How do investors identify a startup that’s going to become a 'unicorn'?

How do investors identify a startup that’s going to become a 'unicorn'?

Thursday February 07, 2019,

5 min Read

At TiECon 2019, investors focused on what makes a company with 'unicorn' potential stand out from the crowd, and the traits a successful entrepreneur possesses.


The 'unicorn', that legendary creature with a single, pointed and spiraling horn on its forehead, has always had a place in popular culture. In 2013, venture capitalist Aileen Lee made the mythical animal one of the most prized members of the startup ecosystem by calling a privately held startup valued at over $1 billion a 'unicorn'. It represents the rarity of such success and is one of the biggest dreams that startups have.

India has 26 'unicorns', each of them offering inspiration and motivation to other entrepreneurs. From Flipkart and Swiggy to Freshworks and BYJU's, Indian companies are setting the bar high for the next set of entrepreneurs.

“I believe we will have 100-plus 'unicorns' by 2025, all solving for India and being mobile first. The consumption story in India is very strong,” said Mohandas Pai, Chairman of Aarin Capital. He was speaking at the second day of TiECon 2019, the annual flagship event of TiE Mumbai.

But how do investors spot a company with 'unicorn' potential? What are the key signs to look out for? What traits should the founders exhibit? All this and more was discussed by a group of industry experts at the technology and entrepreneurship conference held at the NCPA in Mumbai on February 5 and 6.

Also read: India will have more than 100 unicorns in the next 5 years: Binny Bansal at TiEcon Mumbai

Tech can solve problems

Pai said startups needed to be imaginative and understand how to use technology to solve for various consumer problems. “The timing is right. With the usage of mobile and data increasing in India, (there are) several startups that can become great businesses,” he said.

There’s a reason giants like Walmart and Amazon are betting big on India. With computing costs falling, the mobile will offer more for businesses and consumers. AI will end up realigning several jobs. Not to forget: India’s average age will be 27 by 2025, the youngest population in the world.

But Mohandas Pai warned that India also stood the risk of becoming a digital colony if we did not invest in the Indian startup ecosystem.

Also read: Japanese tech startups start to explore India for customers and tech talent

What do the funds think?

Venture capital funds like Naspers, Matrix, IIFL Wealth, and SoftBank, which have bet on companies like Ola, RedBus and OYO,  believe that no one really goes looking for an entrepreneur “who can become an entrepreneur”.

Avnish Bajaj, Managing Director at Matrix Partners, said: “I look at a synergistic system with entrepreneurs. The smaller funds invest in startups because they can expect - based on the success - larger rounds with big funds. Founders these days want to run the company for the long term and are focused on building big businesses. We funded, for example, an entrepreneur at a time when he had an FIR against him; that didn’t mean he was a bad person. We saw him build one of the biggest businesses in India.”

But setting up a startup is not easy, and becoming a 'unicorn' is as tough as it gets. According to TiE, the US has more than 80 'unicorns' while China has more than 120. Several of these companies are those that win the maximum number of users in the shortest possible time. For example, WhatsApp had hundreds of millions of users before the messaging service was bought by Facebook.

The founder must be focused

But the fact remains that when a fund or investor is betting on a startup, it is essentially betting on the entrepreneur and his or her big idea. That makes it vital for the entrepreneur to be clear and focused.

Sumer Juneja of SoftBank India said: “There are hard and tough decisions to be made. We believe that there should be one top dog in the startup; that is very important in a startup looking to raise big money. Valuations exist, but, we go after companies with 70-80 percent market share.”

Also read: These entrepreneurs show that academic pedigree is not a precursor to success

Rome wasn’t built in a day

All investors believe that the journey from startup to Unicorn doesn’t happen overnight. It takes time, and consistent focus by founders who are disrupting the industry.

Ashutosh Sharma, India head at Naspers Ventures, said they take a long-term view - 10 years - as an investor. “It's not a one trick pony. If you look at India in 2010 and now, the business plans are much better. At Naspers, we have given billion-dollar cheques and one million-dollar cheques. We invest in founders who are really changing the market dynamics. And of course, we are looking at original businesses.”

Also read: 2018 was the year when Indian startups attracted new investors and welcomed new 'unicorns'

Failure is never fatal

Finding a 'unicorn' in India requires startups to focus on Indian problems. For example, Swiggy and Flipkart trained employees in the supply chain and service, to pack and present the product in a particular way. Indian entrepreneurs are pushing boundaries to solve problems in India and often making mistakes. But investors believe that’s perfectly fine.

Karan Bhagat, Founder of IIFL Wealth, said: “Failures are important. You decide on a goal; if your intent is good, then failure is OK. To be honest, one does not apply the mind to what happens in 15 years. But there are three stages; you need to align your employees, your clients, and your interests, or you can never grow. Divest more and share more if you want to scale.”

Every startup dreams of becoming a 'unicorn'. The road there may be arduous, but sweat, determination, and hard work can help the dream come true.

Also read: What are investors expecting from Indian startups in 2019?