Our herd of unicorns can’t gallop too far from reality

India has more than 100 unicorns—startups that are valued at $1 billion or more. As many as 42 unicorns appeared last year, as against 37 in the previous 10 years. And in the first two months of this year, according to a March 2022 report from HDFC Securities, a new unicorn was added every five days. The brokerage firm predicted that India could see over 100 new unicorns emerge this year.

Things have changed a lot since then. Post Russia’s invasion of Ukraine and global inflationary pressures, money is not so cheap any more. But even before Vladimir Putin sent his army across the border, if one cared to look, there were cracks showing in the apparently glorious Indian unicorn façade. February 2022 was as good as it gets for Indian unicorns and it may not be the same again for some time.

Sooner or later, common sense has to kick in. The vast majority of these unicorns have no discernible revenue models, let alone any path to profitability. Consider the ‘fintech’ companies, a few of which are valued at close to $10 billion and more. Most of them are essentially brokers that don’t even charge customers a brokerage fee. A few of them even pay customers to sign up with them. What sort of business sense is that?

There are several factors working here. One, promoters and their financiers are hoping that these companies will be able to achieve some sort of monopolistic position in five or eight years’ time—the sort of position a Facebook enjoys in social media—and once that is reached, they will be able to charge subscribers for premium services and make money. But perhaps only one startup among 50 can attain that. In the meantime, all 50 are burning cash like there is no tomorrow with wild advertising budgets and consumer promotions.

Two, take a look at the stock price charts of PayTM, Zomato and Policybazaar. It is utterly puzzling why people—and more importantly, supposedly sensible mutual funds—subscribed to these share issues. The balance sheets of these companies can hardly even be termed red. They are the deepest shade of maroon. And none of them in their share issue documents offered any reasonable explanation of how they can ever be profitable.

Three, the world needs to call out this valuation bluff at some point of time. Boasts about millions of users are meaningless if no one is paying or if the company is selling products and services at deep discounts. And a focus on the top line without the slightest interest in the bottom line can only lead to a bad end. There have also been several reports about employees of these unicorns—especially in education tech and hospitality industries—misleading and defrauding customers to meet their astronomical sales targets.

Four, what exactly are some of these companies selling? How many of us need groceries delivered in 10 minutes, and why? How can any firm make money from charging a customer ₹10 for someone to pick up a cake from a bakery five kilometres away and bring it to her in half an hour? Not that the customer is complaining—after all, who wouldn’t want dreary odd jobs to be taken care of for an inconsequential fee. But many of these services make no commercial sense.

Except to enrich smart promoters, who, at every new round of funding—series C, D or X—cash out on a bit of their holding based on valuations driven by feverishly ambitious Excel spreadsheets. And, as a couple of recent cases indicate, a few of them may also be embezzling funds from the companies. Maybe this is only to be expected. After all, most promoters possibly realize that though the ride is heady, it may not last very long and they need to take care of their long-term financial health. Besides, as long as you keep up the hype, you can get away with a ridiculously large expense account.

As the classic song from the 1942 film Casablanca says, “The fundamental things apply, as time goes by.” I happened to be in the US in March 2000 when the dotcom bubble burst, attending a conference organized by an American software company. Many of its clients—companies that had been trading on Nasdaq at awesome valuations—went belly-up almost overnight. Offices were emptied out all over Silicon Valley and thousands of people discovered that all those stock options in the media-hyped companies they worked for were worth nothing. One hopes India does not see anything like that bloodbath.

It is important to recognize the valuation game for what it fundamentally is. Unless a company produces real value, it is merely passing-the-parcel on a grand scale. Most investors are betting on being able to sell some of their stake at a profit to another group. The key objective, it would seem, is to exit with as high a return on investment as possible before the bluff is called. Because in most cases, someone is going to call the bluff at some point in time. The final aim is to list the company on a stock exchange, and if the company has no profits to make and no intrinsic worth, it is the retail investor who loses money.

One of the lessons of the Ukraine war is that it is the real stuff that matters. The West declared unprecedented sanctions on Russia, yet is also forced to import Russian oil, gas and minerals at prices that it has little control over. In fact, Europe faces the prospect of a very bleak winter if Putin decides to ration its oil and gas supplies. One should keep that in mind before getting too excited about India’s unicorns.

Sandipan Deb is a former editor of ‘Financial Express’, and founder-editor of ‘Open’ and ‘Swarajya’ magazines