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Photo: Alamy
Photo: Alamy

Opinion | The unseen wonders of a two-unicorn race

Big online businesses are accused of an endless appetite for profitless growth. Winner-takes-all dreams look unrealistic, but two-player markets could allow money to be made

Cash-guzzlers. Chimera chasers. Splurgers of investor funds. A variety of epithets have been flung at Indian unicorns that run online ventures. Some analysts hesitate to call them businesses at all, unless they can credibly plot revenue and expenses on a graph extrapolated to show profits in the foreseeable future. Their rarity and celebrity mark them out, though they must be valued at no less than $1 billion to qualify as unicorns, a tag prized by all startups worth their passion and derived from a mythical one-horned horse. But, do they have a horse sense of the future that uni-sceptics cannot quite see? Clues may lie in Zomato’s latest buyout. The food delivery company has gobbled up Uber Eats’ India operations in an all-stock deal that leaves Uber with a tenth of its equity, worth a reported $350 million. It is unlikely to evoke anti-trust scrutiny. With Swiggy offering it stiff competition, Zomato does not dominate the market, nor does it seem it ever will. Neither of the two make money, nor is it clear when they might break even. Frenetic customer acquisition has been the name of their game, with discounts galore and other goodies to habituate us to having food show up at the swipe of an app. Profitable or not, the duo do have plenty going for them. Smaller players have been shaken out of the food delivery space, and, if a duopoly were to take hold, Swiggy and Zomato may not find it very hard to exercise the pricing power they need to start making money.

Investors, however, seem to prefer online startups with a clear shot at a monopoly. Educational app Byju’s, for example, was recently in the news for notching up a valuation of $8 billion, a figure beaten in India only by digital wallet Paytm, at $16 billion, and room rental chain Oyo, at $10 billion. Since they have no direct rivals, they are expected to rake in big money once they have got their markets all wrapped up, with few customers or service points left for others to sign up. Given the ease with which online operations can be scaled up, furious expansion is the best way to maximize a first-mover’s advantage. Once the system is in place, it costs very little to serve every extra customer. Plus, if people spot a benefit in loading the app onto their handsets because large numbers already have it—social media being the classic example of this—then the “network effects" of success could make it perpetuate itself without any further effort.

That dream scenario of explosive growth and eventual market control need not always pan out as planned. To that extent, betting on a unicorn is usually a gamble. The business’ service proposition could get outmoded by new technology, mishaps of reckless expansion could damage its reputation, or users could flee once cheap deals are no longer dangled. Millions spent on generating traffic would then have gone waste. Unicorns whose market conduct is regulated by the existence of market rivals are arguably at lower risk of such a blowout. Competition, after all, keeps companies in check. It forces them to focus on customer satisfaction. It tells them what they could be doing better. Above all, it pumps the adrenaline they need to raise their game. This is why chances of a venture’s survival past the point of profitability are perhaps the highest in fields that feature two-unicorn races. India is lucky to have such hot contests. And these are the online markets to watch.

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