Investors mark down 'unicorn' tag for start-ups, chase real deal

Brand ‘unicorn’ is experiencing some rough weather after crossing the century-mark last year. With 2023 netting zero unicorns after a heady startup scene, investors are now getting real. Notional valuation, that saw the creation of as many as 107 unicorns (startups valued at $1 billion or more) in just a couple of years, doesn’t seem to be a hook for investors any more.

At a tech entrepreneur summit — TiEcon--in Mumbai, investors on Friday described public market debut and finding strategic buyers as the real deal for startups. They dismissed the term ‘unicorn’ as just a private mark-up in an investor’s book.

Looking at the current scenario, a big chunk of the unicorns are ‘zombie’ startups, according to an investor speaking at the conference . Zombie startups are typically those who do not have a strong business model and face growth challenges but refuse to shutdown.    

“Unicorn is a private mark in an investors book, no one becomes rich because of that. Being a unicorn does not give you anything, you may get valued at $1 billion but that doesn’t mean you are worth that much. The real thing is when a company gets listed or employees get liquidity or shareholders get liquidity. That happens when they get bought by a strategic player or make a public debut,” said Abhay Pandey, general partner, A91 Partners during a panel discussion at the TiEcon Mumbai conference.

Pandey was of the opinion that of the 107 unicorns, less than 50 per cent will end up making any money for investors, in the backdrop of falling fund raise opportunities among the late-stage firms.

Sameer Nath, head-PE, Asset 361, added that a fourth of the unicorns in India could well turnout to be zombie startups. In 2021, India got 44 unicorns, and then in 2022, added another 23. The Indian startup segment has not seen a single unicorn this year.

The absolute limited fund raise happening among the late-stage startups also points to the trend. One of the reasons for the dry spell of fund raise among the late stage firms is because of the fear of a valuation markdown.

“Eventually some will turn-out to be zombie unicorns, some may have good business models and investors will survive, but investors will not make any money from there,” said Pandey.

Entrepreneurs, however, also need to realise that down-rounds are not much of a deal. Ashwin Damera, co-founder and executive director, Eruditus, which experienced a 9 per cent markdown, said this is part of the startup journey.

“We were marked down by 9 per cent…. This is part of a startup’s life. In the US, people raise down-rounds and they do not care. In a public market, companies get valued up and down every day. We as entrepreneurs have to accept the fact that this is a journey we have signed up for,” said Damera at the conference.

Vikram Gupta, founder and managing partner, IvyCap, believes unicorn is an exaggerated term and does not capture the real value creation. “We have something called ‘dragon’. A dragon is a company in the portfolio that gives you 1x cash returns of the entire fund,” he said.

“What matters is what cash your investor is receiving at the end of the day. Unicorn is a valuation at one point of time which can fall and rise. Dragon also captures the concept of profitability and value creation,” said Gupta.

Correction in the valuation has to happen and it is happening—that seems to be a consensus view. ‘’This can be a down-round or could be a time correction where companies do not raise money for a couple of years and they automatically grow to that valuation, but their multiples will correct, so rationalisation is coming and continues to happen,” said Pratik Sethi, MD Investment Banking, Ambit.

While it's true that many late stage firms raised substantial funds and are now preserving and bringing the focus on business bets, there are those not venturing into the market due to the fear of a lower valuation.

Shaleen Sinha, head of BCG India Growth Tech, pointed at the fact that valuation downgrades are just on paper. ‘’We are yet to see firms raising actual money at a lower valuation.’’