A billion dollar company is still something magical and rare, elusive and exclusive. And hence they have been called the ‘Unicorn club’, named after a mythical animal which doesn’t exist except in legends. Unicorn club is a serious business of changing the world through innovation and being valued highly in recognition.
The unicorn universe is difficult to enter. Out of hundreds of startups launched every year, only a handful makes it to this exclusive group.
Why this fascination for the big billion dollar companies? They often create overnight millionaires from among the founders and early employees, and venture capitalists who take early risk of investing in these companies make equally good returns. These companies get to this stage in the first place because of the unique value they create for their customers through the product and/or services they provide.
It is really hard to build a company from scratch and make it reach a billion dollar valuation. This requires impeccable execution, lots of capital, rapid growth, a unique value proposition and constant innovation in products and services. Most of these companies create rapid employment opportunities too.
In 2014, 38 private companies across the globe crossed the arbitrary-but-significant barrier, achieving a valuation of $1 billion or more. This included the likes of Cloudera, Slack Technologies and the YCombinator backed Stripe. Two Indian startups which made it to this coveted list in 2014 are Ola Cabs and Snapdeal. As one can observe, all of these 38 companies have raised venture capital.
From an idea to a billion dollar opportunity: What does it take to make this dream come true
Billion dollar opportunities are not obvious green fields. Entrepreneurs have to create it. Steve Jobs reimagined the music industry. Flipkart excited customers with their quick delivery and raised the customer service benchmark for the Indian customers. Uber repurposed the personal ride requirement, so did Ola in India. Box made it easy for us to access our files in the cloud. Instacart rapidly changed the way consumers could order their groceries. Snapdeal saw a way to get small merchants online to find wider markets for their products and gave them access to markets like never before, thus being able to scale rapidly without significant infrastructure costs. Each of the companies took an industry old problem and rapidly changed the paradigm of the existing business models.
Answer following questions in the process of imagining your business. It might give you ideas to make your billion dollar dream come true.
- What is the disruptive value you are creating and for whom?
- How large a market are you addressing?
- What key skills are needed to complement you in the process of building this vision?
- How much money do you need to validate and prove your idea and business model? Don’t worry about the millions you might need subsequently to scale.
- How fast will this market evolve and are you rightly focused on this?
For example, the companies that reached the billion dollar valuations by 2014 took anywhere from 1.5 years (Instacart) to 15 years (Good technology) to reach that valuation.
A company can become a billion dollar company only if it is solving a problem of a very large market and the opportunity in that market is growing. The solution to the problem and positioning in the market has to be right and also the timing. Every market opportunity has a timing window; it is a confluence to various other seemingly unrelated developments that create the right timing.
For instance, without the influx of affordable smartphones, the e-commerce industry in India couldn’t have seen the rapid growth it saw in the last two years. The adage ‘in the right place at the right time’ seems to have played out well for these entrepreneurs. The right idea, right market and right timing needs to be followed by the right kind of investments too – from seed capital to growth capital – everything needs to be aligned to the long term plan.
Why do some startups achieve hyper growth and create these billion dollars faster?
There isn’t one right formula to answer this. However, some aspects of this answer lies in the choices most of these unicorn company teams make at critical moments in their business. They exhibit a capacity to rapidly innovate and pivot to meet changing market requirements. They are especially adept at creating investor confidence, a point on which I will expound more.
These founders hire strong teams early on creating bench strength throughout the organization that allows them to rapidly execute. Innovation, pivoting, raising capital, and leadership hiring, are some of the main points to keep in mind.
Some important questions
There are some vital questions, which if answered, can pave the path to realizing the billion dollar dream with relative ease.
Do you know how much capital you need?
Depending on the segment (sector, industry), the kind of business (B2B or B2C), different amount of funding is required For example, JustDial raised less than $100M as compared to >$200M by Snapdeal to reach billion dollar valuation. But JustDial took 17 years as against four years taken by Snapdeal to achieve the landmark.
Getting the right investments and the right investors!
