Unicorn health check: 30 will be IPO ready next year but future bleak for 20

• Half of India’s 100 unicorns could turn profitable by FY27, but around 20% could go under, as per a Redseer report.
• With sizable revenues and good business models, 30 unicorns will be ready to hit the IPO market by FY25.
• Public market investors are wary of unclear business models, offline pivots and vanity valuations of new-age companies.

Indian unicorns like other startups have been having a bad year since funding winter. Many fired employees and tightened belts, a few like Byju’s and Ola have seen valuation markdowns. The next three years will be testing times for unicorns, says Redseer, which sees a bleak future for around 20% of India’s unicorns.

“They will likely struggle due to regulatory challenges, plummeting demands, and unclear business models. These could pivot to new models, get acquired by other companies or close for good,” said Rohan Agarwal, partner at Redseer.

Redseer, which pegs the number of India’s unicorns at 100, says that half of them could turn profitable by FY27.

30 unicorns to be IPO ready by FY25

Moreover, 30 unicorns are all set to hit the public markets by FY25, ie. next year. These 30 unicorns which cut across sectors like SaaS, B2C product companies, fintechs, media and entertainment and others — have sizable revenues of over ₹500 crore.

They have demonstrated sustainable growth growing at a compounded annual growth rate (CAGR) of 25% in the last three years; and more importantly have a defensible business model, the report says.

Adding in around 150 of soonicorns, India could have 40 listed or IPO-ready new-age companies, which can grow to 90 by FY28, the report says. The contribution of the tech sector to public market capitalisation in India is only about 1%, while it’s at roughly 25% in the USA.

“There’s a large headroom for value creation in the tech space. The scenario looks similar to what was seen during the US tech bubble as tech IPOs grew by three times as much, in the years post the dot-com bubble,” says Agarwal.

New-age company bubble

In India, the ‘bubble’ of new-age companies burst in December 2022, after many newly listed companies like Zomato, PayTM, Nykaa, CarTrade, Delhivery, PB Fintech saw heavy value destruction, especially in early 2023, as they traded below their IPO price.

“Public markets listing, which is considered a litmus test for valuations, has ended up becoming a poisoned chalice for a few,” said Anas Rahman Junaid, MD and chief researcher, Hurun India in early 2023.

So much so, a few unicorns like Udaan and PharmEasy went back on their IPO plans last year, and raised private equity funding.

But the market’s distrust in new-age company valuations seems to be ebbing. Most of the stocks have recovered in the first quarter of FY24 and a few like PayTM, Zomato and PB Fintech are now trading above their IPO price.

Yet, there are a lot of gaps between stock market expectations and Indian new-age companies’ performance. For one, a few online businesses are also going offline – and both these models are different in terms of costs and growth.

Startups also tend to take a lot of sharp pivots – like material corporate actions and acquisitions that are not aligned with the vision of the company. Most importantly, investors do not like vanity metrics, showcasing large total addressable market (TAM) while cherry picking niches.

Agarwal says that engaging with investors, building trust, providing clarity on business models and key metrics is needed to help investors make informed decisions about their investment in new-age IPOs.