The meteoric rise in Indian unicorn valuations

India is now home to more than 60 unicorns, startups valued at $1 billion or more, with more than half of them entering the coveted club this year. Many of these 33 unicorns, which have cumulatively raised about $9.3 billion to date, have also seen a surge in valuations, according to VCCEdge, the data intelligence platform of VCCircle.

Ofbusiness, for instance, doubled its valuation in less than two months to $3 billion. On 30 September, the company raised a $207 million Series F round, which saw participation from SoftBank and Alpha Wave. In July, it raised $160 million from SoftBank at a vakuation of $1.5 billion. Similarly, social e-commerce startup Meesho saw its valuation double in five months to $4.9 billion.

Asish Mohapatra, co-founder of OFB Tech Pvt. Ltd, which runs Ofbusiness, insists the valuations are justified. “This valuation rise is happening in a few companies, which are the bellwethers of new-age firms," he said, adding that there is a “massive flight" of capital to quality where the big companies are getting bigger.

“There is also consolidation happening in terms of demand," he said—the same set of customers or users are buying from the bigger players as they have better teams and more money. “All the bigger companies have grown faster at a much larger scale in the pandemic. We are slated to grow by 4.2-4.3X whereas last year we grew by only 3X." India, Mohapatra pointed out, has become more attractive to global investors after the crackdown on tech companies in China.

Meesho founder Vidit Aatrey has a similar view. On 30 September, he tweeted, “Our monthly transacting users steadily grew by 2.8X while monthly orders rose by 2.5X since our last fundraise." Meesho is targeting the next billion users—a phrase used to describe first-time internet adopters and e-commerce users. Of these, “40% of the new users in this period are first-time users," he added.

Most investors appear to agree. Still, some are sceptical of the steep valuations since most of these unicorns continue burning cash and are yet to turn profitable. That said, those that are continuing to invest in the unicorn story, even if for fear of missing out, are unwilling to call this fundraising frenzy a bubble—at least, not yet. Investors said they would continue to invest in startups where the founders inspire confidence, offer a niche solution, promise to scale because they are chasing a huge market on the back of a digital back-end; and grow every quarter.

“Is the world in a valuation frenzy—sure, driven by increased investment volume. Is it a bubble—No", Siddarth Pai, co-founder of VC firm 3one4 Capital, said. “Startups usually require large sums of cash over a long period. In this era of enhanced liquidity, investors are looking to crunch the time by upfronting the future capital raises to accelerate business growth of the highest quality companies."

Rishi Aswani, managing director in the alternative asset advisory group at Duff and Phelps, believes investors are willing to offer high valuations “where they have conviction around the founders and management teams’ ability to create a moat that is defensible for a good period of time". According to him, the premium reflects a valuation for growth over the next two to three years in chasing a large market opportunity in a new manner, often via a digital solution. “Note, we’re seeing several players in a niche, both on the founder and investor side, able to price-match, and thus you’re seeing market participants as a whole creating an uplift in valuations. Seasoned entrepreneurs are on a very good footing," Aswani added.

He has a point. Several niche firms within sub-sectors are indeed getting an uplift. On Tuesday, for instance, used car retailer CarDekho, operated by Girnar Software Pvt. Ltd, became the third company in the space since July to hit a billion dollars in valuation. In addition, multiple companies in the ed-tech, crypto exchanges, fintech, payments, B2B marketplace and social commerce have also become unicorns in the past six months.

Investors have seen rapid digital adoption over the past year, along with the proof of execution over the last quarter. “The past two years have shown investors that India is a good market for exits. This makes a case for tolerating higher entry points to get into companies earlier. Remember that India has always been a premium market in terms of valuations, so you’re always paying for growth, and not financial engineering or leveraging a return," Aswani said.

A March 2021 Avendus Capital report spoke of a massive uptick in digital adoption in e-retail, payments, ed-tech, paid subscribers for over-the-top streaming, gaming, wealth-tech and kirana stores. Specifically, the report said, ed-tech companies saw 60 million users added in 2020, three times the 20 million users that were added in 2018 and 2019 together. The report added that 60% of the kirana stores are willing to work with B2B platforms, up from 7% pre-covid; and 10 million paid subscribers had been added to OTT content in 2020—a 947% growth in consumption. Payments had seen a 175% increase since lockdown, according to the report.

Investors can already see these metrics in action. “Some startups have scaled up dramatically quarter after quarter in their user-base, product development and, ultimately, monetization. We are seeing multiple rounds in a year as a result in such companies," Aswani said. Investors also have greater holding power and have learned to identify startups better, he said.

Funding, however, does not automatically spell success. “Even if getting funded was a goal, it does not make a company infallible. So it’s good to be cautiously optimistic at the end of the day," Aswani said.

Other investors agree. “Welcome to the new peak where companies are announcing the valuation at which they will go public in 24 months, and investors are announcing the valuation at which their investee companies will raise the next round," Abhay Pandey, general partner, A91 Partners, tweeted on 12 October.

“Investing today is looking no different from investment banking—hustle, fight your way in, pitch your credentials and promise the highest valuation, quick closure and lots of value-adds. Except that you can’t leave the final valuation to be decided by the market," Pandey tweeted on 12 October. When contacted, Pandey declined to elaborate.

Pai, though, believes this so-called frenzy may become the new normal. The “triggers for a temporary adjustment will be tapering out of quantitative easing, which may reduce systemic liquidity or rumblings in the IPO market—once the effects of that are priced this, the trend that this portends will continue as the new normal," he said.