There are over 100 unicorn-startups in India that are valued at $1 billion or more. 42 unicorns appeared last year as against 37 in the last 10 years. And in the first two months of this year, a new unicorn was added every five days, according to a March 2022 report by HDFC Securities. The brokerage firm predicted that India could see over 100 new unicorns emerge this year.
Things have changed a lot since then. After Russia’s invasion of Ukraine and global inflationary pressures, money is no longer so cheap. But before Vladimir Putin sent his army across the border, if any were to be seen, cracks were clearly visible in the forelimbs of the proud Indian unicorn. February 2022 was just as good for the Indian unicorns and may not be the same again for a while.
Sooner or later, common sense has to kick in. The vast majority of these unicorns have no clear revenue model, let alone any avenues for profitability. Consider ‘fintech’ companies, some of which are valued at around $10 billion or more. Most of them are essentially brokers who do not even charge a brokerage fee from the clients. Some of them even pay customers to sign up with them. What kind of business sense does that make?
Several factors are at work here. One, promoters and their financiers are hoping that these companies will be able to achieve some sort of monopoly position in five or eight years’ time—the status Facebook enjoys in social media—and once that is reached, They will be able to charge customers for premium services and earn money. But perhaps only one in 50 startups can achieve this. Meanwhile, all 50 are burning cash like there’s no tomorrow with wild advertising budgets and consumer hype.
Take a look at the stock price charts of two, PayTM, Zomato and Policybazaar. It’s utterly baffling why people—and more importantly, supposedly savvy mutual funds—subscribe to these stock issues. The balance sheets of these companies can hardly even be called red. They are the deepest shade of maroon. And none of them gave any proper explanation in their share issue documents as to how they could ever be profitable.
Third, the world needs to bluff this valuation at some point. Claiming about millions of users is meaningless if no one is paying or the company is selling products and services at huge discounts. And focusing on the top line without the slightest interest in the bottom line can only lead to a bad ending. There have also been numerous reports about employees of these unicorns – particularly in the education tech and hospitality industries – misleading and defrauding customers to meet their astronomical sales goals.
Fourth, what are some of these companies actually selling? How many of us need to deliver groceries in 10 minutes, and why? How any firm can make money from the customer 10 That someone should pick up a cake from a bakery five kilometers away and bring it to it in half an hour? Not that the customer is complaining—after all, who wouldn’t want to take care of monotonous odd jobs for an insignificant fee. But many of these services have no commercial meaning.
In addition to enriching smart promoters, who in each new round of funding – C, D or X – pull out a bit of their holdings based on valuations powered by extremely ambitious Excel spreadsheets. And, as some of the recent cases indicate, some of them may even embezzle corporate funds. Perhaps this is to be expected. Eventually, most promoters may realize that although the ride is very tough, it may not last very long and they need to take care of their long-term financial health. Plus, as long as you keep up with the promotion, you can avoid a ridiculously large spending account.
As the classic song from the 1942 film Casablanca says, “Fundamental things apply as time goes by.” I was born in the US in March 2000 when the dotcom bubble burst, attending a conference organized by an American software company. Many of its clients—companies that were trading at terrible valuations on the Nasdaq—became belly-up almost overnight. Offices in Silicon Valley were evacuated and thousands discovered that all the stock options in the media-promoted companies they worked for were worth nothing. One hopes India sees nothing like that bloodshed.
It is important to recognize the evaluation game for what it is basically. Unless a company produces real value, it is simply passing parcels on a large scale. Most investors are betting on being able to sell part of their stake to another group at a profit. The main objective, it appears, is to get out with the maximum return on investment before being deceived. Because in most cases, someone or the other is going to bluff at times. The ultimate objective is to list the company on a stock exchange, and if the company has no profit to make and no intrinsic value, it is the retail investor who loses money.
One of the lessons of the Ukraine war is that it is the real stuff that matters. The West announced unprecedented sanctions on Russia, yet was forced to import Russian oil, gas and minerals at prices over which it has little control. In fact, if Putin decides to ration its oil and gas supplies, Europe faces the prospect of a very bleak winter. Here’s one to keep in mind before getting too excited about India’s unicorns.
Sandipan Deb is the former editor of ‘Financial Express’ and founder-editor of ‘Open’ and ‘Swarajya’ magazines.