Start-up Ecosystem In India

Risks involved in over-valued unicorns


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper-Unicorns in Indian economy and issues with their valuation


The biggest-ever initial public offering (IPO) in India fell flat on its face on the first day of its listing in the stock exchange, with shares being traded at prices less than 27% of the IPO price.

Rise of unicorns in India and factors driving it

  • Unicorns in diverse sectors: There has been a unicorn gale in India in recent years, covering diverse sectors from fintech to cloud kitchen.
  • Growth in digital payment is reflected in the fintech sector that has contributed the most to the unicorn list.
  • Factors driving growth: An ecosystem which combines thriving digital payments, a growing smartphone user base and digital-first business models adopted by many start-ups has driven expectations of investors, resulting in large-scale fund flows into new business ventures.
  • Growing smartphone user: Expectations are high as the country has around 640 million Internet users, of which 550 million are smartphone users.
  • Growing digital payments: Digital payment has seen a growth of 30.19% as of March 31, 2021 and by the end of September 30, the unified payments interface (UPI) registered 3.5 billion transactions amounting to ₹6.54 trillion.

FinTech and EdTech leading unicorns

  • American investment firms Tiger Global and Sequoia Capital have been the major investors, providing very quick follow-up rounds of funds across all stages and sectors.
  • Fundamental financial performance of the business is not factored in these decisions which could lead to biased valuations.
  • Idea of disruptive technologies: The idea of disruptive technologies has become a buzzword for characterising start-ups.
  • The idea was that start-ups with limited resources can aim at technology disruption by inventing an entirely new way of getting something done.
  • The story is similar in educational technologies (EdTech) as well.
  • The novel coronavirus pandemic has been a blessing in disguise for EdTech firms, as it is this external environment that is pushing the industry, giving it an acceleration by four to five years.
  • Too many acquisitions with big ambitions to grow inorganically puts pressure on the balance sheet in the years to come as some of the new acquisitions are likely to fail.
  • Even, EdTech firms with reasonably good business models are highly overvalued due to abundant liquidity.
  • Cost of achieving behaviour change: Almost every second advertisement on primetime television is either of a digital payment firm or EdTech platform.
  • New firms in services will have to indulge in this process for a longer period than firms in other industries such as transportation as these firms have to bring about a particular kind of change that customers are significantly comfortable using the service.
  • Firms burn cash to give massive discounts to customers in the hope that people will get so habituated to these platforms that they will remain active even when the prices are hiked.
  • To some extent this worked in the context of mobile telephone services as Indians have got hooked to mobile phones and reoriented spending to buy more sophisticated smartphones and data.
  • But in other services this does not seem to work so easily.
  • The projection flaw: Data by the Centre for Monitoring Indian Economy (CMIE) points to this flaw of over-optimistic demand projections as there are just about 23 million households which earn more than ₹5 lakh per year i.e., less than ₹42,000 a month, which is about 7% of all Indian families.
  • It is only this class which can be coaxed to behavioural changes — i.e. people who can afford various kinds of goods and services.
  • If firms want to go beyond this 7% of households they have to offer bigger discounts, burning more cash, with the possibility that once the discounts are reduced, customers drop off.

Consider the question “India is witnessing the unicorn boom in the starts-ups. However, valuation of these unicorns has raised concerns. In light of this, examine the factors driving the rise of unicorns in India and why their valuation raises concerns?”


We are witnessing new unicorns emerging every month, which are products of inflated valuations to tap more funds to burn more cash. These valuations are solely on the basis of future earnings, with virtually no profits to show in the present.

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