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What’s in a number? asked Pythagoras. According to him, numbers rule the universe, and he was right.
We often gloat over numbers. Some quote GDP figures to argue that we are among the fastest-growing economies. Others thump their chests, saying that we are among the top habitats for unicorns, with over 100 at the last count.
Do these numbers reflect reality? Opinion is sharply divided. The over-emphasis on numbers, more often than not, skirts sensitive ground realities that go unexplained by quantitative indicators. Numbers can have an uncanny effect, and people accept them unhesitatingly. Are we right in going only by the numbers?
The learning app Byju’s went up and down, and is now caught in a pincer-like situation. While its business has dwindled, its investors, directors, auditors, employees, and the entire stakeholder community appear to have lost trust in Byju’s.
Pushed to the edge of the precipice, founder and CEO Byju Raveendran is battling to shore up his baby. And with the poster-boy in trouble, Indian unicorns have come under extreme focus.
Byju’s CEO Byju Raveendran. Photo: cherian_in/Wikimedia Commons. CC BY-2.0.
Until FY2016-17, about one Indian unicorn was being founded every year. Over the past four years (since FY2017-18), this number has been increasing exponentially. As of May 31, 2023, India was home to 108 unicorns with a total valuation of $340.80 billion.
Of these, 44 with a total valuation of $93 billion were born in 2021 and 21 with a total valuation of $27.00 billion in 2022. According to market research platform Tracxn, India has only 17 profitable unicorns.
Byju’s, Oyo, Udaan, Eruditus, Unacademy, Swiggy, and PhonePe are among the most celebrated unicorns. What is common to most of them? They have all run up huge losses of Rs 1,500 to 4,500 crore and are now discovering that incessant venture funding isn’t a sustainable proposition.
There are two ways of looking at unicorns. For some, they are a sign of increased technological prowess achieved over the past few years. For others, unicorns are artificial creations, financial bubbles waiting to burst.
The truth lies somewhere in between.
The valuation of unicorns is quite subjective because they are in the earliest stage of their growth. They do not have financial records or performance records which could support a billion-dollar valuation.
A good number, in fact, would have been a negative cash flow. Unicorns are based on perceptions, rather than knowledge. Perception is based on the assumption that these firms have a strong value proposition that their competitors can’t imitate.
Investors and founders have collaborated smartly to create hype about these startups, increase their valuation, drive up their brand value, list them on the bourses at high ,and exit with handsome profits.
Unsuspecting market investors who bought in have lost a lot of money. This shouldn’t be surprising, since the valuation of unicorns is beyond the comprehension of average investors.
“Mere market share gains through mindless acquisitions and brash spends on branding for bolstering mindshare will not help,” avers R. Ramkumar, former CMD of Cognizant India, who is now pro vice-chancellor for professional learning at Krea University.
Also read: India Is Generating Many Unicorns and Decacorns, But Who Gains From Them?
Unicorns are encountering new challenges like funding winters and valuation markdowns. Oyo, Swiggy, Byju’s, Meesho, Eruditus, PineLabs, PharmEasy and the like are hit by valuation markdowns – in some cases, up to 70%. “These have implications for future funding rounds and also for their listing plans,” says Ramkumar.
The fast-evolving trend has triggered panic and extreme cost-cutting. The disproportionately high visibility of unicorns has turned into a double-edged weapon, as their precipitous fall is also getting substantial scrutiny. They have to now demonstrate a path to sustained revenue and profit growth, via pink slips and cost-cutting.
Perception-led valuations based on speculative market tides did trigger a kind of bull run, but it’s over. We have earlier seen the slide of dotcoms and e-commerce. This time, it was e-enabled services.
“Unreal, overpriced and unsustainable valuations let promoters and interim investors indulge in shortcuts and unethical practices to sustain them,” says S. Narendran, a former executive of TVS Electronics and a data scientist. “Entrepreneurs are lovable mavericks,” says Ramkumar, and they become the fall guys.
What about the boards of these firms, whose members guide the strategic investment, growth and profitability agenda of start-ups? “Like coaches of sporting teams, they need to advise on building all the muscles for unicorns to grow gracefully and become proficorns,” Ramkumar says.
A proficorn is a rarity ― a privately held start-up company that is profitable. It requires not hype, but strategic thinking and managing talent, leadership, risk and stakeholder interest. Many entrepreneurs look up to coaching support, so boards are also responsible for the misdirected focus of unicorns.
Also read: ‘Treated Like Slaves, Abusive Practices’: Byju’s Staff Reveal Harsh Work Conditions
Internet Slide 3.0 holds lessons for entrepreneurs and investors. “The cocktail of greedy people and easy money seems to have left a lot of people with really bad hangovers,” quips the former head of a leading non-bank financial company (NBFC). That sector was done in by the shenanigans of unincorporated finance companies, which used advertising to create hype in the early 1990s.
Today, NBFCs are tightly regulated. The troubles of unicorns like Byju’s suggest that it is imprudent to build a business which depends on incessant venture funding. When money is easy, these startups will have a good ride, but when the money flow dwindles – as it is happening now – reality catches up.
Anirudh Ravi Narayanan, CEO and co-founder of electric motorcycle maker Bharat New-Energy Company (formerly Boom Motors), suggests that companies must have a clear product-market fit and clear unit economics.
“Now that funding has dried up, I wouldn’t be surprised if more unicorns and soonicorns (soon-to-be unicorns) exit the scene or valuations come crashing down,” he says.
Can Byju’s and the like be brushed aside as isolated instances of over-stretch? They show that hype has a limited shelf-life. The valuation game just isn’t enough to foster a sustainable business and ensure long-haul survival. It is time that unicorns woke up to the realities of business dynamics.
K.T. Jagannathan is a senior business journalist.
