India start-ups: Land of the giants

With fintech and e-commerce giant Paytm raising $1 billion at a valuation of $16 billion this week, India has cemented a newly won reputation as a globally significant breeding ground for technology unicorns. But such is the speed of the market transformation that even a deal of this caliber can be seen as somewhat behind-trend.    

Put simply, while companies of Paytm’s generation may have helped de-risk the concept of large, late-stage tech rounds in India, they no longer fully reflect the opportunity set. The company, which counts Alibaba Group and SoftBank Group among its backers, achieved unicorn status in 2015, only five years after inception. For many local start-ups, that timeline is already being cut in half.

Furthermore, the horizontal consumer space that Paytm represents has given way to a much broader spectrum of unicorn creation. Most B2C and B2B niches can now identify a billion-dollar segment leader thanks to an explosion in late-stage funding during the past two years. From 2010 to 2017, only one or two Indian companies achieved $1 billion-plus valuations in any given year. That figure jumped to about ten for both 2018 and 2019.

There are now no less than 30 Indian unicorns by most counts, and they are expected to continue multiplying. Investors hesitate to predict how big the club will get in the near term, but numbers as high as 100 are bandied about. InnoVen Capital India CEO Ashish Sharma puts the current population at 35-37, of which 17 achieved the status in the past 20 months. His portfolio includes at least nine of them, with another three tipped to cross the threshold next year. 

“India has clearly established itself as the third biggest start-up ecosystem by number of unicorns and the amount of capital that comes in. I can definitely see in India that there are at least 40-50 companies with the potential to become unicorns in the next 2-3 years,” Sharma says. “There’s more capital, which means more people want to start businesses, which means businesses can grow faster, and it just becomes like a flywheel.”

Emerging ecosystem

India has been setting the stage for this phenomenon since around 2010, so there is little surprise at its manifestation during the past couple of years. The consensus view is that a boom in unicorns is merely one outcome of the overall digitization of the economy, a two-decade process that is now at the halfway mark.

Many of the main ingredients involve improved internet infrastructure. This includes government moves such as a digital ID scheme, a universal payments interface system, a demonetization initiative, and a new goods and services tax regime that has amplified small entrepreneurship. At the same time, tumbling hardware prices have seen feature phone users switch to smart phones as a national broadband rollout by Reliance Jio Infocomm has dramatically lowered the cost of data access.

These developments have played into favorable consumer demographics, increasing the number of mobile internet users more than fivefold in four years to around 600 million. Meanwhile, an increasingly paperless enterprise ecosystem has benefited from reduced operational friction. There were no B2B unicorns before 2018; now they represent about a third of the total. The most recent hotspot is trucking logistics, which produced two unicorns this year in Rivigo and Blackbuck.

In a parallel trend, the B2B cohort is increasingly moving overseas as it becomes more comfortable benchmarking against global standards, especially in enterprise IT. These are believed to be the most capital efficient of the unicorns, having received on average less than half the capital of their domestic consumer-facing counterparts. Mumbai-based investor Iron Pillar estimates that 25% of all unicorns in India are B2B players with an international footprint and that there is room for a dramatic increase in that proportion.

“The ecosystem that is trying to build companies in India for world markets at massive scale is already proven. What you’re see is the next stage of that,” says Anand Prasanna, a managing partner at Iron Pillar. “While earlier it was services or software outsourcing, today it is zero-to-one new products for the global market. That is a trend that we think – as a percentage of successful large companies from India – is going to increase. A quarter of the billion-dollar companies are built from India for the world, and I would not be surprised if in a decade, it will be 50%.”

The unicorn effect is influencing sector targeting in other ways too. In particular, investors are sharpening their focus on the relatively few remaining categories of reasonable scope that do not yet have a clear leader. These range from the largish fintech sub-segments such as lending, which appears capable of supporting multiple strong competitors, to winner-takes-all niches in mores specialized industries such as security.

Deep tech is seen as one of the bigger unicorn white spaces, with significant room for maneuvering in artificial intelligence, virtual reality, blockchain, and high-end robotics. Interestingly, two-wheeler ridesharing, a major unicorn-maker in other regions, remains up for grabs, with only modest successes like Vogo and Bounce currently vying for market share. The latter of these – along with Blackbuck – has received investment from InnoVen.

Health tech is also commonly cited as a leaderless sector, notwithstanding medical analytics provider CitiusTech claiming unicorn status this year following Baring Private Equity Asia’s acquisition of the company from General Atlantic for roughly $1 billion. Videogaming is considered similarly prospective, although the relatively young talent pool that makes the segment tick might prove insufficiently de-risked for some late-stage investors.

Global voices

A slightly older field of more experienced founders does seem to be one of the side-effects of the unicorn boom, however, with early breakouts such as Paytm and online shopping heavyweight Flipkart routinely shedding engineering and executive talent. Tech giants developing products in India such as Google and Microsoft are also feeding this pipeline as their Indian rainmakers increasingly strike out on their own with local start-ups targeting the same Western markets of their former employers.

This theme helps explain the rise of globally facing B2B unicorns, and it has not been lost on local investors such as Chiratae Ventures, which has invested three unicorns and claims that 25% of its overall portfolio has a global footprint. From this view, the advent of a large unicorn market in India means local investors need to start gearing themselves to be international and beefing up their team with cross-border expertise in the form of operating partners, marketing talent, and foreign IPO experts.  

