Is Achieving Unicorn Status No Longer a Mark Of Success? This year, 21 startups have turned unicorns so far. However, in the last two months, there has been a lull in the space
By S Shanthi
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Not long ago, 'unicorn' was just a term used to define a startup that had reached a valuation of $1 billion. However, over a period of time, unicorn status became a mark of success. In the recent past, we saw startups turning into a unicorn almost every day. In 2021 alone, 43 startups across sectors touched the milestone. This year, so far, 21 startups have turned unicorns.
However, in the last two months, there has been a lull in the space due to the overall economic slowdown and the resulting decline in investments across the world. Has this unicorn slowdown shifted the startups' focus away from chasing unicorn dreams and concentrating on other key success metrics?
Are unicorns losing their appeal?
"It's simply in line with Maslow's Hierarchy of Needs. As the startups started achieving the mark and marketing communications highlighted unicorn status for budding entrepreneurs it came forth as a self-actualization need. During the 2021-2022, period as more and more startups achieved unicorn status, Decacorn became the new Unicorn," said Brijesh Damodaran, cofounder and chief investment officer, Auxano Capital.
Due to various factors, fund availability dropped and therefore these companies found it very hard to sustain their businesses. "These companies had hockey stick revenue lines, but very thin or no profits. Therefore, downsizing started to happen which meant retrenchment, downsizing, closing down, etc. And these steps are obviously not palatable and therefore the loss of appeal," said Padmaja Ruparel, cofounder, of Indian Angel Network and founding partner of IAN Fund.
However, experts feel that attaining unicorn status is undoubtedly something to celebrate. It indicates that a small startup has been able to scale and mature, that it has been able to raise monies and that the founders have been able to weather the ups and downs of building the company. It also helps in quick brand building to attract talent and customers.
"Startups go through several cycles during their journey and reaching a billion-dollar valuation mark is a milestone and not all companies can achieve it. While Unicorn status doesn't guarantee success in terms of wealth generation as companies are still in the growth stage and may be burning cash before they achieve cash break even. However, not all companies can become unicorns, which is a big milestone for any company, hence founders tend to celebrate this success," said Anil Joshi, Managing Partner, Unicorn India Ventures.
What defines startup success
There is an increased realization today that while unicorns can be a thing to celebrate, the definition of success should be beyond just valuation. "At one time, 100 Cr. club was what Indian businesses eyed, thereafter it went to $100 mn and then $1 bn and finally $10 bn. Businesses move up this ladder consistently. Apple and Amazon opened doors to trillion-dollar companies also. If a billion-dollar company is turning bankrupt three months later, it reflects the froth and not the real value created by the company, it should be sustainable. If a company with negligible revenues is achieving unicorn status then such is a sham. One can achieve a Unicorn status by raising $ 1 million for 0.01 per cent dilution but is it really a sign of value creation?," questions Damodaran.
The slowdown in investment seems to have shifted startups' focus on unit economics and gaining cash break-even for longer sustainability. "Investment slowdown is a temporary phase, however, this has pushed companies to focus on sustainability. This new trend will make companies more appealing in the future as they will achieve profitability and see steady growth. Success for startups is when they provide a successful exit to investors and also generate wealth for all stakeholders, I feel that's what all startups should focus on," said Joshi.
A successful startup or business is also the one that can manage any external disruptions. Thus businesses focused on gross margins, unit economics, and contribution margins are the ones that build businesses on a strong foundation. "This necessitates a sharp focus on the cash flows such as building revenues, ensuring collections, ensuring expenses are in control and well justified, etc. These companies will also be the ones investors will reach out to invest," said Ruparel.
Unicorn status may still be appealing, but the slowdown has ensured that it alone cannot be the goal for anyone trying to build a business to last. Ecosystem mentors advise entrepreneurs to envision the creation of fundamentally strong businesses by taking into consideration the actual revenues, profitability, defensibility and sustainability.