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Siddhartha Jain
Founder at First Crayon

Death of an Indian Unicorn — Anecdotal Study

On March 15 2015, Fortune ran an article titled ‘Bill Gurley predicts ‘dead unicorns’ in startup-land this year’. For those of you who don’t know Bill Gurley, he is one of the early backers of Uber and Snapchat. Since that article, the number of unicorns has gone up by 50% (96 as of March 2015 vs. 147 as of January 2016). Although a little older, the below graphic shows an increasing pace of unicorn creation. Can you spot the Indian startups?

Source: CB Insights

So was Bill wrong? While he might have been off on timing, there are early signs that things are not too well in Unicorn land. One of the first tangible signs is down rounds (term for raising money at lower valuation compared to previous round) by marquee startups like Foursquare, Jawbone, and DoorDash. Also, there are whispers in Silicon Valley that investors are now starting to maintain a list of dying unicorns. CB Insights has created a list of early-stage companies it believes are likely running out of cash. All of this chatter is flared by news of increasing interest rate environment in USA, slowing down of Chinese economy, failing startup IPOs, and falling oil prices (making Arab investors and SWFs pull money out of stock markets).

Closer to home, there are already noises about Unicorn deaths in China. Already in 2015, there has been news of many smaller Indian startups either shutting shop or getting acqui-hired (mostly another name for could not raise enough cash to run operations). With all of this as background, we set out to understand the state of India’s current and potential unicorns and their chances of survival. We analysed 31 companies with total funding above US$50 mn. based out of India (no Saavn or Freshdesk) which have at least raised one funding round in 2015. In total, these companies have raised US$ 9.3 bn (~62,000 crore) of which 40% came in the latest round.

In order to calculate the survival chances, we rated the companies across 8 factors from independent sources:

  1. Fire employees
  2. Scale down operations
  3. Exit of top management
  4. Presence of well funded competitors
  5. Trouble in international benchmarks
  6. Employee rating (Source: Glassdoor)
  7. Customer rating (Source: Google Play Store)
  8. Lower money compared to previous round in last 3 funding rounds (Source: Crunchbase)

Below are the 3 main insights of the analysis:

  1. E-commerce, Logistics, and Foodtech are the most stressed sectors: With multiple well funded players, employee firings/dissatisfaction, and raising of lower value rounds, these 3 sectors are the most likely place to throw up the next dead unicorn. The most likely candidate being being Snapdeal, Grofers, and Zomato in each space respectively. There is eery similarity between the ‘hottest’ sectors of previous boom cycle and the most stressed sectors. Coincidence, not!
  2. Inverse correlation between funding raised and survival chances: The results challenge the prevailing logic that the more money one raises, the more immune one is to failure. Another downside of the herd mentality maybe? It would seem that the money comes with increased expectations, surprise surprise. In order to justify high valuations, well funded players are trying to find new growth avenues while battling smaller players on their own turf. Whether it be Zomato and Grofers shutting down operations in smaller towns or Flipkart and Snapdeal battling smaller players like Urban Ladder and Big Basket, examples are abound.
  3. Lack of established leaders = open season on startups: One of the main reason why well funded players are struggling inspite of large market is the competitors who are sharing the market with them. According to Vani Kola (Managing Director, Kalaari Capital), more than 4,000 startups were launched in 2015. Most spaces don’t have clearly established leaders. Even Flipkart which consumed 30% of all funding raised by the 31 analyzed startups, is not a clear winner. Flipkart tripled it revenues (US$ 1.5 bn., INR 10,000 crore) and losses (US$ 300 mn., INR 2,000 crore) in FY 2014. Amazon, Snapdeal, and Shopclues are challenging it across product categories while players like Urban Ladder are taking over the most profitable areas. Relative to other sectors, Practo, Oyo, and NetMeds have been able to carve a clear leadership position in Online healthcare, branded hospitality, and medicine delivery respectively.

And now for unveiling the names. Below are the 5 startups that scored the lowest survival score in order:

  1. Zomato
  2. Housing
  3. Grofers
  4. Snapdeal
  5. Flipkart

Bottom-line: Are we likely to see a sea of dead unicorns? Unlikely. Will there be casualties? Of course there will be. But startups stuttering (price of innovation), shutting shop (remember that more than 90% of the startups fail) or consolidating, is probably a good sign rather than bad. These startups will have to quickly align with the changing global and local landscape or be pushed into oblivion. India will continue to be a bright spot amongst global turmoil. But the language and construct will change. The coming startup cycle will be about the path to profitability, international expansion, and public markets. This study aims to only highlight that in today’s environment, no one is safe and that raising money is no guarantee of success.