Zomato to Nykaa: India's unicorns face the m-cap test as IPOs loom

Investors have been tripping over one another to fund a host of Indian startups. Will the stock markets show the same enthusiasm when some of them launch IPOs this year?

In 2011, a nervous Naveen Tewari, founder of inMobi, flew to Japan for a meeting with Softbank CEO Masayoshi Son, hoping to convince him to invest in his mobile advertising startup. Contrary to his apprehensions, the meeting went swimmingly, so much so that 15 minutes into the presentation, Son agreed to write a cheque for $200 million. But he gave Tiwari one piece of advice. According to a source, Son said, “Go and conquer the US and China markets.”

Tewari did just that. Today, as much as 80 per cent of his revenues comes from the two countries. Son’s cheque enabled inMobi to become the country’s first unicorn, or a startup company valued at over $1 billion. Glance, a platform which inMobi launched two years ago, has also become a unicorn.

After a track record of profits for four years, inMobi is now going in for an initial public offering (IPO). Says Tiwari: “We are planning to go in for an IPO in the next six to 18 months, which will be used for acquisitions and growth.”

According to merchant bankers, the company is expected to be valued at $12-14 billion.

Welcome to the world of startup unicorns that are taking the first steps towards IPOs. The 37 unicorns in India have together raised over $38 billion, but are valued at four times more — $145 billion. And at least 10-12 of them, including big names such as Byju's, Zomato, ReNew Power, Paytm, Udaan, Policy Bazaar, and Nykaa, among others, are looking to go public within the next 36 months.

RePower, for instance, has already announced a listing on NASDAQ through a merger with a special purpose acquisition company in the US, and has been valued at an enterprise value (EV) of $8 billion. And Zomato is reported to be considering an IPO and is looking to raise between $750 million and $1 billion, which would value the company at $6-8 billion.

That means by the time the BS1000 edition for 2022 hits the stands, the list of India’s top companies by market capitalisation could see the addition of at least a few companies from the unicorn space.

Merchant bankers say that some of these startups will raise a minimum of $10 billion in the next three years, and there are more than 50 other startups that are on the verge of attaining unicorn status. The top 20 among them have already raised over $3.8 billion.

One of the biggest players looking to take the IPO route in the next 24-36 months is edtech company Byju’s. Founded by Byju Raveendran, the company will possibly list in both the US and India, and the money raised will be used primarily for acquisitions in the two countries. While its India operations have been profitable for two years, Raveendran expects the foreign business, too, to make money by next year.

Raveendran, a maths teacher from a village in Kerala who learnt English by listening to sports commentary, says he was an accidental entrepreneur. After he had done a three-year stint in the US, his friends hired a classroom in Bengaluru in 2011 and roped him in to teach maths to 35 students. Raveendran’s classes became so popular that they had to hire the entire Indira Gandhi indoor stadium in Delhi to accommodate 25,000 students and use six giant TV screens, as he got into the tuitions business himself.

“Killing and disrupting the offline model which we started in 2011 and going online through our app in 2015 was easy for us. In the four years that I was teaching live, we were already using video formats and experimenting with content to reach large classes,” says Raveendran.

Raveendran’s unique sales proposition was that he created content using entertainment formats like movies, gaming and so on, which the kids lapped up. In fact, he says Byju’s has one of the largest movie and gaming studios in the country, with over 2,600 employees churning out innovative content.

At Byju’s, algorithms customise the learning based on the student’s ability. Says Raveendran, “The aim is to give them the right amount of chocolate coating before you introduce broccoli. Our model is not copied, but it is unique to India.”

The Covid-19 pandemic gave a huge fillip to Byju’s business, as more and more students started using the app after the lockdown kicked in. While the app had accumulated over 45 million users in four-and-a-half years, it garnered a similar number in 2020-21 alone. Even its paid users have nearly doubled in just one year — from 3 million to an expected 5 million in the current financial year.

In the last 10 months, Byju’s has aggressively scaled up its international business, offering online classes in English-speaking markets like the US, UK, and Australia, among others. Raveendran says that by 2021-22, revenues from the international foray ($350-400 million) will grow to a third of what they project to make in India ($1.2 billion).

But it is not Byju’s alone which saw an opportunity during Covid-19. Second-hand car startup Cars24, which recently became a unicorn, did the same. After winding down their online furniture business, Fab Furnish, founders Vikram Chopra and Mehul Agarwal decided to venture into a new area. Says Ruchit Agarwal, a former investment banker with Merrill Lynch and Bank of America, who also joined as a co-founder: “We have two pillars — leveraging technology, which has not been done in this space, and an obsession with customer experience to build trust.”

