Unicorns: To invest or not to invest?

We haven’t even finished the first half of 2022, and yet we have 17 companies that became Unicorns (valuation of USD 1 billion or more), taking India’s total count to 103. India is expected to have nurtured 250 unicorns by 2025. For context, there are 1066 Unicorns in the world, with 460 in the USA and 301 in China, followed by India in third place. Another 100+ start-ups are ‘soonicorns’, with the potential to reach unicorn status in a year’s time. As an investor, it is certainly an exciting time to see one’s capital multiply – so why would I write an article titled how to bust one?

For one, unicorns are not the same as ‘too-big-to-fail’ companies whose near-collapse that set off the 2008 crisis. If they falter, the market will let them fail. Secondly, despite their size, there is nothing unique about them – the same market forces and laws still apply to them. Third, there are names like Tesla, Solyndra, Theranos, Housing.com, PayTM, and Oyo that can wake investors up with nightmares, even though not all of them have necessarily failed. Indeed, with their internal finances and internal culture in question, some of India’s most familiar names are not the same as the ones that give confidence to investors – Zomato, Housing, Grofers (now BlinkIt), Snapdeal and Flipkart.

Even if culture hasn’t eaten strategy for breakfast, having no strategy is a problem. PayTM is a case in point. It did nicely while e-wallets were a thing in the mid twenty-teens, but once UPI came into play in 2016, it gradually lost its big USP. As virtual wallets declined (when last did you use one?), PayTM shifted to doing this and then doing that – resulting in a business whose viability was questioned by investors. This that infamous IPO in ’21. PayTM tested another old maxim – that no one will buy your sizzle when there is no sausage at the end of it – and the maxim won. Maybe it will still find its feet. Many unicorns have become downicorns and come back. Leaving scope for an industry making -icorn words.

Having your finances in order is another thing, but that’s for another article. If you’re planning to invest in a unicorn (and often a good choice if made carefully), ask yourself some questions as follows:

1. Does the start-up have a real product that users want? The story of Juicero – the juice press maker – is one of the cautionary fables of the modern world. Who wants to buy a machine to squeeze juice packets, when you can squeeze them, um, by hand? On the other hand, governments are going to make you buy electric cars to bring the carbon footprint down, so anyone in that business, has long-term viability, even if they face short-term problems now. It’s a simple thing after all – if a company is going to go on making sales to new and repeat customers, it will eventually make a profit.
2. Does the unicorn have a business model? Will its products be profitable to make in the long run, or will it keep churning out losses? Does it offer a value proposition for clients, which will not be overcome by competitors? Don’t worry about temporary blips but worry about the founders’ or executives’ ability to solve them.
3. Does the start-up have a ready and sustainable market? We all tried Pepsi Atom once, failed to like it, and Pepsi had to discontinue it in a year. If mainstream companies can fail, so can start-ups. When last did you refill your PayTM wallet, rather than just using it as a UPI interface?
4. Does the start-up have a reliable supply chain? This applies both to getting raw materials and distributing finished products. Of course, many tech unicorns can escape this.
5. Is the start-up ethical? I know that this sounds woke, but it’s a real question. Some have come under the government scanner for harassing customers (like easy loan apps)
6. Is the startup facing governance issues? If the unicorn’s customers are complaining, then it’s a bad sign. If the founders are under investigation for questionable financial actions (like Theranos and Zilingo), it’s a red flag. If the company is known more for its drama than its balance sheet, avoid it.

I have long believed that the New Economy is nothing but the old one with new technobabble. The six questions I ask are applicable to any business. If a business answers them satisfactorily, it’s a great investment since the business knows how to make money and deliver value. It may face temporary turbulence, but if you stay invested, you will reap rewards. If the business is just an investors’ cash furnace, living on investor funds with no viable business plan, cut your losses and say bye. That’s what I call the Sanjay Dangi guide.

The article has been written Sanjay Dangi, Director – Authum Investment and Infrastructure Ltd., & Financial investor to many startups.