Is the new economy creating new jobs?

India has added more than 10 unicorns (privately held startup companies valued at more than a billion dollars) so far this year, at a rate of about one every five days. This comes after the new unicorn’s record year (44 in 2021),who pushed India upwards third place Globally, the Hurun Global Unicorn Index in 2021, followed by the US and China. But what exactly do unicorn valuations mean for the larger economy, and how do these technology-driven startups affect the employment landscape in the country? Thillai RajniProfessor, Department of Management Studies, IIT-M, and Co-Founder, YNOS Venture Engine, and PK JayadevanAuthor and former startup founder, Discuss this question in a conversation moderated by PJ George, edited excerpt,

India has added 10 unicorns this year in just 50 days, which is the highest ever rate for the country. What do you think are the root causes of this higher rate now, and is it sustainable over time?

Thillai Rajan: I was looking at the unicorns that have come out of India so far, and the number appears to be 91. The first unicorns emerged in 2011. From 2014 onwards, the numbers started rising. In 2020, we had 10; And in 2021, there were 44. I’ll give another example here: In 1953, two people climbed Mount Everest. Today we have 500 to 600 every year. Becoming a unicorn is, in some respects, like climbing to the summit.

The first unicorn in India was InMobi. It took the company about five years to achieve unicorn status in 2011. The second unicorn was Flipkart. It also took about four to five years for that company to achieve unicorn status. The latest unicorn Hasura also took about five years. Therefore, the process of becoming a unicorn has not been easy. but this [unicorn status] It has become a huge motivator for entrepreneurs, and it’s a summit they would all like to grow. More and more entrepreneurs are aiming for unicorn status and from the demand side, this is one of the fundamental reasons for the high numbers.

Now, look at it from the supply side. Unicorns are essentially venture capitalist-funded companies, reaching valuations of $1 billion. If you look at the growth in venture capitalist funding, between 2011 and 2020, the compound annual growth rate was 76%. Over 10,000 companies were funded in those 10 years, and people expect that number to grow because of the potential in the economy. Growth may subside over time, but it’s going to be there. A part of these companies is going to become a unicorn. So, when the base is increasing, the number of unicorns is also going to increase.

Now let’s look at the environment. January 16 is designated as National Startup Day. If there is a national priority in identifying, sustaining, supporting and accrediting startups, this will increase the numbers; More unicorns to come.

However, the growth rate in the number of unicorns between 2020 and 2021 was over 300% and is unlikely to be sustained. In financial markets, everything is in terms of cycles. We had the highest number of IPOs in 2007, ie 108. In 2010, there were 66 and in 2021 there were 63. Between these years, there were some very deep valleys. The same is going to happen with unicorns.

If you look at the number of industry classes in India, there are about 302 as per company registration. These industry classes represent very strong areas of economic activity. If we assume on average that three unicorns are likely to emerge in each of these industry segments, we are talking about 1,000 unicorns. This growth has a strong potential to continue. It may not be the strong growth we see today, but as long as the country’s economy continues to grow and venture capitalist funding continues to grow, it will grow.

PK Jayadevan: When Professor Rajan was talking about Mount Everest, it reminded me of an example we used to talk about Freshworks, a Chennai-based company that went for an IPO last year. We kept talking about how many years ago Roger Bannister ran the first four-minute mile, and then we saw many more people do it. Now, you have more experienced coaches, and the ecosystem is more supportive. That’s what’s happening in the startup space right now. Companies that solve real problems with real customers should be real winners. For unicorn valuations, they are the result of bets that venture capitalists accumulate, and they understand the risks involved. Valuations can go up and down because they have a lot to do with macroeconomic factors, the cost of capital, demand and supply. But basically, good companies are being built out of India, and so you’ll see valuations going up, and when it’s north of a billion, we have a unicorn.