While majority of investments in recent times have been made in consumer facing companies in India, the scenario is slightly different at a global level with good representation from enterprise businesses as well. Global investors are critical for follow on rounds for India-based companies. While the seed and early stage capital needed is prevalent in India, the growth capital required by these companies is largely from global investors.
Teams need to be prepared for this kind of scrutiny, diligence and communication requirements. They also need networks and introductions to these key investors. Hiring a good CFO who can manage investor relationships and build confidence into management of large amount of cash, driving a disciplined budget and operating plans are minimum conditions. Most startups I have seen recently offer investment proposal requiring millions of dollars without putting together a basic financial team in house.
You’ve to map the sources, stages and check sizes of funds. Given the fact that not many investors in India invest more than $50M, you’ve to pick your initial investors carefully. Only half a dozen firms in India invest $15-25M and merely four-five invest above $100M, including the likes of Tiger Global and Softbank who are mostly global investors. It becomes even more important for you to map your relationship quotients.
|Flipkart||Tiger Global, Accel Partners, DST Global, Vulcan Capital, Sofina, Morgan Stanley, Dragoneer Investment Group, Singapore GIC, Naspers, Iconiq Capital, Qatar Investment Authority, Steadview Capital, T. Rowe Price, Baillie Gofford, Greenoaks Capital Management|
|InMobi||Mumbai Angels, SherpaloVantures, Softbank Capital, Kleiner Perkins Caufield& Byers|
|MuSigma||Sequoia Capital, General Atlantic, Fidelity Investments, MasterCard, FTV Capital|
|Ola||Tiger Global, Sequoia Capital, Matrix Partners, Softbank Capital, Steadview Capital, KunalBahl, Anupam Mittal, RehanYar Khan|
|Paytm||Alibaba, SAIF Partners, Intel Capital, Silicon Valley Bank, Reliance Capital, SAP Ventures, Ratan Tata, Saama Capital, Sapphire Ventures|
|Snapdeal||Softbank (SIMI & Softbank Capital), Tybourne, Ratan Tata, Premji Invest, Myriad, BlackRock, Temasek Holdings, Kalaari Capital, Nexus VP, eBay, Bessemer VP, Intel Capital, Sama Capital, Ru-net|
|Quikr||eBay, Warburg Pincus, Omidyar Network, Norwest Venture Partners, Nokia Growth Partners, Matrix Partners India, Investment AB Kinnevik, Tiger Global Management, Steadview Capital|
|Pubmatic||Nokia Growth Partners, August Capital, Nexus Venture Partners, Draper Fisher Jurvetson, Helion Venture Partners, Sillicon Valley Bank|
But is it any harder to build a billion dollar company in India as compared to any other country?
I don’t think it is inherently any harder, however success paves way for more to follow. The examples of these companies trickling from India are fewer and hence the DNA that it takes to make this happen is not found in abundance. Usually, the first few companies achieving the landmark are paving the way and making it easier for the others to follow.
The right time
Building a billion dollar enterprise involves a series of inputs and funding can be one of the key ingredients. It is important whom you take money from and when you take the money in the life cycle of the business. Being the leader in the market matters a lot. This means investing appropriately at key inflection points in the business.
I find too many entrepreneurs obsess about dilution and/or the perfect deal. Some of them also wait and optimize the funding outcome.There isn’t an absolute formula to this but in general I favor the approach of raising capital at the right time versus optimizing for best valuation. Time to market makes significant difference to the outcome of a startup.
Relationship with the investors
A company needs to do a substantial amount of business development and brand building which takes many meetings with investors and entering their networks. This can happen by having mutually meaningful conversations with them well before raising funds. The aim of meeting investors should not necessarily be obtaining investment immediately instead founders should make it a point that their startup and their own name are being heard by the investors.
Those who invest in your company might also help determine who else has higher probabilities of investing in your company in the future. Over the years, it will be helpful if you have the right people interested in the success of your company. And that’s why it is important to get capital from the investors whom you feel are your true partners in the journey to build that billion dollar company.
