Redefining Unicorn Startups: A Closer Look at Real Revenue Generated Companies in India

In the current startup ecosystem, the term unicorn is often associated with companies that achieve a valuation of one billion dollars. However, this definition is closely tied to the here-to-now metrics of valuation. In recent years, we have seen a shift in perspective, urging the industry to consider companies based on their annual revenue rather than their valuation. This change in perspective is significant as it provides a more accurate reflection of a company's financial health and sustainability. When redefined to look at annual revenue, we raise important questions about the true nature of unicorns in the Indian market. Let's delve into the implications and challenges of this shift.

The Flaw in Using Valuation as a Measure

The traditional definition of a unicorn hinges on a company achieving a valuation of one billion dollars. While this measure sounds impressive, it has several inherent flaws. Valuation, by its nature, is often a forward-looking and speculative concept. It is influenced heavily by market expectations and is not always a reflection of a company's actual financial state. As a result, a high valuation does not necessarily translate to sustainable growth or strong fundamentals. Many startups achieve this valuation through complex financial engineering and sometimes even inflated metrics, which can distort the true picture of a company's worth.

Why Revenue Should Be the Focus

A more robust and meaningful way to assess a company's success is to look at its annual revenue. Revenue is a hard and clear measure of a company's ability to generate income. Unlike valuation, which can be manipulated or inflated, revenue can be independently verified and serves as a more accurate reflection of a company's current financial performance. When defining a unicorn based on annual revenue, we are better equipped to identify companies that are truly sustainable and profitable.

The Challenge of Measuring True Unicorn Status

When we change the definition to focus on annual revenue, an immediate challenge arises: how do we determine which companies truly belong in this category? Traditional valuation often includes various non-cash factors and metrics that can inflate a company's perceived worth. Revenue, on the other hand, is a more straightforward and unambiguous measure. To accurately determine if a company is a true unicorn, we need to look at its consistent net profit over a period, rather than just a one-time or peak revenue figure.

Assessing Consistent Net Profit Rather than EBIDTA

One key factor to consider is the net profit rather than the EBIDTA (Earnings Before Interest, Taxes, Depreciation, and Amortization) number. EBIDTA is a non-GAAP financial measure that is often used by companies to showcase their financial performance in a more favorable light. It can be inflated through various accounting techniques, thus providing a misleading picture of a company's true financial health. Net profit, on the other hand, represents the actual profit a company generates after all expenses, including taxes and interest, have been paid. Verifying this over a period of time, specifically three to four consecutive quarters, can give us a more reliable picture of a company's profitability.

The Implications of True Unicorn Status

If we redefine unicorns based on consistent net profit over a period, what can we expect in the Indian market? A closer look at Indian startups reveals that a significant number may not meet this new definition. Many startups in India are currently valued based on speculative future revenues, often at the expense of their operational efficiency and profitability. As we refine our definition, we may find that the number of companies that can truly be called unicorns may be far fewer than the current estimate.

Preparation for the Upcoming Market Woes

Given the current landscape, it's crucial for the startup ecosystem to prepare for the inevitable economic downturn. Companies that rely heavily on speculative valuations are more vulnerable to market fluctuations. The next big crash is likely to result in a wave of startups going bankrupt. Those that have not built a sustainable business model based on solid revenue and profitability are at greater risk. By shifting our focus to revenue and consistent net profit, we can better assess the true resilience of companies in the market. This approach will help investors and stakeholders make more informed decisions and ensure that only the most sustainable and profitable startups are considered for investment.

Conclusion

In conclusion, redefining unicorns to focus on annual revenue and net profit provides a more accurate picture of a company's financial health and sustainability. As we navigate through the upcoming challenges in the market, this shift in perspective will be crucial for identifying true unicorns. The Indian startup ecosystem must transition from a valuation-driven model to one that prioritizes profitability, ensuring a more resilient and sustainable future for the industry.