The start, not the end, of Unicorn seeding

Conditions are ripe in a broad range of sectors for strong growth and innovation

In the first part of this four-part ser­ies, we saw how the advent of private equity is reshaping India’s corporate landscape. In the second, we explo­red the progress in layers, driving rapid and broad-based grow­th. In this part, we focus on enablers in sectors seeing clusters of unicorns.
 
Take Software-as-a-Service (SaaS), where we found a dozen unicorns, and expect that number to rise by several multiples in a few years. While this would not have been possible without India’s large pool of trained software engineers, it has been catalysed by the changing nature of software, and how it is built and sold. Corporate users of information technology (IT) are swit­ching to a pay-per-use model for both hardware (better known as “the cloud”) and software. Moreover, large, monolithic software is giving way to smaller and more specialised chunks that communicate in a stan­dardised and not a proprietary lan­guage: A handful of engineers can now develop a tool and sell it to cor­porations. Buyers, too, do not have to commit to multi-year deployment and licensing contracts, or resort to a lot of custom-development. As a result, several specialised areas like customer relationship management, billing, payment processing, cyber-security and even e-groceries are seeing the emergence of fast-growing SaaS companies.

 
Given the significant growth of the Indian IT services industry, many lamented the lack of Indian firms in products: SaaS addresses that. More of this is likely, as the thousands of engineers that have experienced unicorn-creation from very early stages have new role models. Importantly, these firms need not have been founded in Bengaluru (or Chennai, fast emer­ging as a SaaS hub, or Thiruva­nan­thapuram). Even those started in San Francisco or Boston do most of their development in India. There is very little to differentiate them from Indian firms (which also have sales offices in the US): Thomas Friedman’s The World is Flat is in play again. According to Bain, the number of Indian SaaS companies has nearly doubled in five years to nearly 8,000. Nasscom estimates that the revenue for pure-play Indian SaaS companies can rise six-fold to $15 billion by 2025.

 

Another market where the world is being figuratively flattened is education technology (Edutech). I recently heard a venture capitalist ask a remarkable question: “In 1995 who would have thought India would make software for the whole world?” He was speaking in the context of educational content and tools being created in India for the rest of the world. While the pandemic has accelerated the adoption of e-learning in India, with the market expected to grow five-fold in the next five years, less than 15 per cent of India’s students can afford to pay more than a thousand rupees per month. The rest matter less commercially, even though technology may be the best solution for the deep problems of poor quality of teachers and weak infrastructure. A much bigger opportunity may exist in exporting content and tools to developed markets that have a better ability to pay. Just like what Y2K did for Indian software (the need to change the year to a four-digit number in all software in a short space of time led to a large amount of work being shifted to India for the first time), the pandemic may have provided the foot in the door for Indian EduTech firms, some of which generated tens of millions of dollars in revenue last year compared to zero in 2019.

 
The Indian pharmaceuticals and biotech space is also coming of age. Fifteen years back even the largest Indian pharmaceutical firms could only afford research and development (R&D) budgets of 25 to 30 million US dollars. Now the largest firms have a much larger revenue base, and R&D budgets higher than 200 million dollars. Not only has the domestic pharma market grown at 15 per cent annually over 20 years (supported by the growth in doctors, distribution and incomes), exports have grown rapidly too, and now account for 72 per cent of revenues: Half of the US drug market volumes are now supplied by Indian firms, and they have made deep inroads in most major markets globally. This growth has created more than a handful of unicorns.

 
With this size, goals have also evolved, partly as the US generics market is no longer expanding as rapidly, but also because to maintain their growth rates they need to develop drugs that need more research and are not simple generics. Experience of managing these pipelines has also elevated the skill level for the industry as a whole: Whereas a decade back an ambitious Indian company would focus on generic filings in the US, these days their attention has shifted to specialty drugs that enjoy a few years of patent protection, or to biosimilar products. That Indian firms could produce vaccines not too far behind global leaders, and well ahead of even Japan, has been a welcome relief for most Indians, but has not surprised those tracking the progress of the Indian industry.

 
Moving to e-commerce: The rap­id growth and strong prospects of electronic retailing are now well understood, but its impact on pro­duct companies is not. E-commerce, modern trade and regulatory tightening by the government are driving formalisation and consolidation of erstwhile mature but fragmented businesses like that of distribution, retail and jewellery. This is helping in the creation of new consumer brands in novel and fast-growing categories supported by new advertising channels. Twenty years back a firm with a good product would have struggled to develop its own distribution, and cost-effectively target new customers with its ads. Consolidation of distribution and retail, and the availability of online advertising which is cheaper on a cost-per-impression basis and also more effective, has catalysed significant innovation across product categories. With phone penetration greater than that of TV, the reach of advertising has also expanded. As modern trade and e-commerce continue to grow over the next decade, this trend is likely to continue. Expansion of cold-chains and better household penetration of refrigerators has also helped broad-base product categories that were earlier considered too niche.

 
The writer is co-head of APAC Strategy and India Strategist for Credit Suisse
The fourth and final part of the series will appear next Thursday