Unveiling India's Unicorn Investment Strategies

India has the third-largest startup ecosystem in the world, with over 112,718 DPIIT-recognised startups across 763 districts as of October 2023. The country is home to 111 unicorns with a total valuation of $349.67 billion as of October 2023. Unicorns are privately held startup companies with a value of over $1 billion.

Indian unicorns are making headlines not only for their successful initial public offerings but also for their investments in other startups. According to a Zinnov analysis, Indian unicorns have invested in 90+ startups across 110+ deals over the last decade.

Some of the well-known Indian unicorns include:

- Zepto

- Swiggy

- Spinny

- Mamaearth

- Razorpay

- Ola Cabs

- Paytm

- Nykaa

- PolicyBazaar

- Zomato

- Delhivery

- CarDekho

- Flipkart

- PhonePe

- Dream11

- BigBasket

- Rivigo

- Blinkit

- BrowserStack

- Chargebee

- CoinDCX

- CRED

- CureFit

- Digit Insurance

- Droom

- EaseMyTrip

- Eruditus

- GlobalBees

- The Good Glamm Group

- Groww

- Gupshup

- Infra.Market

- Innovaccer

- Licious

- Lenskart

- Meesho

- Mensa Brands

- Mindtickle

- MobiKwik

- Moglix

- NoBroker

- OfBusiness

- PharmEasy

- Pristyn Care

- Rebel Foods

- ShareChat

- Slice

- Unacademy

- Upstox

- Urban Company

- Vedantu

- Zeta

- Zetwerk

- Cars24

- FirstCry

- Pine Labs

- Postman

- Uniphore

- XpressBees

- Perfios

- Rapido

- Boat Lifestyle

- Molbio Diagnostics

- Tata 1mg

- Shiprocket

- OneCard

- LeadSquared

- Purplle

- Physics Wallah

- Vivriti Capital

- Open

- Games24x7

- Oxyzo

- CommerceIQ

- Amagi

- Yubi

- Hasura

- DealShare

- Darwinbox

- LEAD School

- Fractal Analytics

- Global Bees

- Boat

- InCred

Understanding the Indian startup ecosystem

India has the third-largest startup ecosystem in the world with over 112,718 DPIIT-recognised startups across 763 districts of the country as of 3rd October 2023. The Indian startup ecosystem has seen exponential growth in the past few years, with a 15x increase in total funding, a 9x increase in the number of investors, and a 7x increase in the number of incubators from 2015-2022.

Innovation and diversity

India ranks second in innovation quality with top positions in the quality of scientific publications and the quality of its universities among middle-income economies. The innovation in India is not limited to certain sectors, with startups solving problems in 56 diverse industrial sectors including IT services, healthcare and life sciences, education, agriculture, and food and beverages.

Unicorns

A unicorn is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion. As of 3rd October 2023, India is home to 111 unicorns with a total valuation of $349.67 billion. However, this number has been increasing exponentially, with a whopping 66% year-on-year growth in the number of additional unicorns being added every year. As of November 2024, India has 117 unicorns with a total valuation of over $392 billion.

Factors contributing to the growth of unicorns

The growth of unicorns in India has been fuelled by a thriving digital payments ecosystem, a large smartphone user base, and digital-first business models. The COVID-19 pandemic also played a role as work from home during the pandemic fuelled the growth of digital businesses in India. Tech companies, which have become household brands, are contributing significantly to the unicorn boom in the country. In addition, sectors such as fintech, e-commerce, SaaS, and marketplace players are also contributing to the unicorn universe.

Geographical distribution

Bengaluru is India's unicorn capital with the largest number of unicorn headquarters, followed by Delhi (NCR) and Mumbai. However, the ecosystem is not limited to Tier I cities and is proliferating across the country to the last district.

Investment opportunities

The robust nature of the Indian startup ecosystem is evident from the funding deals and amounts in recent years. In H1 2022, 891 funding deals were recorded, an increase of 82.8% compared to H1 2021. Over $17 billion in funding was raised by startups, a 1.8x increase compared to H1 2021. Leading sectors attracting funding include fintech, edtech, e-commerce, social networks, food tech, logistics, media and entertainment, D2C brands, SaaS, and health tech.

The Indian startup ecosystem is vibrant and dynamic, with a booming unicorn club. The country has a strong entrepreneurial spirit and a favourable environment for startups to thrive and grow. The government and the business sector are actively supporting startups, and the impact of unicorns on the Indian economy and society is expected to persist in the future.

Identifying sectors with high unicorn density

• Consumer Sector: This sector has witnessed the creation of numerous unicorns, with a focus on e-commerce and direct-to-consumer brands. Examples include Meesho, Tata 1mg, Mamaearth, Nykaa, and Zepto.
• Enterprise Applications: Enterprise applications have seen a high density of unicorns, with companies like Postman, BrowserStack, and Chargebee revolutionizing how businesses operate.
• Retail Sector: The retail sector in India has a high unicorn density, with companies like Nykaa, Lenskart, and Purplle disrupting the traditional retail space.
• Fintech Sector: Fintech is a prominent sector for unicorns in India, with companies like Razorpay, Cred, PhonePe, and Paytm revolutionizing payments, lending, and investment spaces.
• Healthcare Sector: With startups like Innovaccer, Tata 1mg, and PharmEasy, the healthcare sector in India has seen a significant number of unicorns emerge.
• Logistics and Supply Chain: This sector has a high density of unicorns, with companies like Delhivery, XpressBees, and ElasticRun leveraging technology to optimize supply chain operations.
• Education Sector: Edtech startups in India have gained traction, with unicorns like BYJU'S, Unacademy, and Eruditus disrupting the traditional education space.

