As many as 31 Indian startups have hit a billion-dollar valuation in 2021. As they go from the warm glow of fund-raise to the cold realities of doing business, factors such as steep valuations, cash-guzzling consumer businesses, and low founder holdings will all come into play
This year’s juggernaut of Indian tech startups turning unicorns, or reaching valuations of $1 billion or more, is ticking along. The number jumped to 33 as three—cryptocurrency trading platform CoinSwitch Kuber, cloud kitchen Rebel Foods, and meat seller Licious—entered the coveted club last week, while two others—payments firm MobiKwik and online portal for cars CarDekho—joined this week . As online businesses gain traction, an investing landscape flush with cash and the emergence of public listing as an exit route for investors have contributed to this blitz of fundraising and surging valuations.
One measure of valuations is the ‘revenue multiple’, or the ratio between a company’s value and its latest revenues. Reliance Industries is valued at a revenue multiple of three times; Tata Consultancy Services and HDFC Bank at around seven times. But of the 25 tech startups that turned unicorns in 2021 for which revenue data is available, only one has a revenue multiple below 10, shows data from Tracxn, a platform for startup data. The rest were valued between 13 and 2,073 times their revenues.
To justify such valuations in the long run, these companies must grow revenues briskly—year after year. Assuming no change in valuation, a company with a revenue multiple of 50 (for example, Grofers) needs to double its revenues for three straight years to see this multiple fall below 10. At a revenue multiple of 1,000 (CRED and Groww), that pathway is seven years. In the long run, an inability to grow fast, or spending sprees that don’t translate to commensurate revenue and profit gains, could knock back valuations.
Of the 27 that turned unicorns in 2021 and for which data was available, 15 cater to individuals and the rest to businesses as their target customers. Typically, business-to-business (B2B) ventures need less capital, and have a quicker and easier path to profits. Business-to-consumer (B2C) companies tend to spend big on customer acquisition and forming habits, and so consume more capital and have a longer path to profits.
Yet, the 15 B2C firms in the list of 27 have raised twice as much funds over their short lifespans as the B2B set, despite trailing big on revenues and profitability. However, in the latest fund-raising and unicorn frenzy, the B2B set has matched the B2C set in funds raised. While the B2C set has raised 32% of its funds in the latest round, the corresponding figure for the B2B set is 53%. B2B startups and their investors either see more robust business prospects or they are trying to ride the investing momentum.
Low Founder Holding
As start-ups raise funding over multiple rounds, be it to fuel their growth or to stockpile cash while it is easily available, founders are often forced to part with a big chunk of equity ownership. Founders hold less than 25% stake in 11 of the 19 unicorns of this year for which shareholding data was available. Eight of these 11 are B2C companies, underscoring the capital-intensive path chosen by them. The founders of Vedantu, PharmEasy and Grofers all hold just 7-8% in the companies they set up.
A low shareholding typically means founders have less skin in the game and the real control rests with investors. But in terms of how much founders’ stakes have been diluted, the 2021 batch is only tracing the path of unicorns that preceded them. For a broader set of 50 startups for which such data is available, which includes the class of 2021 as well as those from older years, the median holding of founders is just 15%.
Wide and Deep
Conversely, low founder shareholding shows the presence of institutional investors among Indian startups is both wide and deep. The 27 unicorns from the 2021 batch for which such data is available have a total of 254 institutional investors, or an average of about nine each.
Amid this investor diversification, there is also a concentration at the top end. Three prime movers in the early-stage investing space—characterized by high risk and high returns—have a rich presence in this set of 27. Sequoia is invested in 15 companies, Tiger Global in 14 and Accel in 10. Following them are names like B Capital, Beenext and Dragoneer Investment, who are typically mid-stage investors.
Right now, there’s generous fund-raising happening at steep valuations. At some point, the focus will shift to capital usage, business growth and investment returns. That will show how the unicorn batch of 2021 truly fared.