India’s growth story is driven by innovation, entrepreneurship, and a thriving startup ecosystem with a rapidly expanding unicorn club. According to the recent The State of Indian Startup Ecosystem Report 2022 by Inc42, India is set to have 250 unicorns by 2025, positioning it as the second-largest globally after the US. The Economic Survey 2021-2022 confirms that India currently stands as the third-largest startup ecosystem worldwide, following US and China.
This surge in unicorn companies and the thriving startup ecosystem indicates a promising future for aspiring entrepreneurs and India’s economy. Let’s understand what is a unicorn startup and how to set up one.
In this blog, you’ll learn:
- What is a unicorn startup?
- How does India’s startup ecosystem compare to global markets?
- What are the key challenges faced by entrepreneurs in building unicorn startups in India?
- What are some successful examples of unicorn startups in India?
- How can entrepreneurs attract investors for their unicorn startups in India?
What is a Unicorn Startup?
A unicorn is a privately held startup company with a value of $1 billion or more. Aileen Lee, the founder of Cowboy Ventures, coined the term. She used this term to highlight just how rare and special these startups were. Unicorns can be found in different fields, like technology, e-commerce, finance, healthcare, and others. Inmobi, a mobile advertising platform, became India’s first unicorn in 2011.
Usually, unicorn startups use advanced technologies, unique business ideas, or smart market strategies to outperform their competitors and gain a big piece of the market.
How Does the Indian Startup Ecosystem Compare to Global Markets?
Indian startups exhibit unique strengths, such as their ability to innovate on a low budget, crafting affordable and inventive solutions despite limited resources. The vast domestic market, with over 1.3 billion people, presents substantial growth opportunities without the need for immediate international expansion. Investor interest in India’s startup landscape has surged, attracting both local and international investors and providing increased funding prospects.
The Indian ecosystem still faces challenges, including the need for a conducive regulatory environment, access to more capital, and fostering a culture of risk-taking. While India’s startup ecosystem is dynamic and competitive, it can continue to grow and excel by learning from and collaborating with global markets to foster innovation and sustainable growth.
ALSO READ: How to Build a Successful Startup in India
What are the Key Challenges That Entrepreneurs Face in Building a Unicorn Startup in India?
A few common challenges that entrepreneurs in India face:
1. Building a Sustainable Business Model
Attaining a unicorn status is challenging, but sustaining it is even more difficult. Startups, including unicorns, often incur losses in their early stages. A company’s value can be significant despite being a loss-making entity. For instance, Zomato, which ranked 78th in market capitalization in India during its IPO, saw a drop in revenue in the same year.
2. Traditional Companies Entering Competition
Most startups and unicorns currently enjoy limited competition compared to traditional businesses. However, traditional businesses are gearing up to enter the market, as seen in the retail digital payments space dominated by PhonePe and GPay. Yet, Reliance Jio and Tata plan to challenge this dominance with their super-apps and integrated payment services.
3. Limited Financial Support
According to LiveMint, Indian startups experienced a significant 72% funding decline in the first half of 2023 compared to the previous year. The total funding during H1 2023 amounted to $5.5 billion. Despite being among the top three funded geographies globally, there has been a noticeable decrease in funding for Indian startups.
4. Insufficient Revenue Generation
Many startups fail due to insufficient revenue as they expand. As expenses grow and revenues decline, startups prioritize funding efforts, potentially neglecting essential business fundamentals. Managing the burn rate (initial spending rate) becomes crucial for revenue generation. The challenge is obtaining capital and sustaining and expanding growth sustainably.
What are Some Successful Examples of Unicorn Startups in India?
Here are a few examples of the top successful unicorns of India –
1. Dream 11
Dream11, founded in 2008, is India’s leading gaming unicorn. It has grown from 2 million registered users in 2016 to an impressive 140 million users in 2021. By empowering sports enthusiasts to monetize their knowledge and passion, Dream11 serves over 13 Crore users.
As of 2023, the valuation of Dream 11 is $8 billion.
Razorpay, founded in 2013, revolutionizes online business money management with clean APIs and seamless integration. They offer fast, affordable, and secure payment solutions for merchants, schools, e-commerce, and more.
As of 2022, the valuation of Razorpay is $7.5 billion.
How Can Entrepreneurs Attract Investors for Their Unicorn Startups in India?
Leap by McKinsey conducted in-depth interviews with ten accomplished Venture Capitalists (VCs) and angel investors. It included an exhaustive analysis of 100 unicorns to provide valuable insights for incumbents seeking to launch new businesses. The findings distilled the essential factors that attract investors and contribute to the transformation of startups into unicorns, unveiling five critical elements in this process.
1. Build Teams With Sufficient Experience and Networks
VCs often emphasize the importance of investing in people rather than just businesses, especially during early-stage funding. However, it is essential to identify the specific qualities and characteristics of individuals and teams that lead to successful investments.
As per the analysis, VCs look for the right team set-up, education, and work experience of unicorn founders:
- Two or more founders – 70%
- Higher University degree – 75%
- Prior Work experience – 80%
2. Is the Total Addressable Market (TAM) Big Enough to Be Worth It?
When considering investing in a new business, VCs seek assurance that the investment has the potential to achieve substantial growth and be financially rewarding. Evaluating this potential primarily boils down to two crucial aspects:
2.1. Size Matters
Technology, media, telecommunications, industrials, and healthcare collectively generate annual revenues exceeding $5 trillion, representing nearly one-third of the top 100 unicorns. Having a substantial market size increases the likelihood of a venture achieving significant success.
2.2. There Should Be a Clear Opportunity
A viable market opportunity with significant growth potential is crucial for new entrants. VCs assess a market’s “crackability” by identifying opportunities to leverage market weaknesses. If there are no market leaders, it allows an opportunity for new entrants to disrupt the status quo.
3. The timing, Whether It is Too Late, Too Early, or Just Right?
In the realm of investing in startups, the significance of timing cannot be overstated:
- Astute leaders spot emerging trends early, capitalizing on opportunities and entering unexplored territories. This positions them for higher profit margins and faster growth, leading to greater capital availability and favorable valuations.
- Start-ups have a two-to-three-year window for success. VCs seek the “Goldilocks” spot, avoiding being too far ahead or behind the market. They invest in start-ups with working products and early signs of market interest, expecting significant progress within this timeframe. The capital raised is expected to sustain them for about two and a half years.
4. Does Technology Work at Scale?
VCs evaluate a business’s scalability, especially its ability to grow from a small user base to one with a larger user base.
5. Does the Company Have Evidence That It’s on the Right Track?
Startups require time for growth, yet VCs seek tangible evidence that the venture is heading in the right direction.
- Successful businesses meet genuine needs through disruptive solutions, avoiding the pitfalls of searching for a market. They innovate with technology, user experience, and efficiency to thrive.
- Venture capital investors seek significant revenue growth in new businesses, focusing on Average Recurring Revenue (ARR) over one-off sales. They prefer customers who make repeated purchases, ensuring revenue per customer shows upward trends.
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