Two days after closing a $215 million funding round at a post-money valuation of $2.2 billion, Kunal Shah, founder of Cred, took to Twitter to sound a cautionary note. “Unicorn tag, high valuations are all vanity metrics till the company delivers profits…” he tweeted.
Cred, a credit card payments-based rewards marketplace founded barely three years ago, was one of the six privately-owned, India-born technology startups, that recently saw their valuations vault past the $1 billion marks, earning them the status of unicorns. Between them, the six start-ups drew over $1.5 billion from investors in a record week for private equity investments in India, that saw more than $3 billion deployed, as per data collated by VCCEdge.
Many private investors and beneficiaries of unicorn valuations freely admit that unicorn valuations aren’t a precise science. In reality, most startup valuations, whether at the early or later stages, are typically similar. The demand-and-supply dynamics in individual markets are also the driving forces behind valuations. And right now in India, the dynamics are skewed in favour of technology startups from industries that have benefited from the Covid-19 pandemic’s tailwinds.
As startup companies navigated the pandemic and the country’s long-drawn-out lockdown, the universe of India-focused private investors — private equity firms, sovereign wealth funds, national pension funds, hedge funds, and strategic investors — held off on making big-ticket bets for most of last year. The private capital floodgates swung open in September and October, when it became apparent which companies would do better in the event of a pandemic.
Although the number of private equity transactions fell to a five-year low of 1,462, at the end of the fiscal year 2020-2021, total capital invested rose to a five-year high of $46 billion, bringing the mean transaction value to more than $43 million, up from $26 million the year before.
Given that the pandemic is far from over and that the long-term effect on the economy is unknown, capital is being concentrated in sectors and businesses, especially technology-enabled businesses, that investors believe will weather the storm better in the short and medium-term. Fear of losing out (Fomo) is pushing many of these investors to close deals at prices, that will give them the first-mover advantage in market segments where they believe there are potential winners.
This has been most evident in financial services, specifically fintech. According to a Credit Suisse research report published in March 2021, India’s fintech sector was the second-largest beneficiary of private capital over the previous decade, with payments firms raising $4.2 billion and digital lenders raising $2.5 billion. “In connectivity, shopping, and payments, Covid-19 has accelerated the speed of digitisation globally… “As we emerge from the pandemic, there is general agreement that it has wrought a systemic change in categories such as shopping and payments,” Credit Suisse’s Ashish Gupta said in the paper.
Three fintech companies — crowdfunding company Groww, cloud-based general insurer Digit Insurance, and Kunal Shah’s Cred, are among the ten startups that have already achieved unicorn valuations since January this year. That number is already equal to the total number of fintech unicorns born last year.
The post-pandemic funding frenzy, according to most sources, has only recently begun. Capital will continue to be heavily concentrated in sectors including education, health care, logistics, and food distribution, gaming, e-commerce, software-as-a-service (SaaS), and, of course, fintech, with digital adoption as the underlying trend, a factor that has been exacerbated by the pandemic.
The dry powder waiting to be put to work is the second major factor driving massive funding rounds and euphoric valuations. Credit Suisse said in a separate study released in March, that global dry powder stood at $2.1 trillion at the end of the calendar year 2020, owing to “record second half fundraising and slower transaction pace.”
And there’s more piling up. Early this month, New York-based alternative assets investor Tiger Global Management closed its 13th venture fund at $6.65 billion, almost twice the size of its 12th fundraised just last year. Tiger Global participated in the latest funding round of three of the startups that racked up unicorn valuations last week — Cred, Groww, and social media platform ShareChat. Also in line is SoftBank Group Corp’s Vision Fund 2, currently on the road to raise a $108 billion war chest. SoftBank Vision Fund 2 led a $300 million round in social commerce platform Meesho last week at a valuation of $2.1 billion.
Most markets, like India, experience funding frenzy and soaring valuations every six to seven years. It’s a little different this time, though. According to an Orios Venture Partners survey, it took an average of eight years for the 12 startups that achieved unicorn valuations in 2020 to reach that milestone. This year’s participants took less than five years to complete.
It’s probably a good thing Kunal Shah is more concerned with benefit than with “vanity metrics.” After all, it’s just been four years since Snapdeal, a $6.5 billion e-commerce marketplace backed by SoftBank, imploded spectacularly.
