2022 will be yet another unicorn-friendly year for the startup economy

Regulatory tightening on tech companies in China has prompted several venture capitalists to shift focus to India. In fact, some big funds have even indicated their interest in sustained long term investments in this country. These developments must also be viewed in the context of global liquidity trends which have given a push to funding of new ventures

As 2021 winds to an end, one of the enduring memories will be India becoming one of the largest unicorn creators in the world. One of the bright spots amid the gloom and pessimism of the pandemic has been that as many as 42 startup ventures blossomed into unicorns during the year. The focus on the digital ecosystem over the last two years has been the trigger for intense investor interest in online business enterprises. Indian startups found access to venture capital funds was easier than ever before culminating in their rapid entry to the billion dollar club. It was a massive increase over the 11 emerging in 2020, though these had represented some of the most well known names of the digital marketplace like Zomato, Ola and Cars24.

With this exponential rise in the last calendar year, India is now third after US and China in the total number of unicorns. With 79 such companies, it is still far behind the leaders as there are 487 in the U.S. and 301 in China. Even so, the spurt in numbers shows that the innovation and entrepreneurial skill of the Indian startup founders has been recognized by global venture funds. These include giants such as Sequoia Capital,Tiger Global, Accel and Softbank which have all shown interest in the Indian digital space recently.

The definition of a unicorn no longer has any link to the mythical beast. Instead, in startup parlance, it is a company valued at over one billion dollars. The biggest in the world currently is Bytedance with a whopping valuation of 350 billion dollars. The topper in this country is edtech firm Byju's which has been valued at 21 billion dollars. In second place is the adtech venture, InMobi with a valuation of 12 billion dollars.

The ones that have entered the high value segment this year include several well known brands such as Big Basket, Cred, Grofers, Pharmeasy, Licious, Mobikwik, Urban Company and BharatPe. What is interesting is the fact that crypto currencies have also come into the limelight for the first time. CoinDCX and CoinSwitch Kuber ended up becoming the first unicorns in this segment. This is in spite of the lack of clarity over government policy private crypto currencies. Though it was widely expected that a legislation outlining some form of regulation for this new currency would be introduced in the recent Parliament session, no such bill has been presented till now. This left the sector in a state of limbo but has not prevented investors from placing their trust in its future by the sizable funding and valuations of over a billion dollars each for the two crypto unicorns.

As for the reasons behind the proliferation of unicorns this year, the most significant has been the focus on the internet and digital platforms during the pandemic. With work from home becoming the new normal, online activities assumed greater importance as the months went by. In fact, it contributed to the soaring profits of Big Tech during this period. For consumers in this country, the use of the internet has increasingly become part of their lives. Digital payments through fintech companies like Paytm and Mobikwik have become the order of the day. Similarly, ecommerce is increasingly relied upon with Amazon and Flipkart's reach expanding further than ever before. Other start ups like Big Basket and Grofers gained ground to provide ease of access for consumers.

Another factor has been the recognition of the potential in the country's digital ecosystem. Internet penetration currently is only about 41 per cent, so it is clearly a high growth market for the future. Even among those using digital platforms, a relatively small percentage end up shopping online. For instance, it has been estimated there are about 44 crore Whatsapp users but merely 15 crore are online shoppers. Thus there is vast potential and investors are looking forward to higher revenues in the long run by tapping this segment. Venture capital funds are making investments based on long term projections, looking forward to potential returns over the next five to ten years. The heightened investor interest in startups here also comes in the backdrop of regulatory tightening on tech companies in China. This has prompted several venture capitalists to shift focus to India. In fact, some big funds have even indicated their interest in sustained long term investments in this country. These developments must also be viewed in the context of global liquidity trends which have given a push to funding of new ventures. And ultimately, it must be recognized that the quality of startup ventures has improved considerably over the past few years. These companies were set up to address certain problems that needed resolution in the digital eco-system. For instance, some start ups sought to resolve lacunae in the back end of ecommerce or healthcare sectors. This identification of issues that need a solution is one of the main reasons for high valuations of such ventures.

The question is, whether this is a turning point for the startup segment of the economy. Till now there have always been skeptical comments about the fact that the level of innovation and pathbreaking concepts was much higher in Silicon Valley and even in China compared to this country. The sudden increase in unicorns over the past year has shown there is no lack of ideas or ability to execute them here. Clearly the changed global environment has forced investors to look more closely at Indian companies in the digital space and these are now considered to have long term potential for growth and development. In this backdrop, it seems clear that even receding of the pandemic is not going to alter this trend. In other words, 2022 will be yet another unicorn-friendly year for the startup economy.