Unicorns — unlisted start-ups valued privately at a billion dollars or more — are exploding in number and coming to market. Zomato, India’s biggest food delivery service, has just issued shares to the public and was massively oversubscribed. The issue price valued the company at $8 billion (Rs 60,000 crore), and the price will go far higher when trading begins.
This will make Zomato far bigger than business giants of old. Yet it will soon be dwarfed when a share issue is planned by Paytm. This unicorn pioneered digital wallets and then diversified into several fintech niches. Its market value is estimated at $25 billion.
Credit Suisse, using a broader definition of unicorns than most, estimates India has 100 unicorns. In 2021, an additional 16 start-ups have become unicorns. Ten new unicorns were created in 2019, 13 in 2020 (despite Covid), and almost three a month so far in 2021.
Indians celebrating 30 years of economic reform must cheer this remarkable outcome. It denotes a new class of businesses with no great inherited wealth, connections to the political and social elite, dubious links with the mafia and corrupt politicians, or dependence on loans from public sector banks based on telephone calls from the Finance Ministry or PMO. These are the children of liberalisation, not of the wealthy.
Earlier, the new stars spawned by liberalisation were IT companies led by Infosys, pharma (Sun Pharma) and auto ancillaries (Motherson Sumi). These took decades of profitability to reach billion-dollar valuations. The unicorns have done so in a few years.
Many older unicorns are now household names, such as Flipkart (now sold to Walmart), Ola Cabs (ride sharing) and Byju’s (education). The newcomers of 2021 include Cred (in fintech), ShareChat (social media, mainly regional languages), Digit (insurance), Groww (wealth management). Gup-Shup (messaging), Meesho (social commerce), PharmEasy (e-pharmacy), Innovaccer (healthcare), Infra.Market (materials and logistics for real estate), Chargebee (automated subscription billing and payments), Urban Company (home maintenance and alteration), Moglix (industrial tools), Mind-Tickle (software as a service), Firstcry (ecommerce), Zeta (fintech) and BrowserStack (software as a service). They cover a huge range.
Unicorns represent a veritable revolution in capitalism, where what matters is not inherited wealth but talent and innovative ideas. Billions are flowing across the globe to youngsters with no business history but promising ideas.
Earlier, companies grew gradually. Banks were reluctant to lend to small newcomers. Getting multiple permits and clearances during the licence-permit raj was much easier for well-connected big business than newcomers. Money could be raised through the stock markets only by companies with an established track record of profits.
This changed with the dizzy rise of newcomers globally in the dot-com bubble of the late 1990s. Investors poured billions into new companies spawned by the internet. Share prices of dotcom companies skyrocketed with expectations that they could expand enormously very quickly. So, investor emphasis shifted from current profitability to breakneck expansion entailing huge losses, but with possibilities of massive wealth creation in the long run.
The dot-com bubble burst in 2001. Hundreds of companies went bust, and many investors took a beating. But the few tech companies that survived — such as Google, Facebook and Amazon — became among the biggest companies in the world, eclipsing traditional giants like Exxon and General Motors.
That induced change in the whole capitalist model. Once, those with the most money had the power to build big companies. Now youngsters with no money but innovative ideas have the most power. The wealthy line up to entrust their millions to the youngsters, believing that will be a better use of their inherited millions than trying to start new businesses themselves.
Besides, central banks have flooded the world with unprecedented trillions, driving interest rates to zero or less in some developed countries. In search of better returns, global money has started flowing to developing countries with higher risks but also higher returns. And much is flowing into start-ups that could be the Amazons and Googles of the future.
The dotcom experience showed the vast majority of innovative start-ups could go bust. So what? Skilled wealth managers — mutual funds, venture capitalists and private equity specialists — manage the risk by spreading their bets over dozens or hundreds of newcomers. That way they will make money if just one or two newcomers become unicorns.
Economist Paul Krugman once said that in the long run productivity was not quite everything, but was almost everything. High productivity requires money to go to the most talented, not those with the richest parents. Traditional capitalism was not very good at making money flow to the most talented. That is changing with the rise of unicorns. It bodes well for the future.
This article was originally published in The Economic Times on July 18, 2021.
