Explained: Why India is adding unicorns at a slower pace than 2021

The Indian startup ecosystem recently celebrated the 100th unicorn milestone. It came after a month of no big fund announcements. Compare this to 2021, when three to four unicorns were being added every month.

Nevertheless, the 100th unicorn needs to be celebrated since the first unicorn was announced in 2011 — 11 years ago. But the question being asked now is: Is the pace of unicorns that 2021 saw slowing?

According to PGA Labs, unit of consulting firm Praxis Global Alliance, India will see an additional 45 unicorns this year. However, only a handful of soonicorns have managed to raise funds in the first quarter of CY22. According to Venture Intelligence data, only three soonicorns have raised funds — Perfios Software, Rupeek and INDMoney.

According to a recent survey by Iron Pillar Funds, India is set to have 250 unicorns by 2025. Though the target of 250 unicorns is still achievable, many VC players are saying that the pace may get a bit slower in 2022.

“The pace will reduce in the second half of the year due to global macro risks affecting liquidity. But net-net, we may still end up with a number close to that of 2021,” said Anand Prasanna, managing partner, Iron Pillar Fund.

He added that there are challenges ahead that may impact the soonicorn to unicorn journey. “Increasing customer acquisition costs, poor performance of some consumer tech unicorns that went public recently and general macro challenges for the Indian economy, all can affect the pace of unicorn creation in this year,” added Prasanna.

Some reasons for the slowdown include a spike in the US interest rates, geopolitical tensions due to the Russia-Ukraine conflict, rise in inflation, and the price crash in the US tech stocks.

VC players across the spectrum believe that after the frenzied investment activity of 2021, this year will see some caution. This, in turn, will impact valuations as well as deal closures.

Niren Shah, managing director and head of Norwest Ventures Partner India, believes the pace of unicorn creation will be similar to last year’s, although the segments from where unicorns will be produced continue to be dynamic. “The year has shown a strong start in the number of unicorns, but global market conditions could play spoilsport in the second half,” he added.

“There is certainly more caution in the market, and investors are choosier. But I would view it in a positive manner: that the frenzy has tapered and we will see a much more normal funding cycle,” added Venkatesh Peddi, managing director and partner, Chiratae Ventures.

Peddi also believes that with Fed cuts and rising inflation, investors will probably spend more time on due diligence and governance issues, and may find sectors like software-as-a-services (SaaS) more attractive.

“SaaS as a sector for investment compared to other tech sectors is still small, and perhaps will take another 5-6 years to be higher in terms of attracting funds. But this year we think the sector will see faster investment growth than preceding years,” added Peddi. According to a Chiratae Ventures and Zinnov study, 2022 will see the SaaS segment attracting investment of over $6 billion — up from $4.2 billion in 2021.

Meanwhile, according to an InnoVen Capital report, about 47 per cent of investors expect funding activity in 2022 to slow down to some extent. Investors indicated that SaaS, Web 3.0, fintech, health-tech and creator economy were areas of interest this year.