Is The Unicorn Dream Run Coming To An End?

By: Anshul Vipat

With dried up funding, mass layoffs and huge drop in the number of unicorns, India, the third largest start up ecosystem in the world is facing a turbulent time

In the past couple of years, India has witnessed a significant boom in startups. Mostly based on innovative business ideas and embedded in technology, they are the new ubiquitous phenomena. There were eight unicorns minted in 2018, nine in 2019 and 11 in 2020. The year 2021 saw creation of 42 unicorns, a three times jump over last year. The unicorns collectively raised a record $35 billion in new funds in 2021. In the global innovation index, India has now ranked amongst the top 50 countries in the world for three consecutive years (World Intellectual Property Organisation). Today, India has the third-largest startup ecosystem globally.

However, the blockbuster startup party appears to have dried up as country's workforce. According to a study conducted by PricewaterhouseCoopers (PwC), there has been a sharp drop in the number of unicorns in the country. According to the report, the third quarter of CY22 saw only 2 companies - one each from Fintech and AutoTech turning into unicorns. In the previous quarter, the number was 4. On the contrary, the first quarter of CY 22 saw a whopping 14 unicorns. The number of startups entering the unicorn club declined 28 percent in the first nine months of 2022 as compared to the 29 unicorns produced in the corresponding period of 2021.

As the accompanying chart shows, this is in sharp contrast to 2021 which was a year of unprecedented boom and optimism for the start-up ecosystem and for unicorns. For instance, a record number of 44 unicorns were born that year, compared to 11 in 2020 and 7 in 2019. In the first nine months of 2022, the number of new unicorns totals 20. Unless there is a rapid acceleration in the number of new unicorns being born this year, it does look like 2022 will produce less than the record 44 produced in 2021.

Funding winter grips startups

One of the major reasons for the decline is the funding winter. According to the PwC research, startup funding in India hit a two-year low in Q3 of CY22 at $2.7 billion across 205 deals. Apart from EdTech and e-commerce B2B, funding activity declined across all sectors in Q3 of CY22. Indian startups raised $4.1 billion in Q2 2022 (April-June) across 409 funding rounds, a decline of 41 percent, compared with $7.8 billion in Q1 2022 (January-March). In the third quarter of calendar year 2022, India’s share of total venture capital funding that went to Asia fell by nearly half to 14 per cent. The number of startups funded in Q2 2022 also declined sharply by 29 percent with only 404 firms raising institutional funding.

The war between Ukraine and Russia has also impacted the startup market. The key reason is that investors are pulling out money from emerging markets and routing them back to “safer” destinations like the United States.

In August, Indiatracker had reported mass-layoffs in startup firms as funding dried up. The layoffs are believed to be the result of a global funding slowdown that has also hit Indian start-ups this year, forcing them to conserve cash and discipline themselves. Between April 1 and July 12, 2022, 26 start-up layoff events happened in India, causing 5,670 people to lose their jobs. To put this in context, in the whole FY22, the number of start-up employees laid off in India were 1,440. Indian startups have laid off a little over 11,000 people in the last year.

Clearly things aren’t bright for the Indian startup ecosystem as they were last year. The segment is now facing the brunt of changing trends in the global market which has led to inflation and liquidity crunch – denting the capital raising ability of startups. The investors are getting more selective, and more tightly fisted. For the third largest start up ecosystem in the world, these are testing times.