Unicorns #1: Financial Creatures

A short while back, Reliance invested $240 million in the Bangalore based delivery startup, Dunzo. With this, Dunzo’s valuation became $775 million. But what does the term “valuation” mean? It’s the cost of buying the entire company. For companies that are listed (i.e., bought and sold on the stock market), the answer is intuitive:

Valuation = Total number of shares x (multiplied by) Share price

 

But Dunzo is not a listed company (i.e., it can’t be bought/sold in the stock market). How does one value such a company? In such cases, one has to wait for a round of investing to happen. At that point, when someone pays Y amount for a Z% share of the company, you do the maths (if Z% is equal to Y, how much is 100% equal to?) to get the answer. That’s what we saw with Dunzo above.

 

Since we touched upon billion-dollar valuations for private, startup companies, it brings us to the topic of “unicorns”:

“A unicorn company, or unicorn startup, is a private company with a valuation over $1 billion.”

Note that by the definition, Nykaa and PayTM (or Facebook or Alibaba) are not unicorns anymore – they’re traded on the stock exchange now. How many unicorns are there? More than 900. The US has the largest number (487), China is next (170), and India is 3rd (55).

 

The list of Indian unicorns includes BYJU’s (educational app) - $21 billion, Oyo Rooms (travel, hotels) - $9.6 billion, RazorPay - $7.5 billion, Ola - $7.5 billion, and Swiggy - $5.5 billion, to name just a few of those 55.

 

How come India and China have so many unicorns? More than any European country, Japan, and South Korea? One reason is, of course, the population – with 1 billion people, even a 10% market share means 100 million customers. Secondly, both these countries are still growing and getting richer by the day, in turn driving demand for more consumer goods and services. Third, and I think this is funny when you think of it, the fastest and cheapest (in term of investments) way for a company to grow is if it is Internet + smartphone related. And yet, when it comes to the Internet and the smartphone, Europe, Japan and South Korea never got onboard. Sure, they use the Internet and smartphones, but weirdly, they’ve never formed any Internet giants. All of those come from the US, China or India. Find that hard to believe? If I ask you to name some Internet companies, all the names would be American (Facebook, Google, Amazon, Netflix, Twitter), or Chinese (Alibaba, TikTok) or Indian (Swiggy, Ola). Try naming a single European, Japanese or South Korean company. See the point? Which is so weird since in every other pre-Internet industry, you can easily name best-in-class companies from there (BMW, Sony, Samsung, Rolls Royce)…

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