The startup UNICORN conundrum in India

Introduction

In the last few years, the startup industry in India has seen a significant amount of growth. Though it's still not as developed as other countries, with more venture capital firms and investors coming into the market every day, there is no doubt that it will only get better here.

Understanding what a unicorn is in a startup environment

In normal startup parlance, a unicorn is a company whose valuation has crossed $1 billion. These are the big boys with huge valuations and lots of money. These companies are usually in the technology space, have raised significant amounts of capital, and have made their founders billionaires.

The most famous example is Facebook which was valued at $104 billion when it went public on the NASDAQ exchange in 2012. It was also one of the first few unicorns from India to be listed on an international stock exchange.

But what makes these companies so unique? Well, for starters, they have been able to build trust among investors by consistently delivering returns on investment through multiple rounds of funding over a period which allows them to reach high valuations even before going public or being acquired by other companies for billions like Flipkart did with Walmart last year for $19 billion (approx Rs 13 lakh crore).

The last two years have brought in so many unicorns

India has seen the most number of unicorns in the last two years. With over 100 unicorn startups from India, it’s apparent that we are also home to some of the best startup ecosystems in the world.

Today's situation is vastly different from five years ago, when there were only 12 Indian unicorns. If you think about it, this shows how much progress has been made in these five years and how investor confidence has been building up over time.

We have reached a point where investors are now ready to bet big on relatively young companies with huge potential because they believe that there is an opportunity for them to become massive over time or even before they reach their prime age (usually between 25-30 years old).

Need to change the approach of startups

For a startup to become a Unicorn, the following are required:

●???Revenue and profitability: Revenue is the topmost parameter for success. You must have a minimum of $10 million in revenue annually for at least three years to be considered for unicorn status. Only about 7% of startups in India make it to this stage.

●???Customer acquisition and retention: You need at least 10,000 customers to pay you annually to generate enough profits after covering all your costs, including salaries, office space, etc. A startup with less than 1,000 customers cannot qualify as a Unicorn even if it has a 100% growth rate in sales every year because it will never reach the critical mass needed for generating $10 million in revenues per annum!

●???Product development: The product has been built by some brilliant minds but now what? How do we take it from being another app or website among hundreds of others in its category? What is our value proposition? How will we attract customers? These questions matter more than any other factor when it comes down to making or breaking your business idea into something tangible that people use instead of just talking about it over coffee at Starbucks every day (which happens quite often these days).

More focus has to be on revenue and profitability.

You're probably thinking, "But I'm a startup. We don't need to focus on revenue or profitability."

Well, I suppose you might be wrong. You do need to focus on those things—mainly revenue. And here's why:

●???Revenue is any company's lifeblood; it provides the funds that allow you to keep your lights on and pay employees their salaries (or at least part of them).

●???A profitable business produces enough income from operations to meet all expenses without going into debt or selling off assets (assets being anything from a property like buildings or equipment). This is also called cash flow positive.

●???Growth refers to expansion in terms of both scale and scope—for example, increasing sales by 10 per cent over last year’s figures would be growth in scale, while adding new products or services would show growth in scope.

Funding winter has brought more emphasis on basics.

Whether a startup founder or an investor, the funding environment is changing rapidly. From a founder's perspective, focusing on profitability rather than growth has become imperative. The need to focus on revenue has never been more critical than now, as the funding winter is here and startups are struggling to raise funds. Established entrepreneurs know this well; however, it will be interesting how new founders react to this change in environment.

As an investor, I believe this shift in focus will lead to better quality companies building products that solve real problems for their users – something that we haven’t seen much of recently (especially with consumer internet unicorns). This will force investors (including me) to rethink our investment strategy and approach when evaluating deals.

Conclusion

Startups have been a significant driver of growth for the last few years. With the number of unicorns increasing daily, we should celebrate this fact. However, it is crucial to understand why so many startups are becoming unicorns and what can be done to increase this number. There needs to be a shift in thinking towards revenue and profitability rather than growth at any cost. This has led us into an exciting situation where too many companies struggle financially while being valued as if they were profitable.