The year 2021 started with Bengaluru-headquartered non-life company Digit Insurance (1) entering the unicorn club of India. The company was valued at $1.9 billion after its latest fund raise of ₹135 crore. In the 4th week of May 2021, Zeta the banking technology (2) startup, has raised $250 million from SoftBank Vision Fund II at a valuation of $1.45 billion to become the 14th unicorn in India this year.
In the 2nd week of April, the rise of 6 new unicorns in 4 days (3) has marked a new historical boom for Indian Tech Industry. As ‘The Print’ has rightly stated, ‘It is raining unicorns for India’.
What are Unicorns?
In these times of innovation, in the tech world, a $1B valuation elevates a private company to the status of “unicorn”.
Thus in finance, unicorn is a privately-owned start-up with a valuation of over $1 billion. The term (4) was introduced by venture capital investor, Aileen Lee, in 2013 to describe rare tech start-ups that were valued at more than $1 billion. At that time there were 39 unicorns in the United States (5). It has been observed that start-ups now are growing twice faster than those a decade before (6).
Valuation of Unicorns
As all unicorns are start-ups, they don’t have any past data to rely upon. Their valuation is not strongly related to their actual financial performance or other fundamental data like net worth or earnings. They are primarily based on their growth potential. The valuation process of unicorns relies on valuation mechanisms of venture capitalists and investors.
Valuing unicorns involves critically analyzing various factors, business models used and the development of long-term forecasts. Some of these start-ups, being the first of a kind of business in the industry, make the valuation process more complicated.
What does the rise of Unicorns mean?
Despite abnormally high valuations, many of these start-ups have yet to generate any profits. In simple words, they are great ideas with a promise of potential and prosperity that are attracting investments from around the globe. In 2019 there were 10 unicorns (7), in 2020 there are 14 and by May this year, there are already 14.
The rise in unicorn numbers talks about the presence of ecosystem for startups and the rising interest of international investors in India. This implies a positive financial climate and an investor mindset that inspires innovation and welcomes risk-taking.
Though the current scenario indicates a boom for tech industry, caution has to be exercised because investors overpaying for equity in unicorns, inflating their market caps, can result in a financial bubble that can eventually burst.
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1. Do you consider venturing into entrepreneurship is unappealing than settling with a job in a multinational? Why?
2. What are funding options that will open up post attaining the unicorn status?
3. In spite of being the home to many startups, there are only few startups that entered the unicorn status? What could be the challenges that startups are encountering in India?
1. Shetty, Mayur. Digit Insurance first unicorn of this year. Times of India. 15 Jan. 2021.
2. Bureau, ET. Zeta becomes 14th Indian unicorn this year after SoftBank funding. Economic Times. 24 May 2021.
3. Roy, Saritha. six-new-unicorns-in-four-days-marks-historic-boom-for-india-tech. BllomBerg. 11 April 2021.
4. Institute, Corporate Finance. What is a unicorn?
5. Narayanan, Vishnupriya Sengupta and Suvarchala. INDIA’S NEW UNICORNS. https://www.strategy-business.com/. 21 Oct. 2019.
6. Finance, Entrepreneurial. How unicorns Grow. Harward Business Review. January-February 2016.
7. Singh, Rajiv. India’s unicorn party is just getting started. Forbes India. 2015, April.