A billion-dollar startup dilemma: unicorns, gazelles, and cheetahs

Whether fictional or actual, the animals in the startup jungle need to be ranked on their financial stability and ability to survive rather than on inflated values that provide the wrong impression.

2021 November. It was touted as one of the biggest IPOs in India with a Rs 18,300 crore issue size. And since the stock fell almost 27% on day 1, it ended up being one of the worst stock market debuts. The shares were priced at Rs 1,950 at the Bombay Stock Exchange (BSE), which is 9.3% less than the issue price. That is the case with One97 Communications, which entered the initial public offering (IPO) market with a valuation of about $19 billion at the top of its pricing range. The stock was selling at Rs 851 on June 27 of this year, more than one and a half years later, and the business reported a loss of Rs 1,855.8 crore in FY23. The disparity between private valuation and market reality was glaring, it is obvious.

Another blockbuster listing appeared a few months earlier, in July 2021. Zomato ended the first day of trading at Rs 125.85, a premium of 65.6 percent above the IPO price. On June 27, almost two years after the company launched, the stock is selling at Rs 76.65, and the meal delivery firm ended FY23 with a loss of Rs 971 crore. Private valuation and the reality of the public market were in stark contrast once more.

June 2023 is the future. In India, the startup environment is still bustling with discussions of unicorns, cheetahs, and gazelles. Deeply financed and less deeply funded firms are fighting to cut costs the most—mass layoffs being the easiest to accomplish—in order to lengthen their runway. The ASK Private Wealth Hurun India Future Unicorn Index 2023 has produced some numbers, so let’s have a look at some of them. In the annual study, which brings two new creatures to the startup jungle, it is stated that “India’s future unicorns are worth $57 billion.”

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In contrast to “gazelles,” which are valued between $500 million and $1 billion and are predicted to surpass $1 billion in valuation within three years, “cheetahs” are valued between $200 million and $500 million. They are most likely to join the unicorn stable in five years.

One stark reality is once again highlighted by a closer examination of how most cheetahs and gazelles perform: there is a glaring disparity between valuation and accomplishment. The majority of the ‘animals’ are severely underfed and in losses. Starting with the instant commerce platform Zepto. The firm finished FY22 with a loss of Rs 390.4 crore despite having received about $360 million in funding to date and a last valuation of about $835 million. In FY22, the revenue was Rs 142.4 crore. Afterward comes Rapido. The bike taxi aggregator received finance in the amount of $310 million and ended FY22 with a loss of Rs. 439 crore and revenue of Rs. 144.8 crore. Leap is another gazelle predicted to turn into a unicorn. The fintech platform for students’ India branch reported operating losses of Rs 3.84 crore and only Rs 6.35 crore in FY21. The firm has not yet submitted its FY22 financial reports.

When it comes to cheetahs, the narrative is essentially the same. The index continues by describing cheetahs, who have exceptionally long strides and are the fastest terrestrial mammals over short distances. The description adds, “They are swift at high speeds, and the distance between their steps is six to seven metres and four strides are completed per second.” Now, one can examine the speed of loss rather than the revenue when comparing Dunzo the cheetah’s performance. Look at the data for FY22: Revenue was 54.3 crore rupees while loss was 464 crore rupees.

Industry players, analysts, and critics agree that it is past time for the startup ecosystem to start considering factors other than valuations. Anirudh A Damani, managing partner at Artha Venture Fund, notes that because of the fixation with valuations in India and around the world, exaggerated statistics have taken the place of the strength of the business model, sustainable unit economics, and profitability as the key success indicators.

Startup entrepreneurs frequently become seduced by exorbitant paper values based on predictions of great future success. The startup ecosystem stakeholders frequently applaud these high values as a sign of success rather than warning founders, leading to inflated expectations and demands. When the anticipated outcomes are unavoidably not achieved, “this results in detrimental circumstances for the founders and their ventures,” claims Damani. Valuations aren’t a goal in and of themselves, but they are essential for assessing investor mood and acting as a significant turning point for startups. He continues, “Our ecosystem must recognise and reward actual, observable indicators like revenues, margins, return on invested capital, profitability, and growth.
Ashish Kapur, the CEO of the wealth management and advisory firm Invest Shoppe India, concurs. He remarks on loss-making startups and their stock market debuts and notes that the majority of these firms’ prices have fallen. According to him, the majority of these shares are still trading at a significant discount to their high prices. Even if the majority of them had solid business models, values have to eventually align with the prevailing ideas sooner or later. Unfortunately, as usual, it was the unwary average investor who suffered significant losses when reality eventually set in for this asset class. It’s a sombre reminder, he argues, to always follow the accepted valuation rules and resist the urge to chase hype and noise.

Kapur quotes investing guru Benjamin Graham as saying, “The worth of a business is measured not by what has been put into it but by what can be taken out of it,” underscoring the need of choosing rationality above vanity. According to Kapur, these statements have always rang true anytime reason has returned following an impulsive bull run in whatever asset class. Surprisingly, every jubilant rise is backed by bizarre, novel theories of pricing and valuation that go against the tried-and-true standards for valuing assets. The notion that “this time it is different” is created by spin doctors.

The pursuit of these new paradigm shifts away from the accepted standards must have resulted in more wealth loss globally than any other financial market phenomenon, he asserts.

Back in India, the startup forest glaringly lacks animal instinct in terms of focusing on unit economics and creating a sustainable firm, despite the ASK Private Wealth Hurun India index producing a detailed list of valuations, quantities, and sorts of “animals”.

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