Over the past one year, as interest rates have hardened globally and investor appetite has turned cautious amid a global economic downturn, startups in India have been hit hard by the global funding winter. Yet, India, which currently has 83 unicorns, could see as many as 147 more startups turning unicorns in the next five years, according to a study by ASK Private Wealth and Hurun India.
Unicorns are essentially companies that are valued at $1 billion. According to ASK Private Wealth Hurun India Future Unicorn Index 2023, there are 51 gazelles and 96 cheetahs in the country currently. Gazelles are companies with a valuation of $500 million to a $1 billion and are likely to turn unicorns in three years. Cheetahs are companies with high growth potential valued at $200 million to $500 million and likely to become unicorns in five years.
These future unicorns are currently worth $57 billion, according to the study. E-commerce, fintech and SAAS related companies comprise 42 per cent of the future unicorns list this year.
The outlook for India's startups may seem buoyant over the next few years, but the funding winter has had an impact over the past year and continues to cast a shadow on the near-term outlook.
According to data provider Tracxn, startup funding in the January-March quarter slumped 75 per cent to $2.8 billion, compared with $11.6 billion, in the year-ago quarter.
The impact of the slowdown in funding is clearly visible from the fact that from the earlier ASK Private Wealth Hurun future unicorns index, while 24 startups became unicorns last year, only three have this year. Also, 8 gazelles from the earlier list got demoted to cheetahs and another 18 companies dropped out of the future unicorns index all together, according to the study.
Rising interest rates and geopolitical headwinds have combined to make it harder for startups to raise capital, agreed Anas Rahman Junaid, founder and chief researcher at Hurun India.
"The slowdown in the economy has been tough for certain companies, with almost 20 per cent of last year's gazelles/ cheetahs either dropping off the list or being downgraded. Hurun Research believes these companies could no longer go unicorn within three years," he said.
However, experts say while funding has dried up for companies where the risk is higher, there is still enough money available for well established businesses. That is perhaps evident with the future unicorns list seeing addition of 48 new companies this year.
"Two types of funds are being raised, one being late stage, where people want to go and put money behind the winners, where there is clear establishment of them being leaders and there is clear path to profitability and the second is in early stage, but more related to generative AI (artificial intelligence), deep tech, where people are still finding very new quality businesses that are coming up and valuations there are still reasonable," said Rajesh Saluja, CEO and MD of ASK Private Wealth.
Deep technology startups related to defence equipment, scientific discoveries, drones, quantum computing etc., and AI related to fintech, are unique areas where there is lot of investor interest, said Saluja.
He expects the interest rate cycle should peak out in six to 12 months and as interest rates begin to fall, the funding environment will also improve.
"On the listed equity space, we have already seen foreign fund flows have picked up; net flows last two months itself are close to Rs 60,000 crore. Money finally chases growth. India's growth opportunity remains very strong, including startups. As interest rates peak out and start looking lower, you find lot of money moving out of fixed income and then chasing growth. Its going to be a much better year next year," Saluja noted.
According to ASK Private Wealth Hurun India Future Unicorns Index 2023, Bengaluru remains the startup capital of India with 53 probable unicorns, followed by Delhi NCR with 29 and Mumbai with 19.