“The VC firms themselves have to scale up to 3x what they were before. Now you’re selling companies and taking them public at $200-300 million in revenue because that’s where all these unicorns operate,” says Sudhir Sethi, founder and chairman of Chiratae. “The crux of the unicorn market is that it’s time for VCs to grow up. We need global strategic thinking. India is reinventing itself, companies are reinventing, and VCs have to reinvent themselves.”

For Chiratae, part of this process includes plans to open the firm’s first overseas office next year in Silicon Valley as a way of helping larger portfolio companies reach the US and tapping growing interest among US-based LPs. From an industry perspective, this activity points to a discrete and arguably unique advantage on the subcontinent.

Indian investors appear to have an uncommon level of comfort and natural familiarity with the US versus their peers in other Asian jurisdictions. They regularly namecheck intellectual property co-developers and other non-trivial connections in the country, and cite intimate networking resources in a well-rooted diaspora.

Even small Indian managers often have extensive connections in the US. For example, Blume Ventures, which is seeking $80 million for its third fund, makes 6-7 trips to the country per year, operates a cross-border accelerator with two US GPs, and holds membership in the Draper Venture Network, a global alliance formed by Tim Draper. Karthik Reddy, a co-founder and managing partner at the firm, stresses, however, that this is not the only foreign driver of unicorn momentum.

“We’re seeing for the first time a lot more Chinese investors playing directly and in a big way. GGV [Capital] has spent the whole of this year with smaller teams focusing entirely on India, which we’ve never seen before. Nobody in India had ever met GGV before,” Reddy says, adding that the Chinese firm has been in talks with some Blume portfolio companies. “The capital coordination at the earlier stages is enhanced by the number and quality of players coming in from overseas.”

Bubble territory?

Even as this wave of foreign money continues to bulk up the top end of the Indian start-up space, there are few warnings about the possible formation of a bubble. This is despite massive devaluations in recent years for taxi-hailing app Ola, Flipkart and its e-commerce rival Snapdeal, all three of which achieved unicorn status around 2014-15 on the back of major contributions from foreign blue chips.

Instead, the sentiment has persisted that the new crop of leaders has been, for the most part, reasonably well evaluated and that any latency in profitability is an acceptable inconvenience at a time when seizing market share is the priority. It is perhaps worth noting that Iron Pillar and InnoVen invested Snapdeal, which underwent a restructuring; Chiratae backed Flipkart and exited when Walmart bought a majority stake; and Blume retains a position in Ola.

Part of the ongoing confidence has to do with local strengths around capital efficiency, especially in the increasingly important software-as-a-service (SaaS) space, where India has proven capable of producing big names on small budgets. “I don’t think there is any other market in the world where you can build a global B2B SaaS company valued over $1 billion with less than $100 million,” says Iron Pillar’s Prasanna.

US-based Bessemer Venture Partners, which has invested five Indian unicorns including Snapdeal and Ola, sees the enduring willingness to take bets in this space as a symptom of growing competition and an understanding that being the number-three player in many categories is not enough. In this way, the country’s emergence as a unicorn market signals a kind of new zero-sum game, where the proliferation of big-ticket, globally visible deals will make speed and decisiveness all the more critical.

“In some ecosystems, it’s winner-takes-most and if you decide that you’re going to take the path of slow sustained growth, then potentially, you’re not even a player in that ecosystem,” says Vishal Gupta, a managing director at Bessemer based in Bangalore. “You may end up burning more capital than you anticipated and making a few more mistakes, but that’s more acceptable than going down a path of not growing fast, which basically means you could die. It’s almost binary in that sense.”

The new speed record may have been set by Udaan last month when the GGV-backed B2B marketplace reached the $1 billion threshold upon a $585 million Series D round only two years after inception. But more importantly, Udaan demonstrates that the unicorn market may have reached self-perpetuating critical mass in the fact that it was founded by former Flipkart executives. Indeed, the company tightly encapsulates the entire phenomenon by shifting toward accelerated, non-linear scaling in an enterprise-facing business model leveraging second-generation entrepreneurial talent and foreign capital.

Most of the unicorn creation to come will continue to be in the consumer internet space rather than B2B, however. This raises concerns about whether or not a corresponding wave of exit activity will validate the boom. The uncertainty is made more precarious by the notion that internet consumer plays will be far more likely to require IPO realizations rather than trade sales.

While Walmart’s acquisition of Flipkart last year in a $16 billion transaction has been widely regarded as a watershed moment for India’s consumer unicorns, there is little confidence that deals of this kind will be reliable exit channels going forward. This is largely rooted in the one of the key evolutions of the trend: the horizontal Flipkart-style giants have yielded to more tightly siloed affairs. As a result, public opinion may be the ultimate deciding factor. 

“The success of all this is in when these companies go public. That’s very critical,” Bessemer’s Gupta adds. “Even if five or 10 of this cohort of 30 unicorns go public over the next five years, people will have seen companies scale and will start new companies, and then it becomes a very interesting virtuous cycle. Once that kicks in, it’s very hard to stop, and success begets success.”

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• Topics
• South Asia
• GPs
• Consumer
• Technology
• Support services
• Expansion
• India
• Innoven Capital
• Chiratae Ventures
• Blume Ventures
• Iron Pillar
• Bessemer Venture Partners