Is Unicorn Lull Coming To an End? On Thursday, InCred became the second Indian startup after Zepto to join the coveted unicorn club in 2023

InCred Finance (InCred Financial Services Ltd), the lending business of financial services firm InCred Group has announced that it has secured a funding of INR 500 Crores in a Series D round. With this equity round, the startup has also attained unicorn status.

The development has brought cheers to the ecosystem as there has been an unicorn lull this year after a few years of storm. InCred is the second Indian startup after Zepto to turn unicorn this year. In 2022, 23 startups entered the unicorn club. And, India even topped China for the second time in a row. 2021 was even better. 44 companies turned unicorns in India.

However, in 2023, so far we have only had 2 unicorns. In this article, we will discuss the reasons behind this slowdown and its possible revival in the coming months. But, story, but before that here is a brief about InCred and Zepto's growth so far.

InCred's unicorn milestone

InCred Finance (InCred Financial Services Ltd) is the lending arm of the InCred Group, which is a financial services firm operating across the BFSI sector. Besides InCred Finance, the group has two more separate entities including InCred Capital in Wealth and Asset Management, Investment Banking and Equities and InCred Money in retail bonds and alternative investments. InCred Holdings Limited is the holding company of InCred Financial Services Limited.

InCred Finance, was founded in 2016 by Bhupinder Singh as a new-age, tech and risk-analytics-focused lending institution. Its business verticals include consumer loans, student loans, and MSME lending. Its latest funding round saw participation from various investors, including a global Private Equity Fund, Corporate Treasuries, Family Offices, and UHNIs. The development also comes 16 months after the firm's merger with PE giant KKR's local non-banking finance arm.

InCred Finance claims to have seen rapid growth since inception, building a INR 7,500 Cr loan book within six years, and a growth CAGR of 50+% over the last three years. The company also claims to have seen a sharp positive trajectory in profitability with pre-tax RoA in H1-24 at a class-leading 5+%, and a PBT of ~INR 170 Cr.

The company says that this success has been driven by its commitment to ensuring that all lending and business growth decisions are guided by its strong risk-processes and proprietary risk models powered by its in-house tech engine, which is omnipresent across the entire product value chain. "We have always focused on building a quality business helping us deliver consistently strong financial performance. Investors have recognized both, the high quality of our franchise – as we saw in the great feedback we received from them around our risk processes, team quality, and our tech backbone - as also the consistently great financial performance.

These are the core tenets that have defined our business for the last six years, and it was pleasing to see the positive reception from across the investor community," Bhupinder Singh, founder and group CEO, InCred told us.

How Zepto's turned an unicorn

The quick commerce startup raised $200 million in a Series-E funding round at a valuation of $1.4 billion in August this year, making it the first Indian startup to enter the unicorn club this year. In 2022, Zepto raised $200 million in a Series D funding round led by American technology startup accelerator Y Combinator's Continuity Fund, which then valued the quick commerce firm at $900 million.

This month, the Mumbai-based company raised an additional sum of $31.25 Mn in a Series E funding round from Goodwater Capital, Nexus Venture Partners. Angel investors including Oliver and Lish Jung, and Mangum II LLC participated in the round.

"This business is about execution and we are succeeding because our execution is strong. Our culture of deep frugality and worshipping customers has gotten us here, but there is still so much for us to achieve. We are in this to build a generational company and it truly feels like this is just the beginning," said Aadit Palicha, co-founder and CEO, Zepto in a statement in August.

The company has grown its sales by 300% year-on-year and will likely achieve $1 billion in annualized sales within the next few quarters, the company said in August. Founded in 2021 by Palicha and Kaivalya Vohra, the quick commerce startup plans to go public by 2025.

"Even with this capital, we want to maintain our discipline, avoid complacency, and push hard to hit EBITDA positivity. In that journey, the biggest drivers of P&L improvement for us are based on technology and product. We are building one of the best supply chain product stacks in the country today and we are investing heavily in customer-facing products as well. This technical excellence is in our DNA, and I'm excited about the next phase of building," said Kaivalya Vohra, co-founder and CTO, Zepto, in a statement released after the company turned a unicorn.

Why unicorn drought in 2023 and will it change soon?

At a macro level, the lull is a trickle-down effect of the global economic slowdown and the resulting investment decline from global funds. But the reason behind domestic investors slowing down investments is caution. They are exercising extra caution today in terms of the companies they want to bet their money on. They are now looking at the company's path to profitability, ESG goals and proper financial reporting more than ever. Startups are being told to leave behind the "growth at all costs" attitude. Overall, a lot of investors have been shying away from companies that have hockey stick revenue lines, but very thin or no profits and are thus sitting on a lot of dry powder.

And, as fund availability dropped, many companies found it very hard to sustain their businesses. Many more realized that while unicorns can be a thing to celebrate, the definition of success should be beyond just valuation.

But, will the situation change any time soon? Will we see more unicorns in the next few months? "We will see unicorns in coming years but less in number as VC and PE investors learned a lot about ground realities, unit economics, blue ocean markets, last movers advantage, market share and better business models," said Ravi Teja Gupta, Founder, Guptaji invests.

As the market is matured now, the probability of the soonicorns, the soon-to-become unicorns going into profits, or chances of becoming profitable will be high, he added.

Milan Sharma, founder and MD, 35North Ventures feels it wasn't a drought but a period of consolidation. "Indian economy is at an inflection point, and the future is full of opportunities. So in my opinion we will see more unicorns in times to come," he said.

Experts also feel that India is one of the brightest spots in the global economy and this will continue to spur the interest of global investors, be it in the public markets or the private market. "A number of fund managers are currently on the road to raise capital to invest in companies in India, hoping to generate high returns over the coming years. The environment for companies to grow and succeed is a very supportive one in India and the prospects look particularly bright across multiple sectors. I believe that we are on the cusp of a new era of growth and innovation in India and I am very excited to see what the future holds for the Indian startup ecosystem," said InCred's Singh.

Sonal Saldanha, vice president, 3one4 Capital also feels that there will always a market for businesses with sound fundamentals and expects next year to be no different. "Whether we look at domestic consumption, demand for B2B goods and services, or categories like software, spending has stayed consistent or reaccelerated. With plenty of dry powder waiting to be deployed, investment opportunities in top decile companies will continue to command a healthy premium," he said.