In pursuit of the not so mythical unicorn

The recent rapid emergence of unicorns in India leads Professor G. Sabarinathan^{1, 2}to explore this phenomenon and ponder whether the obsession has gone too far

Last week, CBInsights, now an almost universal go-to shop for data on startups and tech businesses, published a list of unicorns across the world. At 702, the number of unicorns surprised me although it need not have, going by the almost daily flow of news of the minting of the newest unicorn somewhere in the world.

That size of 700 was significant enough for anyone with even a passing interest in the startup space.  What got me even more interested though was that in that there were 32 unicorns from India.

That recent rapid emergence of unicorns in India seems to have intensified the desire among a whole lot of participants in the ecosystem to want to have a piece of the unicorn action – policy planners clamouring that we should have more of them, incubation centre managers each wanting to have a unicorn of his or her own, angels and VCs who did not make it to the gravy train working harder to have one or more unicorns in their own portfolio and so on.

This widespread urge of not wanting to miss the train was one of the primary motivations for me to want to understand this emerging phenomenon as closely as freely available data would permit me to.

Unicorns – not so mythical or rare any longer

With 371 unicorns, the USA leads as the country with most unicorns, followed by China with 168.  India came third with 32, ahead of even the UK which had 29 unicorns. But that can be considered a little misleading for those who look at Europe as a single VC market, as analysts often tend to.  Europe, without the UK, accounts for 55 unicorns, ahead of India.

Pitchbook, another popular global resource for startup data, notes that the term unicorn was first coined in 2013 by a VC professional Aileen Lee.  The term was given to companies with a valuation in excess of US $ 1 billion to signify their rarity.  There were barely 39 of them at that time.  By 2018, there were 348 of them.  That number grew to 700 by mid 2021. It is quite possible that by the end of the year we may have close to 800 unicorns.  It is worth pointing out that these numbers are net of exits and initial public offerings (IPOs).

In relation to the number of ventures funded enterprises unicorns are still a relatively small fraction. But at the rate at which they are getting minted, unicorns may not be that rare after all, three years from now.

Industries throwing up unicorns

Venture funding has always been known to focus on a small set of industries that bear growth potential and herald the future.  Not surprisingly unicorns too tend to be concentrated in industries that are considered hot.

So if you guessed that fintech would lead the herd of unicorns, “that aint don’t impress me”, to borrow from Shania Twain.  See Table I below.

 

Table I

Industries contributing to the unicorn phenomenon

Industry	Nos	%
Fintech	121	17%
Internet software & services	110	16%
E-commerce & direct-to-consumer	81	12%
Artificial intelligence	56	8%
Health	54	8%
Other	50	7%
Mobile & telecommunications	34	5%
Supply chain, logistics, & delivery	34	5%
Auto & transportation	31	4%
Cybersecurity	27	4%
Data management & analytics	26	4%
Hardware, edtech, consumer, retail, others	78	11%

Data:  CBInsights. Rearranged / analysed by author

Fintech is so much around you, thanks to media stories, that hapless finance instructors like me who are trapped in an antediluvian past cannot sleep well because we do not include them in our syllabus.

And then you have all the other common suspects: internet software and services, artificial intelligence and healthcare.

The surprise entry there to me is e-commerce.  In my own naïve and impressionistic way I had come to accept that there is place only for one ecommerce player in the world.  Well not just ecommerce but payment services, cloud services, OTT entertainment, space travel and some fifteen other verticals put together, as of now.

I seem to have been wrong.  There are 81 ecommerce and direct to consumer unicorns.  But maybe I am not wrong after all.  For all I know they are all getting fattened on easy VC, just to be acquired by the only standing ecommerce firm that may soon drone-drop on the Moon and Mars whatever you order.  Customer obsession.  Wow!

Industry concentration, regionally 

A related phenomenon is that the number unicorns in the top three nations seems to be concentrated in a few industries.  This is especially true of India and the UK where the top three industries account for 72% and 63% of all unicorns in those countries respectively.  Not just that.  India and the UK have unicorns in just nine out of eighteen industries.  In comparison the top three industries account for 51% and 43% of the number of unicorns in China.  While China has unicorns in fifteen out of the eighteen industries, the USA has unicorns in all the eighteen.

The concentration of unicorns is interesting to look at because it can be viewed as a proxy for the breadth of the startup economy, as a whole.  That in turn has implications for the likelihood of more unicorns coming out in future.

For example, the high concentration of fintech firms in the UK is perhaps an indication of the fact that the country is now largely harvesting the intellectual capital that it has accumulated in the financial services space over the past fifty odd years.  Further, it probably indicates the lack of global competitiveness of the country in other industries.  It is also probably indicative of the relatively small size of the local consumer and industrial economy in the UK other industries that they possibly cannot support many unicorns.

Just as interestingly the USA and China have a mix of consumer and industrial plays in the set of unicorns, whereas the Indian set seems to be largely driven by consumer plays.

Skew in valuation

Not all unicorns seem to be made equal.  Not in terms of their valuation at least, it would appear.  Table II-A below shows the ten most valuable unicorns.  The valuation ranges from $ 25 bn all the way to $ 140 bn.  Table II-B gives the break-up of valuation of the remaining 692 firms.  The eleventh firm is valued at $ 16.5 bn, way lower than the tenth.

