Don't splurge that fortune

DNA |
Samir Sheth , Head - Due Diligence
Partner
Deal Advisory Services
|

04 February 2019

Apart from growing the business, Unicorns should also spend their millions for innovation and building IP that will set them apart from the competition

It rained funds in the start-up sector last year, with Tencent, Naspers, Sequoia and SoftBank, amongst others, pumping in money and eight home-grown ventures attaining valuations upwards of $1 billion.

Big-ticket ones, including BYJU's and Swiggy got a billion dollars from investors for expansion.

But is spending that kind of money an easy task?

Being a unicorn is merely a tip of the iceberg, feel experts, "since the real challenge lies in effectively utilising the funds to significantly scale up and sustain growth."

"Companies may achieve valuations of $1 billion+, but they require to optimise operating cash flows to sustain the business and focus on intrinsic value creation," says Rabindra Shrestha, managing partner, Prestellar Ventures.

Joydeep Bose, who drives corporate strategy at Tejas Networks and is also associated with E&Y Advisory, says, "My top picks for fund utilisation would be expansion of the sales force, entering new geographies, investment in people, process and infrastructure to increase value for customers, and in research and development.''

As per a survey by BDO India, The Next Wave – Unicorns of today, Giants of tomorrow, conducted among private equity houses and venture capitalists, 52% of the respondents believed that over 30% revenues for unicorns should come from international markets.

"We believe that part of the funding will go in establishing and strengthening overseas presence. This could be through both the organic and inorganic routes," says Samir Sheth, partner and head deal advisory service and leader/private equity, BDO India.

Ed-tech unicorn BYJU's which raised $540 million, invested $120 million in January to acquire US based learning platform Osmo. "With this acquisition, we are expanding into a new demographic. This partnership will help us build strong learning products through cutting-edge technology and provide a new approach to edu-tainment-based learning," says Byju Raveendran, founder and CEO, BYJU's, a learning app. Software-as-a-Service (SaaS) provider Freshworks, which received $100 million, is planning to use the funds for expansion into the US and UK and further invest in the Indian SaaS market. Budget hotel marketplace OYO, which raised $1 billion is utilising the money for its international expansions. OYO is investing £40 million in the UK market, while setting aside $600 million for China and $100 million for Indonesia. A unicorn like food delivery player Swiggy, which also raised $1 billion, will use the funds to penetrate the hyperlocal milk and medicine delivery space, and to grow via domestic acquisitions.

But, unicorns should invest "heavily'' into innovation, research and building a stack of intellectual property (IP), feel experts, "to gain a real and distinctive edge over competitors."

Srikanth Iyer, partner, Unitus Seed Fund and co-founder and CEO, HomeLane.com, says a focus on reducing cash burn post attaining the unicorn stage is crucial, and this can be achieved by focusing on investing in technology, "in order to stand out and make the business model more viable and competitive foolproof".

Sheth says their survey indicates a significant spend on technology. "More than 94% of the respondents believe that about 10% of the revenues of a unicorn should be invested in technology and in digital platforms to sustain demand generation and enhance customer experience."

Channelling 10% revenues on technology, however, appears limited when compared against the average 22-23% which start-ups in the West, especially SaaS-based ones like Dropbox, Zscaler, Secureworks, spend on research and development.

Experts feel, although Indian unicorns like BYJU's, Freshworks, etc, are building digital-heavy platforms for customers, what is needed are highly innovative products and platforms that end up adding patents. As per industry estimates, IP counts for over 80% of a company's value and investors perceive companies with strong IP portfolios as attractive bets. Although the number of patent applications filed by the Indian start-ups increased to 909 in 2017, from about 61 a year earlier (as per the Department of Industrial Policy & Promotion), it does not truly reflect upon an innovative streak amongst start-ups.

"Since the patent process is easy, many ventures apply for a patent just before opting for a fundraising in the hope for an increased valuation. The increase in start-up patent applications does not necessarily indicate a corresponding increase in innovation unless the patents are actually granted," says Debanshu Khettry from law firm Leslie & Khettry.

However, Bose feels if the venture is not a software or an enterprise B2B company, there is not much need to undertake fundamental research, but instead should focus on innovation to add value.

Source: DNA