Unicorn Hunting in a Risk-Averse World: Challenges and Opportunities

Investors in the startup ecosystem are witnessing a shift in their investment strategies. The once-frequent sightings of new unicorns—privately held startups valued at $1 billion or more—are becoming increasingly rare. The reason? Venture capitalists (VCs) are now more cautious, opting for a more conservative approach.

The Changing Landscape of Startup Investments:

Traditionally, VCs were known for taking risks and making bold investments in early-to-mid-stage startups, providing them with the necessary capital to scale and grow into unicorns. However, many prominent investors, such as SoftBank and Tiger Global, are now focusing on established startups at later stages of funding. They are opting for new funding rounds or secondary deals ahead of potential IPOs, rather than taking the leap of faith with early-stage ventures.

The Missing “Leap of Faith Capital”

Early-to-mid-stage startups are finding it harder to secure funding and achieve unicorn status. The so-called “leap of faith capital,” which was once essential for these companies to take off, is now scarce. VCs are hesitating to make big bets on unproven ventures, preferring to back established startups instead.

Late-Stage Activity vs. Early-Stage Deals

While late-stage companies continue to attract significant investment, early-stage startups face challenges. Here are some key observations:

1. Late-Stage Activity: VCs are actively investing in late-stage companies, especially those with strong growth potential. These investments often come with substantial funding, enabling rapid scaling. However, this trend disrupts the market dynamics.
2. Big Investors: Prominent investors like SoftBank and Tiger Global have historically played a crucial role in taking series C or series D companies to unicorn status. Their large checks have fueled rapid growth. Yet, such investments are currently scarce, even though overall deal activity has increased.
3. Skepticism and Reevaluation: Some VCs are revisiting the same list of companies they evaluated in the past. Rather than taking a leap of faith with new startups, they are opting for familiar names. This cautious approach reflects a sense of skepticism, as investors consider whether they missed out on promising ventures earlier.

Notable Exceptions

Despite the scarcity of new unicorns, a few startups have managed to break through:

1. Perfios: A financial technology company, Perfios, successfully achieved unicorn status in 2024. Its innovative solutions in financial data analytics and risk assessment caught investors’ attention.
2. Krutrim AI: Founded by Bhavish Aggarwal (also the founder of Ola), Krutrim AI focuses on artificial intelligence applications. It too joined the unicorn club this year.
3. Zepto: Riding the quick commerce wave, Zepto has emerged as a notable startup. However, it remains an exception rather than the norm.

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Investor Skepticism and Repeat Evaluations:

Investors are revisiting the same list of companies they have previously evaluated before writing bigger checks. This cautious approach stems from a sense of skepticism, as investors may have passed on these companies once before. Consequently, the process of securing substantial funding for new firms becomes prolonged, despite the gradually improving investment sentiments.

The Funding Winter and Selective Investments:

The decline in unicorn sightings is also attributed to the prevailing “funding winter” in the country. While venture funding across stages totaled $1.97 billion in the first quarter of 2024, it was significantly lower than the $3.2 billion recorded during the same period the previous year. Investors are primarily focusing on fast-growing and profitable companies for new deals, leaving early-stage startups with limited access to capital.

Gradual Improvement in Investment Sentiments

While the leap of faith capital may be missing, investment sentiments are gradually improving. Late-stage deals are on the rise, with larger amounts being invested compared to the previous year. Notable deals include PharmEasy’s funding led by Manipal group chief Ranjan Pai, Kore.ai, and Pocket FM.

Conclusion

VCs are treading carefully, evaluating their options before writing bigger checks. As the startup landscape evolves, the balance between risk-taking and cautious investment will shape the future of unicorn sightings.

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Source: Unicorn sightings become rare as VCs shun that leap of faith