The company, which has around 4 per cent of the $50 billion second-hand passenger vehicle market, built its own proprietary technology to assess the condition of the cars. Price discovery takes place through a short, half-hour auction window on its platform, which has over 10,000 dealers on it. So, you can get out of their outlet in an hour with the car sold, the money transferred to your bank, and all the necessary paperwork done. Cars24 also has a non-banking finance company that offers finance to both consumers and dealers.

When the pandemic hit, and many more customers were looking for personal transportation to protect themselves from the risk of infection, traffic on Cars24 grew four-fold. It also gave them the opportunity to launch a second-hand two-wheeler platform.

Agarwal says they also tweaked the sales model to adapt to the challenges of Covid-19. Instead of cars being brought to their offices by customers, the company’s salesmen now went to customers’ homes to undertake the same process. “This has helped us launch services in more cities and scale up quickly, as we don’t require real estate, and is also cost-efficient. Nearly 50 per cent of our business comes from homes now,” says Agarwal.

The company has now taken its services to 130 cities, up from 70 cities before the pandemic. Cars24 hopes to expand its reach to 200 cities in a few quarters. And, while there is no specific plan for an IPO, the company could look at a listing in case there are opportunities for mergers and acquisitions to consolidate its market share.

Even former Flipkart employees and IIT alumni Amod Malviya, Sujeet Kumar and Vaibhav Gupta leveraged the lockdown by building trust with small retailers, as they managed to deliver products to their stores, when others failed. Udaan, a B2B e-commerce retail platform set up in 2016, has already roped in over 3 million kirana shops (out of 16 million) and over 25,000 sellers, and can deliver products in 12,000 PIN code areas. And they are taking on the might of companies like Jio and Amazon.

“We have only a 0.4 per cent share of the $780 billion market. In seven years we will be 10-14 per cent. We can become profitable now, but we are in the investing phase. Our aim is to prepare for an IPO in three years,” says Sujeet Kumar.

When Falguni Nayar, a former investment banker at Kotak, decided to take the plunge into the online beauty business, there were just a couple of small players in the market. Nayar, who has worked on many IPOs with Indian promoters, might soon bring that expertise into play by taking Nykaa, her online beauty company, public.

Nayar learnt about the beauty business on the job. For instance, she realised that customers like going to a store once in a while to try out products. But they also like to buy from the comfort of their homes. That is why she has 75 Nykaa stores across the country. Moreover, research on her customers showed that they wanted Nykaa for needs beyond beauty. So the beauty startup has forayed into fashion as well.

Though Covid-19 affected Nykaa’s business for a while, Nayar reinvented the model, using technology to undertake hyper-local delivery through the company’s physical stores, in spite of the lockdown-induced restrictions. Merchant bankers say that with its beauty business having been profitable from last year — it is now valued at $1.2 billion — and the fashion business also going that way, Nykaa is ripe for an IPO.

One startup stands out among India’s list of unicorns — Sumant Sinha’s renewable energy company, ReNew Power. Sinha, who was earlier with wind turbine manufacturing firm Suzlon, saw a big opportunity in this space. So he set up ReNew Power, hoping that private equity (PE) funds would back him.

But he faced a big challenge. “Unlike other startups, we were a capital-intensive business, and I needed $70-80 million to launch the plan of building capacity to produce 150 Mw of power. The venture capital funds found the money too much and the PE funds said we were too early, as the sector was not known,” he recalls.

Sinha knocked on the doors of over 35 PE funds before he got Goldman Sachs to give him $100 million. Today, ReNew Power has a 10 per cent share of the country’s renewable power sector, which makes it the largest player in the field.

ReNew Power generates positive cash flows, so it can depend on debt, which is not available to many unicorns. The company has a debt to equity ratio of 3:1, and with an EBITDA of $600 million last year, Sinha says its enterprise value is about $8 billion. “An IPO is a natural progression and provides liquidity to shareholders.” Right now, apart from doubling his installed renewable capacity in three years, he is also looking at opportunities in energy storage — hydrogen, batteries, among others. 

Sinha is not planning to go global as there is a large, untapped renewables market in the country. But a company like inMobi has always operated in the global mobile advertising market, which is dominated by Facebook and Google.

So, how does it survive in this cut-throat space? Says Tiwari of inMobi: “Seventy per cent of the mobile ad market globally is with Facebook and Google. But there is an open garden of the rest, which accounts for 1.6 billion customers and 20,000 mobile apps. We can be a big player in this space.”

He points out that this market is here to stay, for two reasons. One, there is a growing anti-trust move by governments in various countries against these platforms. And two, advertisers want to hedge their bets and not overly depend on Facebook and Google.

Clearly, inMobi’s model for going global has been emulated by the likes of Ola and Oyo, and is prompting others like Byju’s, Cars24 and even Nykaa to join the party. The question is, can they all put the Indian flag on the global map?