New Indian unicorns get rarer in 2022 as funding winter sets in

• While 46 companies turned unicorns last year, according to Tracxn’s Geo Annual Report: India Tech 2022, the number of companies that attained this much-coveted status in the startup world fell to 22 in 2022.
  
• The number of unicorns may have fallen but the number of gazelles and cheetahs – the future unicorns – went up this year, says a Hurun report.
  
• However, India has emerged as the third largest ecosystem for startups after the US and China.
  
• Industries like auto, fintech, cleantech, agri-tech, lifestyle deep tech, artificial intelligence, and climate tech are projected to secure higher valuations in 2023.

This year, India added fewer unicorns to its list as the number of companies that gained billion dollar valuations fell by over a half from a year earlier. While 46 companies turned unicorns last year, according to Tracxn’s Geo Annual Report: India Tech 2022, the number of companies that attained this much-coveted status in the startup world fell to 22 in 2022.

India added 20 unicorns with a total valuation of $26 billion in the first half of 2022, according to the ASK Private Wealth Hurun India Future Unicorn Index 2022 . However, the momentum fizzled in the second half when it added only two more unicorns – as the funding winter set in.

Since funding is key to survival in the startup world, many of them went in for retrenchments – forcing them to do more with less. According to Tracxn’s Geo Annual Report: India Tech 2022, funding winter set in in the fourth quarter of 2021, with funding on a declining trend since then.

The worst of its effects were however felt in the Q3 of 2022. As per the IVCA-EY Report, PE/VC investments stood at $8.3 billion in India in Q3 2022, declining 69% year–on-year.

“Because of rising interest rates and fear of a worldwide recession, investments across all industries have been impacted,” stated the Tracxn report, which pegged that the average time startups took to go from Series A to unicorn round was 5.1 years in 2022.

As the number of funding rounds dropped by 30% from Jan-Nov 2021 to the same period in 2022, the bigger deals declined even deeper.

The number of companies closing $100 million plus funding rounds has also dropped by 35% to 55 in 2022, as compared to 85 in the same period last year, according to Geo Annual Report: India Tech 2022.

This had a direct effect on the number of unicorns that were produced. According to the KPMG Venture Pulse Q3 '22 report, the number of down rounds – where funds were raised but at lower valuations – will become more common.

“The desire to be called a unicorn is very appealing for startups, but in many cases it comes with a cost. We’ll start to see investors look at startups and saying, ‘You want to be a unicorn? To get that valuation, we want more influence and more favourable liquidation preferences’,” says Jules Walker, senior director - business development, KPMG US.

India’s new unicorns in 2022

Tracxn Geo Annual Report: India Tech 2022

To-be unicorns: The rise of the cheetahs and the gazelles

Funding winter notwithstanding, India has become the third-largest ecosystem for startups, with 69,000 startups and the steady rise of entrepreneurs.

“India has emerged as the third-largest ecosystem for startups after the US and China, and saw a record 44 startups turning into unicorns in 2021. It has the third-highest number of unicorns and gazelles in the world,” Rajesh Saluja, CEO & MD, ASK Wealth Advisors. To be certain, while Tracxn report estimates 46 unicorns were created in 2021, ASK Private Wealth Hurun India Future Unicorn Index 2022 report estimates this number to be 44.

An interesting trend that has emerged is that India has produced more cheetahs and gazelles than unicorns this year. Gazelles are startups that are most likely to turn into a unicorn in the next two years; and cheetahs are startups that could turn into a unicorn in the next four years.

India is currently home to 84 unicorns, 51 gazelles, and 71 cheetahs, as against 51 unicorns, 32 gazelles, and 54 cheetahs in 2021, ASK Private Wealth Hurun India Future Unicorn Index 2022 revealed. Moreover, the country’s future unicorns – i.e. 51 gazelles, and 71 cheetahs – are currently worth $49 billion, with an increase of 36% as compared to last year.

According to ASK Private Wealth Hurun India Future Unicorn Index 2022 – with 84 unicorns –India is ranked third globally in terms of the number of unicorns featured in the list. The cumulative wealth contributed by the Indian unicorn and gazelle listers to the IIFL Wealth Hurun India Rich List 2022 increased by 35% to ₹3.14 lakh crore.

Top investors in Indian startups in 2022

With investments in 39 probable unicorns, Sequoia is the most active investor in the ASK Private Wealth Hurun India Future Unicorn Index 2022. Classplus, DeHaat, Porter, Progcap and CityMall are all funded by Sequoia. It also has two unicorns in its portfolio — Zetwerk and Mamaearth.

Tiger Global, with stakes in 27 future unicorns, ranks second on the list of top investors in the same future unicorn index. GreyOrange, Captain Fresh, and MoneyView are a part of its portfolio.

Sectors projected to see good valuations in 2023

While enterprise applications, fintech, and retail raised the most funds in 2022, come 2023, it’s deep tech and AI that could take over, say experts. “Given the current financing environment where our crystal ball is clouded by fast-rising inflation, tightening fiscal policy of the central banks makes 2023 hard to predict. However, we believe that industries like auto, fintech, clean tech, agri-tech, lifestyle, might see higher valuations in 2023,” Pallav Kumar Singh - managing partner of early stage venture capital firm Sphiticap told Business Insider India.

Industries like EdTech and fast commerce saw their valuations soar in 2021, experts say, but next year will be that of deep tech, agri-tech, artificial intelligence, clean tech and climate tech.

Investments in sectors that had tailwinds from Covid-led consumer behaviour – such as EdTech or work-from-home tools – dropped or remained stagnant whereas funding across B2B-focussed enterprise software and deep tech has seen growth, said Vishesh Rajaram, managing partner, Speciale Invest told Business Insider India.

“Startups leveraging deep technologies (such as AI, material physics and chemistries etc) are seeing growth capital being pumped in (in addition to the early funding). We believe we are at the beginning of the deep tech cycle and expect increased funding through 2023,” added Rajaram.

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