New Delhi: India’s unicorn ecosystem, which is ranked as the third-largest globally, has been experiencing a significant drought in new additions for over eight months. This stagnation is reflected in the absence of any startup achieving the prestigious $1 billion valuation milestone. The decline in valuations of technology companies over the past year, amid the ongoing Covid era, has contributed to this slowdown.
Presently, India boasts nearly 50 startups that are valued at $500 million or more, often referred to as “soonicorns” or soon-to-be-unicorns. However, it is unlikely that most of these startups will secure funding at the $1 billion valuation within the next three months. Startups in the country are facing the challenge of achieving milestones such as profitability while grappling with a deteriorating funding climate, as highlighted in the data.
Tarun Davda, Managing Director of Matrix Partners India, expressed that in 2021, the entire ecosystem, including investors, founders, and the media, excessively emphasized the “unicorn” or “soonicorn” tag on startups. However, he believes that the unicorn tag has lost significance now, as founders are more focused on building profitable businesses. The current discourse revolves around discussions of achieving profitability rather than chasing unicorn status.
SoftBank, Sequoia Capital, and Tiger Global Management, which played a crucial role in shaping India’s startup landscape with over 107 unicorns, have reduced their deal-making activities this year. Consequently, this has contributed to the scarcity of new unicorns. Moneycontrol reported in May that these prominent investors had participated in only 11 deals in the first four months of 2023, compared to 59 deals in the previous year. Tiger Global and Sequoia have significantly cut their investments, while SoftBank is yet to make an investment.
The funding drop has been a cause for concern, with startup funding plummeting around 60% to $11.1 billion in the first five months of 2023 compared to the previous year. This decline represents funding levels even before the onset of the Covid-19 pandemic. Data reveals that this funding amount is the lowest recorded since 2015 when startups secured $10.5 billion from January to May.
Founders have had to adapt their investment metrics during pitches in the past year as investors now consider factors beyond superficial measures. Investors are becoming more discerning in their investment choices, asking more questions, and seeking additional data points. Kannan Sitaram, co-founder and partner of Fireside Ventures, noted that the investment scenario has shifted from the exuberant valuations of 2021 to a more rational and sensible approach. Investors are seeking more success and conviction around unit economics before committing funds.
This change in investor perspective has led industry observers to predict that startups, particularly those in need of capital, might have to settle for down rounds. A down round refers to a lower valuation compared to a previous financing round. According to industry experts, about one-third of India’s unicorns may have to accept down rounds due to falling short of projections. Another one-third might be able to raise funds at their previous valuations, while the remaining third, with strong economics and growth potential, will be able to raise up rounds.
The future of India’s startups hangs in the balance as they navigate these challenging times. The outlook for valuations appears bleak, and only time will reveal how many companies can emerge stronger from this period of stagnation.
