Unicorn valuations balloon as big Fomo grips investors

As the tech sector’s bull run continues unabated, over 20% of unicorns minted this year have already gone past their previous valuations of $1 billion or more that ushered them into the club.

Digit Insurance, Infra.Market, PharmEasy and ShareChat, are among the new unicorns that have raised additional capital or in the process of doing so at increased valuations, within a few months of their previous funding rounds.

Business-to-Business (B2B) commerce startup OfBusiness, which
became a unicorn last month after a funding round led by Japan’s SoftBank, is closing a new round from New York-based investment firm Tiger Global.

This is markedly different from the previous generation of unicorns, which took much longer to grow their valuations.

For example, B2B ecommerce platform Udaan, which
became a unicorn in September 2018, took more than a year to net its next round of funding,
following which it was valued at $2.8 billion. It then
raised additional capital as an extension of the same round in January at a post-money valuation of $3 billion.

In January and February, general insurance startup
Digit and
Infra.Market — a B2B commerce startup for construction material — were valued at $1.9 billion and $1 billion, respectively.

Last month, Digit said it had
raised $200 million more at a post-money valuation of $3.5 billion, while
Infra.Market is now valued at $2.5 billion after Tiger Global wrote a $125 million cheque to the Mumbai-based startup.

This is happening at a time when Indian startups, in the first six months of 2021,
raised $12.1 billion from venture capitalists and private equity firms, surpassing the last calendar year’s overall funding by $1 billion, ET reported last month, based on Venture Intelligence data.

What’s driving this?

It is the fear of missing out (FOMO) that has created this unprecedented surge in liquidity, as risk investors are entering even at a 2X valuation since the possibility of an IPO-led exit at higher valuations has become a reality, especially after
food delivery app Zomato’s listing in July.

Over half-a-dozen tech startups have
filed for an initial public offering (IPO) in India and others are thinking along similar lines.

An influential tech investor, who has led some of these startups to unicorn status, told ET that most founders were sitting on significant amounts of cash and that is playing a role at the negotiating table, essentially matching valuation expectations of entrepreneurs that would otherwise have been seen 12-18 months down the road.

Founders have realised that in the current bull run, investors are chasing only a select number of assets that are among the top three or four in their respective segments.

“There is a premium and investors such as Tiger Global and SoftBank are willing to pay that to get in the door,” Souvik Sengupta, cofounder of Infra.Market, told ET.

“We have a great set of investors and even if Tiger didn’t lead in the $2.5 billion valuation round, others were also looking at us. They have to pre-empt the round. If they wait it might be late and it can become pricier (to enter),” Sengupta said.

The investor said founders do not require funding immediately and since their businesses are going through dynamic changes, they are ready to wait.

“The only way to convince them is to give them a valuation 12-15 months ahead of time. Most of these founders have $100-$300 million in the bank and without the hike in valuation they say, ‘let’s chat again in 12-18 months’,” he said.

Aggressive investors are chasing the top three players in a sector. “In some cases, no one is considering the number four player,” he added.

Gaurav Munjal, cofounder of ed-tech startup Unacademy, which
recently raised $440 million from Temasek, Mirae Asset and others, said Indian startups have ‘arrived’ and investors are betting at this entry price because they believe valuations will continue to increase.

“After the IPO, the thinking is that there will be many more exits. There could be $20-billion companies in the next 10 years and a price of $1-$2 billion is still relatively cheap. People want to enter at these valuations now,” Munjal said.

Unacademy was valued at $2 billion less than a year ago but has seen a 70% bump-up in the current round to $3.4 billion.

Covid-led growth

Marquee investors may be chasing such ‘hot’ assets, but it is also a fact that these startups are growing rapidly because of Covid-19, which continues to accelerate growth metrics across sectors such as education, payments, B2B commerce, insurance, logistics, and e-pharmacy.

“Covid-19 has helped these businesses to grow faster. We are paying ahead of time but we know in most cases it will be fine six months later,” the investor mentioned above said.

Ravi Srivastava, partner and head of research at Mumbai-based investment fund Bay Capital, echoed this sentiment. He said there is a realisation that technology will continue to play a huge role in people’s lives and will soon become a larger part — somewhere around 10-20% — of the economy.

“Covid-19 has accelerated consumer adoption rates. Digital businesses have gained significant market share and they continue to grow at a rapid pace while reducing their customer acquisition costs, leading to improved profitability,” Srivastava added.

Bay Capital recently invested in startups such as
omni-channel eyewear retailer Lenskart and
VerSe Innovation, the parent company of news aggregation platform Dailyhunt and short-video platform Josh.

The fund has also backed IPO-bound startups
Policybazaar and
Ixigo.

The Covid-led acceleration has also expanded the total addressable market for many of these startups, which will help sustain high growth rates and better cost structures.

OfBusiness cofounder Asish Mohapatra said this was a phenomenon seen among companies that have grown quickly over the past four to six months.

“Most of the unicorns I know are actually growing at 20-25% month-on-month, which means if you’re growing 40% month-on-month, you have doubled in four months,” Mohapatra said.

“I think there are a lot of tailwinds in many companies that have just hit unicorn scale,” he added.

He, however, declined to comment on the company’s new financing talks with Tiger Global. OfBusiness is
valued at $1.5 billion presently, compared to $800 million in April. Sources told ET that the company is in talks with Tiger to close its latest fundraise of around $100 million, which will value it around $2.6 billion.

Founders in control, IPO on mind

Exits through IPOs have been talked about for a while in India but they haven’t really been seen as a serious option until Zomato’s recent listing.

Besides providing an exit to investors, founders are also managing to retain bigger stakes in their ventures even as they raise back-to-back funding. Going public may help some of them unlock significant wealth at the time. For example, Sengupta and his cofounder Aaditya Sharda own around 32% in the company. Even if it goes for an IPO over the next couple of years, both of them are expected to retain a 25% stake. Sengupta is
among the founders who wrote to PM Narendra Modi recently, seeking clearance for direct listing of Indian startups abroad.

Mayank Kumar, cofounder and MD, at upGrad, which
became a unicorn last week, said with startups filing their draft prospectus and Zomato getting listed, he noticed a significant shift in how people look at India. “Given the amount of capital that is available and the booming IPO ecosystem, there is greater confidence that the ecosystem will deliver,” Kumar said. UpGrad doubled its valuation to $1.2 billion in two months. In this company too, the founder group owns around 70%.

Last week ET reported, edtech startup Eruditus cofounder Ashwin Damera
will hold more than 40% after closing a $650 million funding round at a valuation of $3.2 billion. Eruditus was initially looking to raise $500-550 million but had to increase the round size owing to strong investor interest, Damera told ET.

But this does not necessarily change the dynamics of how a startup is run. “Founders are the boss whether they own 5% or 15%. Even in older startups, founders are running the operations,” the investor mentioned above added.

Abhishek Goyal, cofounder of IPO-bound startup data platform Tracxn, said while Zomato’s IPO has been a big validation for Indian startups looking to go public locally, another major factor in attracting capital to India is the growing number of fundamentally sound startups here. “If the next set of startups see successful IPOs like that of Zomato, the floodgates will open further,” he said.

He said that 10 years ago, US venture capital funds were investing around $70-80 billion in technology, of which India got only around $600-700 million. “India is set to touch about $18-20 billion while the US has also grown exponentially to $160-170 billion. This makes India about 15% of the US and the way companies are growing in the next decade we will likely touch 40%,” Goyal added.

Last week, Accel Partners-backed Tracxn
filed for an IPO through the offer for sale (OFS) route.