Why are Investors Running From Indian Unicorns?

Emerging as the third-largest startup ecosystem in the world, India soon became a favourite economy for startups. Home to over 100 unicorns, India only falls behind the USA with 661 unicorns and China with 312 unicorns. The Indian government and the ever-expanding investing sector welcomed Indian startups with open arms. All was going well for the unicorns in India, but then the valuation tumble started, and now India is on the verge of losing its 100-mark when it comes to unicorns.

For those who are not as familiar with the term "unicorn", let's revise what it entails. Along with being mythical horse-like creatures with a horn, Unicorns are private companies with a valuation of $1 billion. These companies have a well-established standing in their respective fields and are known to lead the sector by a good margin.

You must have heard that unicorns like Swiggy and Ola have been slashed by their major investors in terms of valuation. Many companies have seen valuation reductions of more than 30-50%. Take Swiggy, for example. The FoodTech giant was valued at $10.7 billion but has now been incised by its investment fund Invesco by 33%. That's right! Swiggy is now worth $5.5 billion in the sector.

All the news about valuation deductions makes one wonder how this phenomenon occurs. How and why the unicorns are in danger of losing their top status in India?

You will get all your queries answered by reading ahead!

Factors by which Investors value a Private Company

Finding a public company's correct value is comparatively easier than doing the same for a private one. All information, such as the company's revenue, profit & loss, balance sheet, etc., is available in detail for the public eye to dissect. But this is not the case with a privately-owned company. So, how exactly do all the hot-shot investors, both national and international, value the companies they have in their portfolios? Let's figure it out!

Financing History & Competitors Comparison

An investor always checks more than one company in the same sector before going ahead with the investment. This procedure of comparing competitors to analyse the true potential and worth of the company is known as Comparable Company Analysis (CCA). The investors then look for the public-listed companies which most closely resemble the private company they are thinking of investing in. 

Potential investors also go through the financial records of the company, including detail regarding the raised funds, fund utilisation and more. For this task, an auditor is assigned to go through the financial statements of the private company in-depth. Based on the competitor comparisons, as well as information collected via word of mouth and market predictions, investors entail the valuation of a company.

Exit Value Estimation

The one interesting fact about investors is that the first thing they calculate before finding the value of the business is how much exit value it can have. An investor always shoots for the highest return on investment. For example, if a company is valued ₹100 Crore and the investor holds 20% of shares, then during their exit, they will liquidate stakes worth ₹20 Crore.

Using their rich experience, investors always get the gist of what the exit value will be for a particular company. Call it the “investor’s hunch.” So the potential exit value also guides an investor in deciding a company’s value.

Reasons Why Unicorns Valuations are Reducing in India

From Swiggy (the fastest company to become a unicorn in India) to PineLabs and now Byju's, the sword of valuation slashing is brought upon many Indian unicorns. This dilemma of the valuation tumble is making investors and competitors worry about what the future might entail. In this scenario, what's important to know is why so many companies are in the range of getting their value dipped down by their significant investors.

Funding Winter

Our country, which had a spring of funding during the first nine months of 2022, is now suffering from a funding winter. Funding winter refers to the continuous downfall of investments in a country's startups. It's the beginning of June 2023, and no company has transformed into a unicorn in the last two quarters.

So, what exactly is the reason for the arrival of the funding winter this year? The uncertainty in the macroeconomic market and the outcome of the lavish funding done by investors and companies alike has resulted in funding winter. It has been going on since 2022 and will likely stay until the end of 2023.

The investments in startups as fundraising have also reduced at an alarming rate of 75%, whereas the funding rounds, both early and late-stage funding, have gone down at a 60-80% rate. This is also one of the reasons for the onslaught of layoffs in both startups and major corporations.  

This phenomenon opened gates for other fishes in the sea. Such as Minicorns have the chance to boost their businesses by finding potential investors who are hesitant to fund a unicorn. In comparison, Soonicorns might find it challenging to join the prestigious Unicorn club due to the rise in uncertainty in the market.

The Investor Attack

Whether major or minor, investors in a company have power and influence when it comes to the stability of a company. Investors contribute towards pointing out the exact value a company holds as their stakes help in boosting varying operations. Where Early-stage investors help a startup get on its feet with seed funding, late-stage investors assist companies in carrying on with further operations.

These investors are well-versed in what's going on in the market and have an uncanny ability to grasp what might occur. Based on their calculations and predictions, investors often increase or decrease a company's value. This phenomenon became full-fledged and visible in the past few months as investment funding companies took the value-slashing ride. Funding winter discussed above plays a massive role in valuation slashing by investors. Famous names like Swiggy, PharmEasy, Oyo, etc., were trampled on their way and are now on the verge of losing their unicorn status.

Going Public

The loss of unicorn status is not always an adverse event. Many times a company's value gets slashed when they go public. Since unicorns are companies which are private, they automatically get removed from the lists once the IPO comes. The prospect of a new IPO brings excitement and a unique buzz to the market as beginners, mature investors, and traders prepare to add a new name to their portfolios. However, a unicorn listing themselves under a stock exchange is one occurrence which is not very common, especially in the recent few months of value decline.

The Bottom Line

Although the unicorns are having a tough time dealing with the strike of valuation slashing, small companies finally have the chance to bloom. The fundraising, especially late-stage funding rounds, were done extravagantly by investment funders on large companies. The small businesses didn't stand a chance to show their potential. Now, the funding winter and the tumble roll of valuations for unicorns are giving them the spotlight to shine.

The one thing that would be crucial to witness is whether India lost its status of boasting above 100 unicorns in 2023 or not.