Analysing investment trends and funding rounds

India has witnessed a surge in the number of unicorn startups in the past few years, with a 15-fold increase in total funding and a 9-fold increase in the number of investors from 2015 to 2022. As of 3rd October 2023, India is home to 111 unicorns with a total valuation of $349.67 billion. The country's startup ecosystem is ranked third globally, with a vibrant entrepreneurial spirit and a dynamic economy.

The rise in Indian unicorns can be attributed to various factors, including the work-from-home culture during the pandemic, a thriving digital payments ecosystem, a large smartphone user base, and digital-first business models. The growth of unicorns in India is not limited to specific sectors, with startups making waves in diverse industries such as IT services, healthcare, life sciences, education, agriculture, and food and beverages.

The funding rounds for these startups come from various investors, including venture capital firms, private equity firms, and other investment companies. These investors participate in different funding rounds, from seed capital and early-stage funding to later-stage investments.

• Sector-wise Breakdown: The leading sectors attracting funding include FinTech, EdTech, E-commerce, Social Networking, FoodTech, Logistics, and HealthTech. FinTech, in particular, accounts for a significant portion of the total funding, followed by EdTech and E-commerce.
• Geographical Distribution: Bengaluru, also known as India's Silicon Valley, leads the way with the highest number of unicorn headquarters. It is followed by Delhi (NCR) and Mumbai. However, the ecosystem is not limited to Tier I cities and is spreading across the country.
• Time to Unicorn Status: The time taken for an Indian startup to achieve unicorn status varies, with some taking as little as 6 months, while others may take up to 26 years. The average time seems to be around 5-10 years for most startups.
• Investment Amounts: The investment amounts vary widely depending on the funding round and the stage of the startup. Early-stage funding rounds may be in the range of a few million dollars, while later-stage funding rounds can go up to hundreds of millions or even billions of dollars.
• Key Investors: Some of the prominent investors in Indian unicorns include Sequoia Capital India, Tiger Global Management, Accel, SoftBank, and Temasek, among others. These investors have participated in multiple funding rounds, helping startups reach unicorn status.
• Exit Strategies: Indian unicorns are exploring various exit strategies, including initial public offerings (IPOs) and acquisitions. Some of the notable IPOs include Zomato, Nykaa, PolicyBazaar, Paytm, and Freshworks. There have also been instances of acquisitions, such as Tata's acquisition of BigBasket and Blinkit.
• Trends in Funding: The funding landscape is evolving, with startups exploring alternative routes such as crowdfunding, revenue-based financing, venture debt, and bank loans. Additionally, there is a growing trend of new unicorns emerging without any billion-dollar ticket size investments.

Exploring the role of government initiatives and policies

India's government has played a pivotal role in the growth of its unicorn ecosystem through its Startup India initiative and other policies. Since its inception in 2015, Startup India has implemented a range of policies, funds, incubation programs, and tax breaks and benefits to encourage entrepreneurship and streamline the regulatory environment for startups. This has been instrumental in fostering the growth of startups in India and helping them succeed.

The government also recognised the importance of technology in society, the economy, and the government itself. The Reserve Bank of India, the country's central bank, created a supportive financial framework. This, combined with the supportive regulatory and legal framework implemented by the government, helped Indian entrepreneurs push their concepts forward.

The results of these collective efforts can be seen in the number of unicorns India produced in 2021. As of October 3rd, 2023, India is home to 111 unicorns with a total valuation of $349.67 billion. The majority of these unicorns are tech-native businesses that have offered cutting-edge solutions to specific issues in a variety of industries, including healthcare, financial services, mobility, logistics, e-commerce, software as a service (SaaS), and education.

The Indian government's initiatives and policies have played a crucial role in the growth and success of Indian startups, including unicorns. By providing a supportive environment and necessary resources, the government has helped foster innovation and strengthen the country's economy.

Assessing risks and challenges in the Indian market

India's startup ecosystem is vibrant and fast-growing, presenting a range of opportunities for investors. However, it is essential to be aware of the risks and challenges associated with the Indian market. Here are some key factors to consider when assessing these risks and challenges:

Regulatory Environment

India has a complex system of laws and regulations that can be difficult to navigate, especially for foreign investors. The country has high tariffs and protectionist policies, and US exporters and investors often encounter non-transparent or unpredictable regulations and tariffs. The Indian government has promoted "cooperative, competitive federalism," which encourages states to compete for investment, leading to potential variations in business conditions across states.

Infrastructure Challenges

While India boasts a vast network of roads, railways, airports, and ports, much of this infrastructure is outdated and congested. This can create capacity constraints and impact the efficient transportation of goods and access to markets, particularly in remote areas. The country's infrastructure development projects often face delays due to regulatory gaps and inefficient approval processes.

Cultural Nuances

India has a diverse population and culture, and building relationships and trust with local partners and stakeholders is essential for success. Understanding the cultural differences and nuances of doing business in India is crucial for investors.

Market Sensitivities

Indian companies and consumers are price-sensitive. US companies need to evaluate their pricing models and consider whether their products are competitively priced for the Indian market. Adjustments in product features or sizes might be necessary to align with local preferences and purchasing power.

Capital Market Malpractices

The Indian capital market has witnessed rapid growth, but it is not without its challenges. Malpractices such as share price manipulation, insider trading, misleading information, and exploitation of unwary investors have been reported. The Securities and Exchange Board of India (SEBI) has introduced guidelines and regulations to address these issues and protect investors. However, investors should remain vigilant and informed to mitigate potential risks.

Economic Conditions

India is one of the fastest-growing economies globally, driven by factors like the government's push for foreign investment, the rise of digital technologies, and a strong manufacturing sector. However, investors should monitor the country's economic health, including factors like inflation, interest rates, and socio-economic conditions, as these can impact the performance of their investments.

Frequently asked questions