New Delhi(CNN Business)This time last year, Indian entrepreneurs were in panic mode.

The government had locked down the country’s entire population in a dramatic step to fight the coronavirus pandemic. Company founders feared the restrictions would leave them in a severe funding crunch that could hurt their ability to expand, pay salaries or even stay afloat.

The mood a year later is very different, despite a brutal surge in coronavirus cases that is threatening the economic recovery. India’s startup community has found itself in an unprecedented funding bonanza. In the first four months of 2021, 11 companies have attained unicorn status, meaning they’ve reached a valuation of at least $1 billion, according to data platform Tracxn. Five startups hit that milestone in April alone. By comparison, there were 13 in all of 2020, and 10 in 2019. The ranks of India’s super wealthy tech leaders are swelling rapidly as a result.

The boom is in large part thanks to powerhouse investment by firms such as Tiger Global and SoftBank (SFTBF), which are pumping money into India’s fast growing internet businesses — a prize many investors simply find too big to ignore. Not only are more companies amassing this kind of money than ever, but they’re also doing so at a record-breaking clip. And some of India’s most successful startups — including Flipkart and Zomato — are reportedly exploring potential listings this year. Zomato declined to comment and Flipkart did not respond.

But the seemingly endless fundraising cycles may eventually produce diminishing returns, worry many industry experts, who say India’s startup ecosystem needs to start showing consistent profits and healthy exits for investors, and soon. Some observers feel that the huge funding being doled out makes being a “unicorn” a less-than-mythical achievement.

“It is great that Indian startups are going through this funding boom. But they will need to find sustainable business models, which make a lot of money, in order to survive,” said Radhika Gupta, CEO of ‎Edelweiss Asset Management Limited. “Even a Google or an Amazon cannot survive on customer numbers alone.”

First, the good news

 

The investment craze is due to the rise of India’s digital economy. There are more than 700 million internet users in the country and roughly half a billion yet to come online, creating enormous potential in the marketplace.

The pandemic, meanwhile, has encouraged people outside of major cities to spend money online, speeding up digitization of businesses and opening up more opportunities for technology entrepreneurs.

Financial technology firms have been the biggest winners. By the end of 2020, India had 44 unicorns, and most were in the fintech sector, according to a report by Orios Venture Partners. Retail and software as a service companies are next in line.

The venture capital firm also found that the time it takes for a tech startup to reach a $1 billion valuation has shrunk dramatically, from nearly 15 years in 2005 to 2.4 years in 2016 and 2017.

This year alone, app developer Mohalla Tech, investment startup Groww, and messaging platform Gupshup have all become unicorns — largely because of big investments from Tiger Global, according to Tracxn data. The New York-based investment company, which also made big early bets on Flipkart — the e-commerce giant acquired by Walmart (WMT) in 2018 — has been more bullish than other firms on the country.

Tiger Global did not respond to a request from CNN Business for comment, but the firm has in the past praised the businesses it has invested in as well positioned in India’s growing internet market.

Risk of bloat

 

Some experts, though, have started questioning how much money big investment firms are pouring into the sector.

“They over-capitalize the company by giving 1.5 times or 2 times the amount needed,” said Amit Ranjan, co-founder of presentation-sharing service SlideShare. He’s now working with the Indian government on a virtual locker project called DigiLocker.

“There is no justification for this except to bludgeon the competition,” Ranjan told CNN Business.

But Rehan Yar Khan, managing partner at Orios Venture Partners, doesn’t see the influx of money as a “big worry.” After all, companies still need massive amounts of capital to capture the potential of India’s vast market.

He cited PharmEasy, an online pharmacy firm, as an example. Khan was an early investor in the firm, which became a unicorn earlier this year.

“E-pharmacies have covered only 3% of India’s market,” Khan said. “… So naturally they need more money to grow.”

But there are other headaches to consider, too. What happens if a unicorn becomes over-funded and fizzles before it has an exit plan?

Flipkart is the only Indian tech unicorn to have been acquired at a valuation of more than $1 billion. (E-commerce firm Shopclues, which was valued at $1 billion in 2016, was acquired three years later by a Singapore-based company. But by then, Shopclues’ value had collapsed to between $50 million and $80 million.)

Only a handful of Indian tech firms have held listings over the the last two decades. And no tech startup worth more than $1 billion has gone public.

“By inflating valuations in the private market, you are postponing your ability to go into the public market,” said Karthik Reddy, co-founder of venture capital firm Blume Ventures. He believes that Indian firms have to think about initial public offerings sooner rather than later in order to build a sustainable startup ecosystem.

“We don’t have large tech acquirers, so you can’t wait for a Walmart to come and buy your biggest asset every time,” he added.

Could this be the year?

 

There are murmurs in Indian tech circles about huge upcoming exits. Reddy is optimistic that 2021 may be remembered not just for its funding boom, but also for bringing about a cultural shift in the industry.

Indian conglomerate Tata Sons is reportedly looking to buy online grocer BigBasket for more than $1 billion, the Mint newspaper reported last month. Asked for comment, Tata Sons referred CNN Business to BigBasket, which did not respond.

Other Indian media outlets have reported over the last few months that older unicorns may consider listing soon, too. And the Economic Times reported last week that several startups are scrambling to recruit senior executives with some IPO experience.

Should either Flipkart or food tech company Zomato follow through with an IPO, such listings could be game-changers, according to Reddy.

“India needs to unleash its tech firms on the public market,” he said. “Right now Indian citizens have hardly any exposure to the unicorn boom.”

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