Credit Suisse recently released this hugely informative report which generated considerable interest. It trawled the entire economic landscape to identify all the privately held companies with valuation of greater than a billion dollars.
Against 336 listed companies with billion dollar-plus market capitalisation, there are now 100 unicorns in India with a combined market capitalisation of US$240 bn. Two-thirds of these firms started after 2005, whereas only 46 of the listed firms were founded this century, and as many as 112 started before 1975. The sectoral split is highly diversified: in addition to the largely expected e-commerce, FinTech, education technology, food delivery and mobility companies, there is a rapidly growing number of such firms in Software- as-a-Service (SaaS), gaming, new-age distribution and logistics, modern trade, bio-tech, pharmaceuticals, and even fast-growing consumer brands benefitting from accelerating penetration and formalisation. These are only at the top of a fast-growing pyramid of 80,000 start-ups in India, which are incrementally now nearly 10% of new companies formed every year; the number of firms is up 70% in 8 years. There is some geographical diversity in the cities where these firms started, though there is some concentration in Bengaluru, Mumbai and the National Capital Region (NCR), Delhi.
Some graphics from the report.
Private equity, mostly foreign, has outstripped public capital raising even in India in each year of the last decade
While the emergence of these private equity funded unicorns is a positive development, it should be a matter of concern that almost all this capital is foreign. Coupled with the fact that most of these unicorns are incorporated outside India, it is fair to say that the best ideas and businesses emerging from India are foreign owned. I had blogged here on the practice of flipping, whereby foreign investors force founders to register outside India, with the attendant wealth transfer from India.
Are India's unicorns the conduits for the biggest systematic wealth transfer from India to foreigners after the British colonial period?
This on the age of the unicorns and the listed companies is striking
There has been an undoubted increase in the dynamism of Corporate India since the millennium as manifest in the form of new business incorporation. The number of active companies have grown from 700,000 to 1.3 million in just 8 years.
Even among these, creation of startups, those which are completely new entities, and not subsidiaries of existing businesses, too have risen sharply.
Information technology, discretionary and healthcare continued to be the dominant sectors in 2020. The decline in volumes from peak in percentage terms has been the worst for industrials: from 113 in 2008 to just 56 in CY20. Staples saw a record high 106 deals in 2019, but the value per deal was just US$6 mn.
IT, and services like health care and education, and discretionary goods (personal care, spirits, packaged foods etc) remain the main destination for private equity. Aggregators (of people, finances, and goods), content delivery providers, and software firms, propelled by the advances in IT, are perhaps the biggest attractions for venture capital.
This about the paucity of risk capital in India is important,
Low per-capita-GDP economies like India are generally short of equity capital. Not only do they have low wealth per capita, most household wealth is in hard assets like the land they own, the house they live in, the shop they own, the vehicle they use, or gold. The share of their wealth in financial assets is low. Further, even for financial wealth the first investment preference for households tends to be capital-assured asset classes like bank deposits. It is only beyond a certain quantum of weatlh, and usually after the purchase of a house that households begin to invest in equity of firms they do not run themselves.How did this happen in other economies when they were at the per capita income and wealth of India? First, the transition of currently developed markets out of their emerging market status occurred over a much longer period, with growth averaging 2-3% a year over a century or more. Wealth thus accumulated over a period of time, and was able to provide the risk capital necessary to finance this level of growth. To grow at 6-8% annually for a few decades though one needs significantly large amounts of risk capital. Some emerging markets (including the US in the early 19th century) also used debt as risk capital, and had several boom-bust cycles in debt. The Chinese model of growth has also relied on debt-funded growth, with state ownership reducing the risk of systemic instability when loans go bad. Given an aversion to boom-bust cycles of debt, and low availability of locally available risk capital, India has been short of risk capital. If a business needed Rs1 bn of equity capital, only a handful of business families could afford that.
The share of financial wealth has remained stuck at this level for at least two decades.
India adds 3.5 million engineering graduates each year, and now employs 4.5 m people in the IT sector, though its growth has been declining sharply. It has fallen from 25-30% till 2007 to about 5% now.
The report is without doubt very informative and an important addition to the area. However, its inferences are questionable and grounded more on optimism than any realistic or historical basis. The point about valuations of a start-up and associated wealth creation which can be form the basis for significant contributions to increasing risk capital in India is questionable.
A unicorn is a valuation. Instead we need companies to create wealth and generate risk capital. Unfortunately, there is a big difference between unicorn creation and risk capital creation. Most often unicorns are vapour ware. Only companies create hardware and software.
Neelkanth Mishra has opeds on the report here, here, here, and here. Understandably, these are promotional pieces to market the Credit Suisse report. Much of the optimism is grounded on logic and theory, but have little real-world basis.
For example, it remains to be seen how the much hyped Edtech unicorns will go beyond marginally improving the learning environment of a tiny sliver of students from middle-class families to helping improve the massive problem of poor learning levels that affect more than 90% of Indian students. Or whether Agtech firms will address any of India's several agriculture sector problems. Or the biotech and medtech companies will address the problem of access to affordable and good quality health care for more than 80% of Indians. Or whether the fintech companies will help address the problem of improving financing intermediation by increasing access to mass-market financial products and increasing India's financial savings, besides making formal finance mainstream for the 80% of the labour force working in the informal sector. Or ensuring access to finance simple for businesses in the informal sector. Or whether, like Alibaba's rural Taobao's, India's e-commerce sector has significantly improved market access and incomes in the aggregate to small manufacturers and traders.
In fact, a simple smell-test is the answer to the question, which of these unicorns have had a meaningful impact on the incomes of at least some of 80% of Indians?
In all these cases, the respective IT solutions will undoubtedly improve the experience for the better-off consumers. But its impact on those really needing such disruptions is deeply questionable. At the least, it needs to be acknowledged that there is absolutely no evidence of significant improvements in any of these areas.
Highlighting the point, Nivedita Mookerji strikes the note of caution here.
Update 1 (12.01.2021)
Livemint has a data feature on the Indian unicorns universe in 2021. Its startups raised $39 bn over the year, compared to $13 bn in 2020, added more unicorns in the year (44) than all previous years combined, and now has the third largest number of unicorns after US and China.
Social platforms formed a major share of the capital flows
If you discount for copycat innovations, as all of the above are, it's hard to not argue that there is little by way of genuine innovation happening in India's startup universe.
Finally, Delhi is clearly breaking away as the startup capital of the country.
No comments:
Post a Comment