Table II A

Top 10 unicorns in terms of valuation

Company	Valuation ($B)
Bytedance	$140
Stripe	$95
SpaceX	$74
Didi Chuxing	$62
Instacart	$39
Klarna	$31
Epic Games	$28.7
Databricks	$28
Rivian	$27.6
Nubank	$25

Data:  CBInsights. Rearranged / analysed by author

Table II B

Valuation range-wise break up of unicorns other than the top 10

Valuation $ bn	No of unicorns
15 to < 25	7
10 to < 15	15
> 5 to < 10	42
> 2 to 5	174
>1-<2	278
1	176

Data:  CBInsights. Rearranged / analysed by author

And then there is the long tail of $ 1bn firms that seem to have scraped through into the league.  Together with the sub $ 2 billion they are almost half the world of unicorns.

That reminds me of a probably apocryphal story of some time ago.  I cannot recall where I read it.  A founder was negotiating a Series C or Series D.  That is around the time the average startup begins to gallop harder and faster and yet manages to stay where it is like the Queen in Alice in Wonderland.  The founder’s only ask of the VC leading the round was:  You write the term sheet.  Just make sure I get a billion-dollar valuation.  And, that makes me ask if I should be wondering how many of the 175 are indeed true unicorns.

The Indian unicorn story

With 32 unicorns in the market, the Indian story has gone beyond the lone swallow not making a spring stage.  Yet, as statisticians might argue, the sample is not large enough to draw robust inferences.  Broad patterns may be discernible though.

We have already noted a few comparisons earlier vis a vis the USA, China and UK in terms of the concentration in certain industries.  A few other aspects may be worth noting.

For example, 14 of the 32 unicorns are from Bengaluru, 12 from the National Capital Region and the rest from Mumbai/Thane, Pune and Chennai.  For a country with a broad-based industrial economy and dispersed consumer base agglomeration effects seem to trump everything else when it comes to growing unicorns.

Similarly, 21 out of 32 unicorns have joined the club in 2019 (6), 2020 (7) and 2021 (8).  The remaining have come earlier with the oldest having joined the club in 2014.

Very few of the unicorns, probably less than half a dozen of them, have any home-grown VC funds.  A home-grown VC fund is commonly understood as one where the fund management organization was conceived and founded in India and most if not all the general partners are based in India.  It is not the Indian arm of a fund management organisation conceived outside India carrying an Indian footprint.

I sound tentative because to make a more definite statement in this regard the evolution of the shareholding patterns of these companies would need to be studied.  This aspect has some implications in the light of the stated aspiration that I noted earlier among many participants to have a piece of the unicorn action. A similar trend has been noted in an analysis that Pitchbook made of funds that have supported various unicorns globally.

It does appear from the foregoing that some funds have more of the Midas touch than others, to use a cliché.  While it is understandable to aspire to own a unicorn, in part or in whole, a good starting point on that endeavour may be to understand what it takes to grow one.

What makes so many unicorns possible?

That is a $ 700 billion question.  Literally.  Pitchbook’s hypothesis is that it is the availability of private capital that allows startups to defer their going public process.  That is certainly true.  In the past twenty five years or so the allocation of capital to alternate assets has grown considerably, leading to a surfeit of capital sloshing around with fund managers in search of investment opportunities.  But that is a supply side explanation, as an economist might view it.

On the demand side too, profound changes have been taking place, driven by technology on the one hand and the strategic exploitation of the same by entrepreneurial firms.  It is important to understand these demand side aspects, especially for those who want to own a piece of the unicorn action.

First and foremost, is the winner take all nature of disruptions that seem to be affecting many industries.  It is important to note that these unicorns have continued to emerge at a time when the world economy has not always grown at breakneck speeds.  Their growth has often been by rearranging the way goods and services are made, delivered or consumed and disrupting the value chain in the process.

The second is the way startups strategise.  From starting slow and small, the mantra seems to have changed to a land grabbing approach, presumably following from the winner take all compulsion.  Brynjolfsson and McAfee talk about this at some length in their book The Second Machine Age.  On similar lines strategy scholars now talk about startups that are more often which not “born global” these days.

A third aspect is that growth for a modern-day startup is inorganic from early days.  And those acquisitions are driven by considerations that would have been considered unorthodox for a startup not long ago until the technology boom.

The rapid ascent into unicorn status is to an extent powered by these acquisitions.  In a world where valuations are not subject to public scrutiny of any kind all such acquisitions appear to be value accretive – enhancing shareholder wealth in plain English – until all fall down.  Thanks to the generous flow of capital such moments of reckoning don’t seem to occur often.

Life beyond unicorns?

This attempt to understand unicorns a little better was motivated by the growing aspiration I see around me to grow more unicorns in India and for everyone to own a piece of the action.  That brings up the question:  Are unicorns the summum bonum of startup dharma for our country?

The answer to that question will require a deeper understand of what kind of entrepreneurship is germane to the needs of a nation and its economy.  In a nation where consumers are heterogenous in terms of their consumption preferences, where consumers sit along the entire stretch of the price curve, where production, delivery and consumption are all highly constrained by local conditions that are not likely to be overcome in the medium term, a winner take all approach to entrepreneurship may not be the only way forward.

The obsession with unicorns – at the risk of using an extreme metaphor – is entirely driven by the supply of capital.  Policy and institutions relating to entrepreneurship should ideally approach the problem from the demand side as well.  Else, entrepreneurship that matters simply may not happen.

A highly successful entrepreneur in the health care sector who has made visible (sorry for the pun intended) impact and is also profitable recently sounded defensive to me that he might at best deliver a 30% to 40% compounded annual rate of return to his investors over a seven-year period and not the kind of multiples that unicorns in the consumer space might deliver.

That to me does not augur well for the ecosystem.  It is unicorn obsession gone a tad too far.

¹I thank Professor Venky Panchapagesan, Chairperson, NSRCEL, for the motivation for this article. The trigger for wanting to know more about unicorns came from a discussion in an advisory group at NSRCEL, where I try not to be a gadfly, unsuccessfully though.