Govern Pre-IPO Unicorns to Create Value; Not Valuation

Billion-dollar startups always make the headlines. But is there true value behind those eye-catching valuations? How can proper governance be implemented for these much-hyped companies?

Whether right, left or centre, Indians have a penchant for cherry-picking data to suit their narrative. In 2022 India scored a century of Unicorns, those privately held startups with a valuation of over a billion USD. Media and government boasted of beating China in the number of new unicorns added this year. But no one talked about the issue of value creation, and whether the IPOs depleted public wealth.

As one startup founder says, the venture capitalists (in his words, vulture capitalists) push for high burn rate (some unicorns burn as much as Rs 750 to generate one rupee of revenue) to play up the valuation game and get their several X return by exiting via IPO within 3-4 years as against the earlier norm of 10+ years. They don’t hesitate to spend crores on media buzz to hype up public imagination, and transfer the burden of their profiteering!

The median post-money valuation (PMV) of a unicorn is USD 1.3B. According to Stanford research, PMV is almost always higher than fair market value (by as much as 50%), which means startups with a USD 1B PMV in a private round would not be counted as unicorns if measured by fair market value. Together, the 100 Indian unicorns have raised over USD 90B at the combined PMV of USD 340B. The post-IPO performance of the few has not been great and they will take years to turn a profit.