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Should ‘Unicorn’ be a Measure of Success?

Updated: Feb 20

There’s no doubt that when a Startup achieves the coveted Unicorn tag, it’s a moment of pride for its founders, employees, and investors, and now even the general public who have been celebrating the rise of Indian Unicorns like never before. But we ask,

 
Is the Unicorn tag a mark of success?

First, let's look at some examples of Unicorns that failed to concentrate on the bigger picture and ultimately lost their prowess:

  • The logistics Startup Rivigo, that turned Unicorn in Dec’19, ultimately sold off its B2B business arm (comprising of almost 50% of its sales) at $30 Million in Nov’22, as it failed to create a mark with its unique relay-trucking-model

  • Ecommerce Startup ShopClues, that turned Unicorn in 2016, was ultimately sold off at less than $100 Million in 2019, having failed due to heavy competition

  • As per Hurun Research (2021), Paytm’s ecommerce arm – Paytm Mall, which was last valued at $2.9 Billion, is no longer a Unicorn

  • Hike, the chatting platform, which was last valued at $1.4 Billion in 2019, is no longer considered as a Unicorn, as it failed to innovate and stay relevant.

  • Quikr, the used goods marketplace, was stripped off its valuation status when instances of fraudulent financial reporting surfaced. A classic example of how a startup lost its way as it thought that cooking up its books to seek higher valuations is what it is all about.

So now we know that even Unicorns are vulnerable, and as the competition intensifies with multiple Unicorns in almost all sectors, the risk of failure is more than ever. So we ask,

 
What is it that entrepreneurs should rather pursue or aspire to achieve?

1. Positive Unit Economics over mindless Blitz scaling

To understand this point, here’s a perfect lesson from a Startup that lost its Unicorn status, but eventually picked itself back up – Snapdeal. Backed by marquee investors like SoftBank, Sequoia, Tamasek, Ant, eBay, etc., this ecommerce startup was valued at $6.5 Billion at the peak of its fortunes. However, after a failed merger with Flipkart in 2017, its funds dried up and existing investors refused to infuse fresh funds. Valuations dipped significantly as the company laid off 100s of employees in a desperate attempt to stay afloat. In the next few months, the company underwent significant makeover and finally, a strong and consistent focus on positive unit economics helped it to sustain. The company is currently valued at about $1 Billion and is aiming for a $2 Billion + valuation in its upcoming IPO.

Speaking in a session with Inc42, co-founders Kunal Bahl and Rohit Bansal spoke about the importance of unit economics –

Positive unit economics means the consumer is allowing you as a company to make money while serving them. Negative unit economics means you are having to pay the consumer to use your service. Snapdeal’s view for the last few years is that we made a lot of errors to get to this realization.

2. Create value for investors a.k.a Profits

Kunal Shah, the serial entrepreneur who is currently driving growth at CRED, took it to Twitter to emphasize the importance of profits which is the ‘true’ measure of value:


3. Create value for other Stakeholders

What we often forget is that the term ‘stakeholders’ has a much wider scope, as it gives equal importance to customers, employees, and suppliers, as much as it does to shareholders. An entrepreneur sets forth on the journey of entrepreneurship with the aim of finding realistic solutions to problems that we face in our day-to-day life and business. One cannot be in this only to bag higher valuations.

In an interview with Inc42, BookMyShow founder Ashish Hemrajani put it perfectly,

Unicorn club is a total fallacy…you must have a purpose in life and a purpose of business instead. Build a culture and integrity in the business. Valuation, money, cash are by-products and those will come. Entrepreneurs need to understand that — your job is to leave a legacy and enjoy the journey and the by-product.
 
So what's a better metric to measure good fundamentals?

Let’s do some math:

When you read someone’s valuation, here’s what it basically means:

Startup’s Headline Valuation = Value of future potential + Funds raised from Investors today
  • For example, when Fractal raised $360 Million at $1 Billion valuation, it means that the future potential of the Startup is worth $640 Million and its present cash in hand is worth $360 Million which it gets from the investors.

  • Now consider another example - A Startup raises $1.1 Billion as soon as it is incorporated. Now this Startup's headline valuation will also be $1.1 Billion, and it will also be called a Unicorn (going by the same formula). But did it really create any value?

This means, that a Startup is actually gaining in wealth only when its valuation rises more than the money that it gets from its investors.


We got curious to find out how much of the valuation of Indian Unicorns is actually fueled by the cash pumped in by the investors. So, we derived the Total Funding raised to the Present Valuation (TFPV) ratio of each of the 88 Unicorns. Here’s what we have:

The average ratio of 88 Unicorns comes to 23%. This means that if your Startup is valued at $1 Billion, its normal to have raised funds of up to $230 Million in the Company. The ratio is also found to have a strong negative correlation with the Founders’ shareholding of the Startup. That means, in majority cases, the higher the TFPV ratio, the lower will be the founders’ shareholding and vice versa.

A low TFPV ratio and high founders’ shareholding are also a good indication of stronger fundamentals and greater stability. Games24x7, for example, has raised nearly $110Mn of venture funds till date with the latest post money valuation coming to $2.5Bn. Its founders hold 44% of the shares. It has also turned in a profit in 9 out of the last 10 years. Ola, on the other hand, is currently valued at $6.7Bn out of which as much as $3.95Bn is fuelled by cash pumped in by Investors like SoftBank, Tiger Global and Others. Despite being in operations for more than 12 years now, the company is still far from profitability. Both in FY’20 and FY’21 the cab aggregator recorded negative net margin of more than 70%.

These signs of poor fundamentals make it easier to understand why its co-founder Bhavish Aggarwal stepped down as CEO in April’22.

 

This article is a part of the January'23 edition of our Startup Newsletter. Here's the complete publication:


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