The Quest for Unicorns While we are unlikely to witness another year like 2021 in the minting of unicorns in the near term one hopes that a similar environment emerges for exits. For (in keeping with the unicorn theme) surely the pot of gold at the end of the rainbow is more important than the unicorn appellation

When Aileen Lee coined the term Unicorn for startups or unlisted companies that achieved a USD1bn valuation, I'm certain she was drawing attention to the rarity of such an achievement. However, they do not seem to be as rare as this accolade suggests. India got its first unicorn – InMobi – in 2011, added a record-breaking number of 45 unicorns in 2021 and reached a peak of 115 by June 2024, as per Inc42's India's Unicorn Club tracker.

However, this list accounts for companies that were minted unicorns following fundraises at valuations above USD one bn but likely doesn't take stock of their current status. As per the Hurun Global Unicorn Index 2024, the total number of Unicorns is 67, which means that the extant number of unicorns are 47 startups lower than the peak count. As per Tracxn, 16 unicorns are either acquired or gone IPO. That leaves us with 31 startups that have lost their unicorn status.

So, while 31 out of 115 startups are not able to sustain their unicorn valuations, this begs the question – how many unicorns and soonicorns have business models that can continue to sustain the unicorn badge?

While accurate data is difficult to come by, various estimates reveal that about 80 per cent of unicorns are loss-making.

Accordingly, in this environment of profitable growth and down rounds, about 30-35 unicorns are at risk of not being able to sustain their unicorn status, while about 60-65 Soonicorns are unlikely to make the cut for the same reason over the next couple of years.

So, what does it take for valuations to sustain? In the euphoria of 2021, many of us in the investing fraternity seem to have forgotten the fundamental logic that valuation is an outcome of profitable organic business growth. We ended up putting the cart before the horse and 'gifted' startups valuations that were unsustainable basing their investment theses on concepts such as "winner-take-all" and "right to win" or misguided estimates of Total Addressable Market (TAM) and the startup's ability to get an inordinate market share of this overestimated TAM.

Investors today are however once-bitten-twice-shy and have become more circumspect and discerning, which indicates that startups will need to earn their straps by demonstrating delivery of profitable revenue growth consistently to achieve and retain unicorn valuations.

Another point to note is that pre-revenue startups are inherently overvalued. Valuation at these early stages is a factor of the quantum of money raised in lieu of a certain amount of stake in the company mutually agreed by the company and investor. However, valuation in future fundraises incrementally hinges on the execution track record and market multiple benchmarks. It therefore boils down to the brass tacks – build a market-beating business that demonstrates consistent revenue growth, strong unit economics and improving profitability, and overall capital efficiency.

So, while we are unlikely to witness another year like 2021 in the minting of unicorns in the near term one hopes that a similar environment emerges for exits. For (in keeping with the unicorn theme) surely the pot of gold at the end of the rainbow is more important than the unicorn appellation.