that comes from not disclosing business details. Google (Alphabet Inc.) and Facebook Inc., the gold standards in the startup world went public in six and eight years, respectively. Contrast this with Ola (AnI Technologies Pvt. Ltd) or Paytm (One97 Communications Pvt. Ltd) or Uber Technologies Inc. who can afford to stay private for so long.

Ready for scrutiny?

Too much capital can result in a valuation race that is not only an illusion externally, but also dangerous internally as it can lead to losing focus. As number of unicorns grow, it calls for higher scrutiny on how long can they sustain it with long term value creation than merely hitting the benchmark. Perhaps, a unicorn report card is an idea whose time has come.

Shrija Agrawal is Mint’s deals editor. Due Diligence will run every week and cover issues in India’s venture capital, private equity and deals space.

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