Want to keep India's unicorn boom going? Focus on these 3 things: Ashish Dave

From three unicorns a year pre-Covid, India has added roughly four unicorns per month in 2021
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India added 49 unicorns since April 2020, and a staggering 41 of them came galloping into the stable in 2021 alone. The speed is astonishing. Let’s dice the numbers to have a better perspective. We had only 29 unicorns between September 2011 and March 2020. What this means is that from three unicorns a year pre-Covid, we have added roughly four unicorns per month in 2021. The pace is likely to continue. The intensity, though, may not be the same.

Is this a validation of tenacity, passion and vision of the startup ecosystem in India? Does it indicate that our startups have matured? Or do they underscore concerns around ‘valuation’? Are unicorns the actual benchmark?

Let me start by busting a myth. Investors love unicorns. Right? Now here is the reality. Backers are looking beyond unicorns. They rely on smarter yardsticks such as the ability of companies to generate and compound free cash flow (FCF) consistently as against GMV (gross merchandise value). As startups list on the Indian bourses, the progress on actual growth metrics would be keenly watched. ‘Valuation’ and ‘value creation’ will be scrutinised using a broader lens. Companies that create efficient cash flow engines while ensuring top-quality governance will attract investors and capital seamlessly.

Cash flow, Communication and Culture

This brings us to the three Cs of business. While 2021 was all about people writing about VCs (venture capital), let’s talk about 3Cs.

Founders must remember that cash flow is always the king; valuations appear to occupy the throne only during a bull market. While plenty of hope capital has flowed in, the investors’ patience will diminish if companies fail to demonstrate the ability to create profits, growth and cash flows. Private equity (PE) players are acquiring companies at unrealistic valuations. An interest rate reversal will also reverse their interest in such companies.

‘Sustainable’ growth is also about the conduct of such companies and their founders. When ‘startups’ transform into public companies, the regulators and the public keep a watchful eye. When companies elicit their vision succinctly, it enhances comprehension of their ideas and evokes interest. Conversely, lack of clarity breeds confusion and can impact their share prices significantly.

To compound cash flows and to ensure clear communication, founders must build a great culture, which is driven by values, ownership, accountability and a sense of pride in the organisation. With hybrid work culture being no more an aberration, companies will have to create a culture of cohesiveness, clarity and inclusiveness to empower employees to succeed and become its true ambassadors.

Founders should waste little time in chasing VC money. While the company is just one among many in the VC portfolio, it is everything for the founder. If she focuses on it and checks the 3Cs regularly, VCs are bound to invest in the company despite a high valuation. VCs will also do their portfolio companies a world of good if they insist on the 3Cs in their evaluation checklist and monitor it closely.

With power comes responsibility and the founders must realise that the magic is in making the 3Cs happen, and not in chasing VCs.

Demarcate vision and execution

Founders must realise the need to entrust operations to experienced and capable hands, and graduate to visionary roles over time. Sustainable organisations are built by generals who have a stake in the game and the authority and autonomy to lead proactively. Founders backed by such generals have built professionally managed institutions that have outlived them.

On the other hand, many companies have failed because of the inability of their founders to address this issue. Founders must realise that hiring mercenaries isn’t a great idea as they move on when funds dry up. Mercenaries won’t stay long enough to win wars. ‘Institutionalisation’ under the watchful guidance of generals is the way to go.

Monitor unwanted spikes

Funding and valuation spikes have created an ‘ego’ surge too. If a founder, with his team, can stay grounded amidst the valuation hype, they will be better placed against setbacks too.
 
When ‘mean reversion’ starts playing out, it will create a visible gap between valuations and revenue. The startups that won’t grow revenues and profits will be constantly under pressure to justify their valuations.

There is too much hope capital that has flowed in, but the subsequent execution capital will trickle down painfully. While I don’t wish for it, consolidation is inevitable and there will be unicorn blood down the road if caution is not heeded.

2022 and beyond

New funds and capital will keep flowing into India and that’s only bound to increase. Will it be democratically distributed? Unfortunately not. We will see an era of ‘consolidation’ that follows. The companies that execute their vision efficiently will garner market share, revenue, profits and cash flows. When ‘consolidation’ plays out, such companies will attract more investments and become more valuable.

Companies that create strategic moats by learning fast, pivoting if necessary, and creating multiple revenue streams will ace the 3C framework with a distinctive check on cash flow, communication and culture. Prudent investors will keep an eye on such companies and will invest and flourish along with them.

The fear of missing out has made VCs invest in companies at astronomical valuations. Many startups have transcended a potential five-year growth journey in two years due to the fillip provided by the pandemic. Are the pandemic-induced conducive factors here to stay? Doesn’t seem likely.  



The market will soon start distinguishing companies that have toiled from the ones that got lucky. They will separate the process-driven unicorns from the rest. It is all about the balance you need while walking the ‘tight rope’ of entrepreneurship and this is exactly where investors will distinguish the best funambulists from the ones that may fall off.

While it is great to see such capital flowing into India, founders must remember that fundraising is just a milestone, and not an accomplishment. It is not a moat, but a means to buy resources such as skilled manpower, technology, and time. It does not guarantee great execution, which is the secret sauce for the success of startups.

Founders who are focussed on creating robust processes, and a culture of growth and development, will ensure that the learning curve across their organisation is better. They will manage upturns and downcycles efficiently.   

The writer is CEO, Mirae Asset Venture Investments India