Un-Unicornization- Startups Lose Their Billion-Dollar Value Status

Earlier this month, India’s startup ecosystem celebrated its 100th entry into the coveted $1 billion Unicorn Club. With this, India ranks among the top four countries in the world to have 100 or more unicorns. It trails the United States, China, and roughly borders the United Kingdom in terms of the number of unicorns.

As Indian entrepreneurship continues to thrive and create brilliant companies to create these unicorns and soon to be unicorns (soon to be a unicorn), the startup ecosystem has also benefited from the global surge in liquidity, so far, in terms of pumping up the valuations of these startups. The past decade has seen a surge of liquidity in the global banking system due to near-zero interest rates in the United States and other European markets. This has prompted global capital to seek higher growth rates in other markets such as India. Until last year, we saw investors falling over each other to enter the capitalization tables of new-era companies offering ever-increasing valuations, on the back of a massive volume of funds. that needed to be deployed for growth. Since 2010, technology or new age companies in India have raised over $125 billion in equity.

With inflation soaring, central banks around the world have had to resort to a change of direction in their monetary policy, moving from accommodative to hawkish. This is going to have a significant impact in terms of compressing global liquidity as well as funds that would be available for investments in startups.

With funds becoming valuable, the premium pivot is clearly shifting from companies to investors. The seller’s market, so far, is now turning into a buyer’s market. Investors are becoming extremely cautious about what they invest in and at what price they invest. Abandoning their hunt for corporate “power”, investors are vehemently demanding profitability or a very clear path to profitability. The mantra of investing equity for startups in order to burn through cash for more growth and then higher valuations in subsequent funding rounds is now definitely discarded.

Startups, especially in the consumer sector, that used to have the luxury of handing out discounts and endlessly spending on marketing expenses to acquire customers are now being forced to rethink their business practices to ensure continued growth by putting the focus on long-term customer value versus the cost of acquiring them. Profitability is the predominant demand and companies are now forced to cut costs. We are already seeing companies downsizing growing so far, as well as boards taking a very aggressive stance with founders/CEOs. Over 5,600 jobs have already been cut across the startup ecosystem. And that might just be the start.

Valuations are under unprecedented pressure for the startup ecosystem, also given the capital market performance of some new-era listed companies. The profit-demanding, results-driven, and unforgiving stock markets have added a new dimension and data point to how startup pricing is scrutinized, even by private investors. The era of benevolent valuations is over. We are already seeing some of the start-ups raising structured debt instead of equity for their financing needs to cover their inability to raise funds at increased valuations, also in hopes that an eventual IPO will help repay the debt. Not all companies aspiring to the IPO will be able to see themselves listed.

Companies that would be able to hold valuations would be those that either have very strong and profitable business models, solve real problems, or are those with inflated capital buffers. Others, including unicorns and future unicorns, will test existing investor support for funding needs to avoid likely valuation erosion or, in extreme cases, bankruptcy. The phenomenon of non-unicornization or startups losing their billion dollar valuation status is a clear writing on the wall.



The opinions expressed above are those of the author.


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