In a nutshell, a startup should be mindful about the following areas right from the very beginning which will help take it to the billion dollar enterprise:
- Having a robust finance team: Often paid less attention, a dedicated finance team does not only help with sorting finance but keeps a fast growing organization on a disciplined track and eventually achieves a long term goal.
- Strong traction: With increasing competition and very little product/service differentiation, the one with a strong traction has better chances of having access to more capital. Demonstrating quarter on quarter growth is necessary to raise growth capital.
- Deep relations with right investors: Right investors at initial stages will help you with the crucial contacts in the investor universe. They also bring a level of reassurance to future investors
- Building & continuing the momentum: Hire a strong team and demonstrate that you have the leadership team in place. Continuous innovation, acquisition of customers, hiring and expansion to right markets ensures that the startup remains ahead of the curve. A lot of companies are unable to capitalize on the initial advantages and traction and loose the vision midway.
- Being visible: An entrepreneur has to be at the right places at the right time. Potential investors, industry influencers, acquirers which can play an important role at later stages should have you in mind.
It is important that the founders are thinking about the brand and not just about the product and customers, but also as to the gold standard in business.
Avoid the ‘one size fits all’ trap
Sometimes, entrepreneurs fall into the trap of standard business models that have worked in other parts of the world. But they forget to consider the sector, the market and the time at which these business models have worked well. What works amazingly well in the US might not even kick off in India. The business principles that rock in manufacturing might be detrimental in the analytics sector. It is of utmost importance to remember that every sector is set on different contingencies and that it is not always possible to compare different companies on the same parameters especially when it comes to valuation.
Can we make India home of more unicorns?
According to my analysis in this article, in India we have about eleven unicorns, including recent public companies. There are four more startups that have a strong near term potential to be a part of the unicorn club.
Public listed companies which were backed by VC
|Name of the company||IPO Year/Time taken for IPO(in years)||Current Market Cap||Listed In|
Potential billion dollar valuation companies in next 18-24 months
|Name of the company||Sector||Founded In||Current Valuation(in USD) (approx)||Investors|
|Housing||Consumer web||2012||250M||Nexus Venture Partners, Helion Venture Partners, Qualcomm Ventures, SoftBank Capital, DST Global, Falcon Edge Capital|
|Urban Ladder||Ecommerce (furniture)||2012||150M||Kalaari Capital, SAIF Partners, Steadview Capital, Ratan Tata|
|Zomato||Consumer web||2008||660M||Sequoia Capital, Info Edge, Vy Capital|
|Freshdesk||Enterprise||2010||300M||Google Capital, Accel Partners, Tiger Global Management|
|Bookmyshow||Consumer Web||1999||200M||Network 18, Accel Partners, SAIF Partners|
(Note: By no means do I claim this list to be accurate or comprehensive. These are merely the companies that came to my attention. If you think, I have missed any of the potential billion dollar companies, I invite you to share your opinion.)
Build a company of significance
One factor that matters the most is your singular focus, ambition and activation to build a company of significance. Entrepreneurs get distracted along the way and get side tracked. There is a difference between a bold pivot and a frequent change in strategy. While the former has created many great companies, the latter only frustrates the team and investors.
India is not far behind if compared on a global scale and we’re catching fast with China and USA. The last decade has been instrumental in setting up the momentum and we can achieve even more in the coming years. I believe that the floodgates are opening for billion dollar startups out of India.
If founders really want to build large companies, they should not aim low. To build a company for the long term, entrepreneurs need to take big risks and forego short-term gains and satisfactions. It is fundamental to aim high and look at the long-term goals. All your plans should be purposeful, nothing happens accidentally. One should be very clear about your aspirations and be extremely proactive and self-selecting in actions to have higher probabilities of meeting those aspirations.
I hope for all the entrepreneurs out there you find your perfect combination of many critical factors combined together – product, market, team, consumer behavior, customer service, execution, and capital among many others. May the force be with you!
(PS: If you are building a billion dollar company, I hope you will consider Kalaari Capital as a source of initial capital for your enterprise.)
Published on 8th April, 2015