Factors that could slow down the spawning of Indian unicorns in 2022

Apart from Fed rate hike, inflation and Russia-Ukraine war, it is the challenges within the soonicorn ecosystem that could spoil the billion-dollar party for many enterprises.

According to a recent survey by Iron Pillar Funds, India is set to have 250 unicorns by 2025. The report says that during the past 15 months, the number of enterprises with unicorn status rose from 62 to 130. Though the target of 250 unicorns is still achievable, many VC players are saying that the pace may get a bit slower in 2022.

Year 2021 saw over 40 startups joining the billion-dollar club. According to PGA Labs, unit of consulting firm Praxis Global Alliance, India will see an additional 45 unicorns. However, only a handful of soonicorns have managed to raise funds in the first quarter of CY22. According to Venture Intelligence data, only three soonicorn’s have raised funds—Perfios Software, Rupeek and InfMoney.

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

Some of the reasons for the slow down include a spike in the US interest rates, geopolitical tensions due to Russia-Ukraine conflict, rise in inflation, add to this the stock prices crash in the US tech stocks.

VC players across the spectrum believe that after the frenzied investment activity in 2021, this year will see some caution. This, in turn, will impact valuations as well as deal closures for 2022.

Niren Shah, managing director and head of Norwest Ventures Partner India, believes the pace of unicorn creation will be similar to that of last year, although the underlying segments from where the 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 of the year," he added.

“There is certainly more caution in the market, and investors are much choosier. But I would see it in a positive manner that the whole frenzy has come down and we will see a much more normal funding cycle. So by the end of the year, if we had the same frenzy the investment would be far higher,” added Venkatesh Peddi, managing director and partner at Chiratae Ventures.

Peddi also believes that with Fed cuts and rising inflation, investors will probably spend more time in due diligence and governance issues, and could end up finding 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 over $6 billion from the $4.2 billion in 2021.

Rather, according to an InnoVen Capital report, about 47 per cent of investors expect funding activity in 2022 to slow down to some extent. In 2022, investors indicated that SaaS, Web 3.0, FinTech, Health-Tech and Creator economy were areas of interest.