I would like to add a few things to what Professor Rajan said. First, India is an open market with a fairly stable democracy, and keeping startups as a national priority is a big hurdle. There are some discrepancies that need to be addressed, but the fact remains that it is one of the largest markets in the world. Second, we have good data penetration. The cost of accessing the Internet is very low these days, and the consumer base has grown enormous. Hopefully, someday, all these consumers will join the domestic market, which is big enough to deliver unprecedented returns for these startups. This means startups will essentially tap that consumer base using digital technologies. Third, we’ve seen some really good IPOs over the years. Zomato and Freshworks are great examples of this. Behind all these companies are great talents manufacturing high quality technology products which are being adopted by enterprises and consumers. Hence, a huge amount of venture capital will come into India. In 2006, there were probably three or four funds that, after six months or eight months of diligence, would hesitantly refund some companies. Nowadays, you see that checks are being deducted on WhatsApp messages.

I am no economist, but I believe that quantitative easing has been done in the US and interest rates have been kept low. Liquidity in the market led to asset price inflation and a rally in stocks. Even cryptocurrency, a risky asset, soared. As the cost of capital became cheaper, there was more venture capital. ‘What do we do with these funds? Hey, here is the great Indian open market with the support of startups and great talent. Let’s deploy it here. In India, I suspect there’s a bit of a race [among venture capitalists] To provide funding for good companies, and perhaps that’s why valuations are being raised.

How do you think startups will have an impact on the employment scenario of the country? How do you think startups will change the nature of employment?

PK Jayadevan: It is evidently true that startups have created jobs. It started anew with a few dozen employees and by the time it went public, there were 3,000. About 500 people became ‘millionaires’ from that IPO. I personally know dozens of people who have gone out and started their own companies with team sizes of five to 10. Many of them have substantial capital and understand the market. So, hopefully they will create high quality jobs and it becomes a virtuous cycle. These are niche, high-paying jobs and in the larger scheme of things, the numbers couldn’t be higher. But these are high-quality jobs that have a flywheel effect, meaning employees will start their own companies or invest in new startups and riskier ideas, and bet more on innovation.

The question of mid-level, white collar jobs has been around for a long time. Automation will move some of these jobs elsewhere, but I wouldn’t say it’s killing those jobs. In a country like India, which has access to the Internet and a global market, it is a net positive because we can participate in this labor market as it becomes more and more remote.

TR: What is the mandate for startups? It is essentially innovation and development. Through innovation and development, they have been able to make an impact. To achieve this growth and innovation potential, startups take the help of technology or people. There are some startups that will really take help of a lot of people, such as food delivery aggregators. There are few startups where growth will result in substantial job creation. There will also be some startups that are largely technology-driven, where job opportunities may not be much, but if startups are going to result in growth, it can have a roundabout effect, according to Jayadevan, Can create a lot of jobs directly or indirectly.

But the mandate for startups is not really in terms of creating jobs, unlike a government or public sector enterprise, where job creation is an important metric. For startups, it’s a metric that’s useful but probably not the goal.

Having said that, we also have to see where the need lies. Employment generation is an important requirement for economic development. Jobs are like a pyramid, always wide at the bottom. We need to create more jobs at the bottom so that the pyramid remains stable. If startups are creating more jobs at the base of the pyramid, then they are meeting the need of the hour.

Do you think the Indian startup sector is overvalued?

Thillai Rajan: In the financial markets, asset prices are very dynamic and prices can play a very important role in valuation. When the sentiment is good, the valuation is high. A major consideration is that asset prices are rising today, not only for startups but in the overall stock market. I think I would subscribe to the dominant view that asset prices today do not reflect true values, but again that is the nature of the financial markets.

I think angel investors and high net worth investors looking to invest in startups are very aware of the risks and cycles of the stock markets and these valuations and will be able to tolerate it. They will understand the risks of these valuations because many of them are knowledgeable investors.

PK Jayadevan: I think there is froth in the market. But venture capital is risk capital, and those who allocate a portion of their money to venture capital understand the risks well. I think we also underestimate the talent of the markets. They know exactly which companies are just fiction and which companies are actually making profits and having good cash flow. Companies whose fundamentals are not good will be removed. There are no two ways about it. If there’s no way to profitability, if no cash flow is being generated, you’re looking at companies that haven’t fundamentally discovered a business model or a problem that they’ve actually existed for many years. Want to solve even after living.