Mixed signals on unicorns

The valuation of India’s unicorns (technology start-ups valued at over $1 billion) has seen sharp fluctuations of late. For instance, while both Paytm (One97 Communications) and Hike have received new tranches of funding at higher estimates, Flipkart has seen one of its investors marking down valuations. A reference list of real time start-up valuations, maintained by CB Insights – a firm that tracks venture capital (VC) activity – indicates that India is the third-largest “unicorn nation”. There are 174 global unicorns, which are cumulatively valued at over $635 billion. This is a huge increase over mid-2015 estimates, when there were only 107 with a total value of $377 billion.

The US dominates, with 99 unicorns, and China has 35. India makes a much smaller, but significant, contribution, with seven home-grown start-ups valued as unicorns. The cumulative value of India-centred businesses adds up to over $35 billion. However, it may be a misnomer to call these businesses “Indian” without qualification. It is true that all of these are run out of India, by Indian managements, and each is focused on the needs of Indian users. But, these businesses are all funded by capital contributed by overseas VCs and private equity players. This is in contrast to China, where many businesses raised funds in the mainland.

In a recent regulatory filing with America’s SEC, Vanguard Group, which holds a stake in Flipkart, valued the Indian e-commerce major at around $11 billion, which is quite a write-down from the $16 billion valuation Flipkart received when it last raised money in May 2015. Nevertheless, Flipkart remains the highest-valued Indian unicorn at $16 billion. In contrast to this write-down, social messenger Hike raised $175 million in August at a higher valuation of $1.4 billion, and One97 Communications was valued at $4.85 billion, when it raised $60 million in August. Global VC activity has dipped in 2016, but India remains a relatively favoured destination.

VC funding into India saw a 55 per cent drop with $1.78 billion received between January and June, compared to $3.9 billion received in the same period of 2015. However, companies such as Grofers (a hyper-local online grocery) and OYO Rooms (aggregates hotel and guesthouse rooms) are tipped to soon become unicorns, while others such as Quickr, and MuSigma are also in the $1-billion ballpark.

So what explains the change in valuations? For investors who can raise very cheap money in Europe, Japan or the US, India’s growth potential is attractive. But the churn is not only due to company-specific factors. It is caused by differences in opinions about the future of India’s online markets, given a combination of glaringly positive and negative factors. India has the world’s second-largest Internet population at around 350 million and online consumption is climbing fast. The goods and services tax will reduce the complexity of tax and excise laws. Sector-wise restrictions on FDI are easing, though the multi-brand retail inventory model remains barred to overseas investors. But, physical infrastructure remains very poor and per capita online spending is low. Future Group CEO Kishore Biyani has said online customer acquisition and retention can amount to as much as 50 per cent of operational costs for e-commerce players. Negotiating such formidable barriers requires deep pockets, an excellent sense of local norms and, above all, faith that policymakers will continue to make decisions that enable fast growth.

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