Online grocery store BigBasket, online ticketing site BookMyShow , health and fitness startup CureFit, ecommerce focused delivery provider Delhivery, eyewear retailer Lenskart, digital payments company MobiKwik, surface transport firm Rivigo, and online discount brokerage firm Zerodha, are investors’ top picks for joining the coveted unicorn (or $1 billion valuation) club this year.
The investors’ picks were a part of a survey conducted by BDO India, a management consulting firm, for their latest report titled – “The Next Wave - Unicorns of Today, Giants of Tomorrow,” highlighting the growth of unicorns and soonicorns in India, released on Thursday. The BDO India survey received insights from over 70 members of the PE and VC community.
According to the report, while Internet software and services, and e-commerce and marketplace featured among the top five sectors where unicorns in India will emerge on expected lines, three other major sectors that need to be watched are: fintech, healthcare and artificial intelligence/robotics/business intelligence.
“We are seeing interesting deals especially in the fintech and healthcare domain. Big data and analytics and supply chain/logistics are also catching the investor’s eye,” says Samir Sheth, partner and head deal advisory services and private equity leader, BDO India.
2018 was an eventful year for the India startups ecosystem. India added eight unicorns in 2018 alone, compared with nine unicorns in a span of 6 years from 2011 to 2017. The 2018 list includes insurance aggregator PolicyBazaar, popular e-commerce site Paytm Mall, hotel aggregator OYO, food technology companies Swiggy and Zomato, and educational technology firm Byju’s.
India is now home to 26 unicorns. The jump in the number of unicorns directly impacts the overall deal flow in a positive way. In 2018, investments in startups increased by over 100% to $4.2 billion in 2018, from $2 billion in 2017, according to Nasscom. Funding in late stages (such as Series C, D, E, F) also grew 250%— from $847 million in 2017 to $3 billion in 2018. While seed-stage funding stood at $151 million, the number of late-stage investments rose sharply, indicating renewed investor confidence in the Indian startup ecosystem.
India is now the third largest country with respect to incremental additions to the unicorn club, following U.S. and China. India’s promising base of unicorns/ soonicorns will surprise the world in 2019,” says Sheth.
Like China, India’s big advantage is its population and a vibrant domestic market. “With a 1bn + population base, increasing number of aspirational & tech- embracing entrepreneurs, pervasive technological innovation, consumption story (a growing prosperous middle class), strong agricultural & industrial roots, high savings rate, exponentially growing digital infrastructure, favourable regulatory environment and declining cost of doing business only suggest India’s growth story can only surprise,” says the report.
Business models of established unicorns stand on strong economic moats of disruptive innovation, first mover advantage, tech paradigm shift and consumer focus. For Soonicorns, first mover advantage scores high, according to the BDO India report.
“Five factors have been ranked high in valuing productivity of unicorns/soonicorns with customer acquisition cost being the single largest factor. Unicorns/soonicorns should enjoy 10-30% EBITDA (earnings before interest, tax, depreciation and amortization) advantage to remain competitive and a preferred choice.”
While 70% of respondents of the survey feel that they have been over-paying for equity in these ventures, valuing these ventures has its own sets of challenges. While the preferred methodologies in valuing unicorns are ‘market cap/revenue or market cap/GMV (or gross merchandise volume) and EV/EBITDA (or enterprise value/ earnings before interest, tax, depreciation and amortization), Sheth says the survey with investors indicated that “elongation of profitability metrics and premium to be assigned to a differentiated business model,” are key challenges faced in valuing unicorns.
In the meantime, the preferred mode of exit route from unicorns is strategic buyouts and mergers & acquisitions.