Zombie unicorns could be a reality in Indian startup space: Experts
CNBC-TV18’s special Big Deal puts the spotlight on the state of affairs in the startup space. At the time of funding winter along with challenging macros and volatile equity markets what are we glaring at especially for the unicorn club of Indian digital sector? Two veterans TV Mohandas Pai, Chairman, Aarin Capital and Sanjeev Bhikchandani, Founder & Exec VC of Info Edge discussed this further.
The startup ecosystem is facing its toughest period with a funding winter amidst macro-economic challenges. TV Mohandas Pai, Chairman, Aarin Capital and Sanjeev Bhikchandani, Founder and Exec VC of Info Edge, shared their views on what lies ahead on Big Deal with CNBC-TV18’s Nisha Poddar.
Pai says that the next two quarters will be difficult but there will be more clarity in the third quarter when interest rate hikes in the US will stabilise. In the meantime, Unicorn zombies would be a reality.
As the startup ecosystem continues to face uncertainty and upheaval, the question on everyone’s minds is if the world is going to see a lot of unicorn zombies by the end of this year? According to Pai, the answer is a resounding "yes." In fact, he believes that if companies can't raise money and their economic models aren't working out, they are essentially doomed to become zombies.
“If you are not able to raise money and you don’t have hopes of raising money and your economic model is not working out, you got to be a zombie,” he said.
In most developed economies, between 30 percent and 40 percent of all companies are considered zombies. These are companies that may not be able to earn enough money to pay their interest on debt fully, especially if interest rates rise, and that certainly won't be able to pay back their debts. In other words, they are companies that are barely surviving.
So what exactly is a zombie company? Pai defines them as companies that have no hope of raising money and are doomed to die unless existing investors put up more money, cut their burn rates drastically, and change their business models. This is a grim picture indeed, and one that is likely to be exacerbated by the ongoing economic fallout from the pandemic.
Adding to the concern is the fact that a few of the unicorns out of the 108 are already impaired. Pai points out that there are clear signs that a few of them are deeply impaired. This is particularly worrying, given that unicorns are supposed to be the cream of the crop when it comes to startups.
Nevertheless, the fact remains that the startup ecosystem is facing some serious challenges right now. As investors and entrepreneurs navigate this uncertain landscape, it's important to remain vigilant and proactive in order to survive and thrive in the years ahead.
Sanjeev is of the view that there will be Zombie Unicorns, which will languish expecting the same valuation as last round, which was in a dramatically different market environment. He adds that the companies with a solid business model will continue to get investments.
“There is always money available and there is enough money in the system for the right companies. If you are running a good company – if there is growth, there is good unit economics, there is path to profit or even profits – you will find your money,” he added.
Bhikchandani would focus on company fundamentals rather than waiting for upcycles.
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