Prolonged Purple Patch

India will have 122 unicorns in the next two to four years, according to the Hurun India Future Unicorns Index 2022 released by Hurum Research Institute. The projection is in line with the recent trends. In just one year, the number of unicorns has increased 65 per cent probably spurred by the pandemic.

As we celebrate India’s emergence as the third largest ecosystem for startups after the US and China, we need to pause and review the emergence of unicorns and their impact on the capital market. The questions that naturally arise pertain to valuations and IPOs. However, leading investors feel that the valuation is between two-parties and has nothing to do with public money. 

Valuation vs growth

Higher valuations are no longer a sign of healthy startup growth, especially so for a unicorn. However, since a number of unicorns are also some of the largest employers in the Indian market, a decline in valuation and business slowdown can be catastrophic, not just in terms of venture capital (VC) funds but by way of major job losses.

“We are in the middle of the year, Q3 or the second half of the year has just started. The Covid outbreak has been unfortunate but the last couple of years have been very healthy for venture capital. Just one word of caution is, of course, valuations. Indian ecosystem is creating digital tailwinds. What has happened in the ecosystem actually is not unhealthy, because one never wants over-valuations, but rather always wants companies to be rightly valued. I can see a silver lining in that companies get rightly valued and not richly valued,” says Sanjay Nath, Founder, Blume Ventures, sharing his viewpoint on the current scenario.

Nath founded Blume along with Karthik Reddy in 2011. He oversees the broad B2B tech (or the “built-in-India tech for global markets”) space. He also manages the investment and ecosystem partnerships at Blume. The spectrum of investments Nath covers within the B2B space range from enterprise, software, cloud, SaaS to hardware, IoT, robotics, AI / ML, data science and deep-hard tech. He has overseen investments in some of Blume’s leading portfolio companies such as Locus, Little Black Book, Tricog, DataWeave and Yulu Bike, amongst other emerging stars.

Nath is a board member of the Draper Venture Network (DVN), an affiliation of global venture firms. He also represents Blume as a founding partner-member of Arka Venture Labs, a cross-border B2B seed fund along with Benhamou Global Ventures (BGV) and Emergent Ventures.

China & Israel Models of India 

The public market has been impacted because of the period of slightly over valuations, which is leading to a correction. According to Nath, Blume Ventures has actually been a net beneficiary of the correction because the capital is flowing to the early-stage (startups) and pulling away from public markets. 

In India, the startup ecosystem has broadly seen three round of evolution so far. The first wave of innovation was in services, with Wipro and Infosys creating world-class services companies. The next wave was product-led, with the rise of robotics, artificial intelligence and machine learning-powered platforms. Currently, the startups are leveraging technology such as enterprise SaaS, Big Tech and launching multiple sub-sectors. 

According to Nath, there are two India. The first follows the China model which is a consumer-centric market. The masses in metros and Tier-2 cities are regular consumers of digital-first businesses such as fintech, edtech, agritech, ecommerce and more. The other India can be called the Israel model which primarily focuses on product innovation which is majorly built in Gurgaon or Bangalore for the world.

Entry and exit strategy

The Indian market has been attracting more investors over the years because of the change in the nature of investment as well as increase in the ratio of potential returns during a given time period. Given the strong fundamentals in place for homegrown startups, the PE and VC investors continue to keep pace with the funding activity but the exit activity is expected to weaken further in the latter half of 2022. 

According to a report by Bain and Company, this year’s exit activity stood at just $5.9 billion so far, which is a 56 per cent decline over last year’s over a similar duration. In CY2021, exits grew four-fold to $36 billion. Citing the example of a recent exit, Nath says, “As far as the exit is concerned, I think the frequency and also size is of great concern. One does not want to exit too early or only for the sake of exit. Last year, we had a company acquired by Coinbase, but what VCs want is large exits and outcomes. The venture is all about evaluating scale and size, VCs cannot and should not force a founder to exit.  So I think founders should build for the long term, but at the right time, they should always take those exit options or at least entertain it.”

The government has been working as a catalyst for startups in India. According to Nath, what is further required from the government is a smoother tax regime. In addition, the government can offer grants for university-funded startups for technology-related research, and there should be more active participation from other government entities as backers of venture capital and startups to support the new-gen ventures. 

Founder-investor ties

Elaborating on the issue of mentorship and founder-investor relationship, Nath says the job of a CEO is a very lonely one, and a mentor is someone who gives bad news. He equates it with a sisterhood and about making cohorts instead of just juggling money. Investors are the supporting cast and not the main role actors. The funding gets celebrated the most whereas the customer success should be highlighted. An investor’s job is not to shape the culture but to ensure that they are going in the right direction.  

Nath states, “Core people issues are more difficult than financial issues. Emotional involvement with the founder is much more important than financial involvement. We are in a ‘people-flow business’ not in a ‘deal-flow business’. 

For a brighter tomorrow

Five years ago, investors were required to have at least four or five slides on why they should invest in India. Today, one doesn’t even have to have a slide. The young talent is the strongest amongst the best in the world. In India, the environment is very collaborative. The fundamentals for Indian startups are strong and falling in the right place, Nath firmly believes. 

Touching the mark of 104 unicorns is a net positive development for the country. We're actually seeing the later stage, including public market funds coming down earlier. There is comparatively more early-stage capital because there are lots of micro and homegrown venture capitalists. Nath believes that the growth investors and VCs are waiting for the markets to further correct and take time for due diligence but the early-stage remains very vibrant.