The year of the soonicorn: investors come calling on the promise of strong valuations

Three months into 2019, the Indian startup ecosystem saw the latest entrant into the coveted unicorn club. Logistics startup Delhivery raised $413 million at a valuation of $1.6 billion. In 2018, the company was valued in the range of $600 million to $700 million.

Delhivery’s example speaks of the strides made by the Indian startup ecosystem, as a greater number of companies with the status of ‘soonicorn’ – those with valuation of just below $1 billion – are hungry to get into the unicorn club. And here, their enthusiasm is supported by investors, who fuel their aspirations with funding.

So far this year, investors have devoted greater focus, and funds, to soonicorns that are likely to soon break the unicorn barrier.

Also read: [Funding alert] Delhivery raises fresh funding of $413 million, charts out growth path

Harsha Razdan, Partner and Head – consumer markets, KPMG India, says, “The current funding landscape has evolved with a significant increase in startup investments. Investors need to have confidence on the short-term and long-term viability of ideas being pitched by entrepreneurs. India offers a vast market with a population of over 1 billion that is diverse, and has a growing prosperous middle class.”

He adds, “With increase in pervasive technological innovations and a corresponding boom in the available digital infrastructure, several tech-embracing entrepreneurs have been able to come up with innovative and feasible solutions.”

Potential market leaders

All soonicorns in India have a strong technology infrastructure which powers their business model. Online grocery startup Bigbasket was the second company that crossed over from being a soonicorn to a unicorn status in May this year with a funding round of $150 million.

Also read: BigBasket joins the unicorn club with $150M in fresh funding from Alibaba, others

So far this year, startups that have received over $100 million in funding are Cardekho, Firstcry, Delhivery, Bigbasket, Grofers, and Blackbuck. The common trend among all these startups is that they were already classified as soonicorns in 2018, and investors have continued to pour money into them.

Three startups among them – Firstcry, Delhivery, and Grofers – have Softbank as a key investor. The Japanese investment powerhouse with its $100 billion Vision Fund has been one of the largest investors in the Indian startup ecosystem, touching around $10 billion in investments.

Speaking about the investor focus on soonicorns, V Balakrishnan, Chairman, Exfinity Ventures, says,

“It all started with Softbank, which scouted for the market leader, gave them a large stake and set aggressive targets. Once they achieve a particular size, the goal is to look for an exit.”

He feels other investors have now caught onto the trend as well.

Rising investment momentum

A report by Bain & Company along with Indian Private Equity and Venture Capital Association (IVCA) titled ‘The India Private Equity Report 2019’ says, “India remained a hotbed for deal making in 2018. Investment momentum was robust for a second consecutive year, with total investment of $26.3 billion from approximately 793 deals during the year. While the deal volume was higher than in 2017, the average deal size was flat. The result was a small decline in total investment value, which still was the second-highest in the last decade.”

In such an environment, where capital is focused on relatively larger companies, the one question that arises is whether early stage startups will receive the attention of investments. According to Harsha, India has seen a significant rise in investments made in early-stage startups, at around $4.2 billion in 2018.

“The funds looking at soonicorns and early stage companies are completely different. For example, a fund which does a $10 million deal will not do a $100 million deal, which will be the minimum deal size for a soonicorn. In fact, it might help them as more and more companies move from soonicorn to unicorn,” he says.

The report by Bain & Company says,

“We believe there is sufficient India-focused dry powder to ensure high quality deals don’t lack capital.”

This, the report suggests, stands at around $11.1 billion, the second highest level in the past decade.

Early stage

“When it comes to funding, we strongly believe that access and availability of funds is not a challenge for early stage companies. What is crucial for early stage companies is that they have a sustainable differentiated business model focused on a solid top-line and bottom-line trajectory. This will also ensure consumer and investors interests being protected,” says Harsha.

There is a significant amount of risk capital that has gone into early stage funding, and with several investors believing in increased quality and quantity of deals, it has given entrepreneurs more confidence.

However, Balakrishnan sounds a note of caution. He says earlier, the game was on the premise that higher the revenue growth, the better would be the valuation of a startup when it went for an IPO or an acquisition. However, the poor performance of recently-listed companies like Uber and Lyft has dampened such expectations.

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