To date, these unicorns have raised more than $80 billion from investors, resulting in a total market value of more than $300 billion.
Open, a new banking platform for small and medium enterprises, raised $50 million at a $1 billion valuation earlier this week, marking a watershed moment for the world’s third-largest startup ecosystem.
Startup founders, investors, and government officials all lauded the achievement.
As they sought to rapidly expand across sectors, verticals, and geographies, these 100 unicorns were aggressive in raising funds at high valuations.
However, when it comes to profitability, very few have cracked the code.
According to data shared with Moneycontrol by data analytics firm Tracxn Technologies, only 23 of the 100 unicorns, or startups valued at $1 billion or more, have achieved profitability in a fiscal year.
Also Read List of Top Unicorn Startups in India
Investor resentment
According to the data, these startups have raised more than $80 billion from investors to date, resulting in a total market value of more than $300 billion.
The data is significant because some unicorns that went public on stock exchanges last year faced investor backlash for failing to achieve company-level profitability.
Since their initial public offerings, shares of Paytm’s parent company, One97 Communications Ltd, Policybazaar’s parent company, PB Fintech Ltd, and Zomato Ltd have fallen below their initial public offering prices.
Many analysts at securities and research firms have criticized these unicorns’ high cash-burning models. For example, in a February note, Macquarie Group stated that Paytm’s profitability remains a “distant reality” due to its costly employee stock option plans (ESOPs) and a “sub-scale” loan distribution business.
“Stock market investors, particularly retail investors, are similar to FD (fixed deposit) investors.” They are fine with 10% returns, but that 10% should be consistent. Risks are not understood by retail investors. They want a strike rate of 100 percent. “If they invest in ten companies, they want all ten to be profitable and to provide multi-bagger returns,” said A K Prabhakar, Head of Research at IDBI Capital.
“I believe that all of these companies (unicorns) that were listed last year bit off more than they could chew.” “The kind of premium he charged for Paytm, and when questioned, he said he offered a lot on the table, but for a loss-making company, these kinds of comments don’t help and will have an impact on future listings (of new-age tech startups),” Prabhakar added, referring to Paytm founder Vijay Shekhar Sharma.
Continuing to be optimistic
Private market investors, on the other hand, are unconcerned about the profitability of new-age startups and remain bullish on them.
Investors and entrepreneurs, according to Siddarth Pai, Founding Partner at 3one4 Capital, which has backed unicorns such as Darwinbox and Open, should focus on companies’ paths to profitability rather than absolute profitability.
“Investors and the Board of Directors (of a company) look at two things. How quickly are you growing, and are you on your way to profitability? “These are the two most important considerations,” Pai stated.
“If the company stops growing and does not find a path to profitability, it becomes extremely difficult for anyone to actually make an investment case.” “However, if you have a company that is profitable and growing at a rapid pace, it becomes a very interesting investment prospect,” Pai added.
Various judging criteria
According to Ganesh, Serial Entrepreneur and Promoter at BigBasket, Portea Medical, HomeLane, and Bluestone, the fundamentals of new-age technology companies differ from those of traditional companies, and thus their valuations may not always correlate with key financial metrics such as profitability.
“You might not have a PE multiple or the company might not be EBITDA positive, but that’s because their fundamentals are completely different and disruptive,” Ganesh explained.
The term “PE” stands for “price-to-earnings.” EBITDA is an acronym that stands for earnings before interest, taxes, depreciation, and amortization.
“These companies have altered how consumers behave, how they buy, how they interact, how they consume information and make decisions.” All of this has occurred in the last five years, thanks to the internet, the pandemic, the adoption of digitization, and the unwillingness to travel physically. These new-age companies have brought about this tectonic shift, and thus they are valuable,” Ganesh added.
Prabhakar disagreed with Ganesh and Pai. claiming that a private equity investor had a different perspective
“A PE (private equity) investor understands that only 20% of his portfolio companies will be successful, whereas public market shareholders do not.” “They don’t have patience here, and they want all of their bets to be successful,” Prabhakar explained.
The story and infographic reflect the most recent Tracxn Technologies data, which was shared with Moneycontrol. However, according to their most recent regulatory filings with the Ministry of Corporate Affairs, Mu Sigma and Razorpay’s Indian entities are profitable.
It should also be noted that Groww’s India entity is profitable, whereas its US parent lost Rs 107 crore in 2020-21, according to news agency Entrackr.
Furthermore, while Freshwork Inc recently reported a quarterly loss, its India-registered entity–Freshworks Technologies Pvt Ltd–is profitable for FY21, according to the company’s most recent regulatory filing.
This is the first in a three-part series examining the data of India’s 100 unicorns.
