Unicorns in Business

 

India Startup stories are creating a sensation. They motivate many toward entrepreneurship. 14 Indian companies turned into unicorns — companies valued over a billion dollars — between January and June 1, 2022.  The government is trying to create a new startup culture. Government agencies have been directed to reach out to entrepreneurs whose startup initiatives may not have taken off because of inadequate support or resources. Department of Science and Technology would take up a mentorship role to promote startups in Tier-2, and 3 cities in areas such as eCommerce, Fintech, Edtech, and biotech. 50% of the country’s startups have emerged from Tier-2, 3 cities, where opportunities and resources are comparatively less. Tier! Cites are abuzz with Startup Glamour. Equity-meets-live-action theater of Shark Tank has added to the startup mania. Maybe few wannabe entrepreneurs are motivated to chase billion-dollar valuation in the Facebook movie The Social Network   

But there is a note of caution, though entrepreneurs should strive to be the next unicorn their focus should be on sales and they should strive to make their businesses viable rather than strive for valuations based on projections. Their businesses should generate revenues than just depend on investments to sustain their businesses. Historically successful companies would grow products [internally] -- until startups became trendy. But not all products are born within a startup. In the real world,  the majority of entrepreneurs and founders generally are the business owners first, and entrepreneurs second. They founded their companies not based on who they could reach out to and how much they could raise, but rather by investing their own time and money into creating something that generated revenue by selling things that customers needed. There is a misguided notion that a fundraising cycle, especially one done at the inception of the company, is a no-cost way to fuel growth. It's certainly much quicker and cheaper than forming a team and building a product and selling into an established market. But raising money isn't free. You need to spend money to raise money. And more importantly, the startups with the best chance of raising money are the ones that don't necessarily need that money to be sustainable or even successful.  

If someone has an idea and access to talent/infrastructure, one should not focus on seeking investment.  Instead, put that energy into a sales deck. Go out and pitch the new product to existing and potential customers or early adopters or whoever might actually want the product you're already building. Maybe those customers will fund the idea into reality. Maybe one can sell to a few MVPs and get revenue on the books immediately. It will also help get a better understanding of how to make the new product investable and worthy of building a new company around. The more entrepreneurs think about business as a business and less like a baby unicorn, the better chance their business has of being successful. It doesn't matter if that business starts in an existing firm, a dorm room, or in a well-known incubator. All that matters is how many customers need your product and how much they'll pay for it.    

Apart from being sales-oriented, entrepreneurs also need to analyze the latest trends to be realistic about valuations that will now be driven by sustainability rather than being bullish based on projections. In 2021, American VC-backed companies raised $329.9 billion. On top of this, early-stage VC activity surpassed $80 billion for the first time, and annual exit values soared to more than $774 billion. This huge influx of funds led to skyrocketing startup valuations in 2021. However, as the end of the Covid-19 pandemic appears to be on the horizon, entrepreneurs and investors alike are wondering what the future holds. Can these sky-high valuations last? Is this investment frenzy sustainable, or should we brace for a crash? US Federal Government’s goal is to moderate inflation and unemployment by controlling the money supply. It doesn't directly support venture capital specifically, but changes made by the Federal Reserve have a ripple effect. US Federal Reserve provided nearly $5.8 trillion in financial support to the American economy. The government infused the economy with cash. Consequently, many funds and other bondholders received enormous amounts of cash, which they invested elsewhere. Most of this money went to the stock market, some to real estate, but a significant portion of this windfall was received by VCs and thus resulted in high valuations  

Feds have already started reducing its balance sheet, which has some worried.  The current levels of investment are unsustainable since the money supply is no longer increasing, so there will be a slowdown in VC deals. However, the total amount of money already committed and available is still high. The future will likely show a flattening of valuations growth at earlier stages. In later-stage startups, valuation will fluctuate in sync with stock market changes. Good startups will continue to be in high demand and enjoy higher valuations, while less successful ones may have a hard time raising the next investment, which may lead to flat or down rounds. The Good startups are ones that can sell and be sustainable. A few valuations might dip, but now the money is allocated which means there's no sudden crash to worry about.  

Markets these days are interlinked. There will be a similar trend in India as in the US. A combination of macroeconomic factors, including falling tech valuations, tech crackdown in China, the Russia-Ukraine war, supply-chain issues, etc., have reduced capital flow globally, bringing a sense of rationality to valuations. Now, the focus has shifted back to the fundamentals of the business, where metrics such as unit economics and profitability are back in vogue. It is not that these were not there in the past, but given the latitude of capital, these were pushed to the background. So as an entrepreneur you need to be in the business of doing the business and not just aim to be a Unicorn based on absurd evaluations the market had promised.