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Zomato, the Indian online food delivery unicorn, has filed a draft IPO prospectus with India's securities regulator. Other tech companies could follow. (Photo by Rie Ishii)
Market Spotlight

India emerges as China's tech challenger with record unicorn run

Startup valuations soar as pandemic boosts online services

WATARU SUZUKI, Nikkei staff writer | India

TOKYO -- India is rapidly closing the gap with China in minting new unicorns -- privately held startups valued at $1 billion or more -- highlighting growing investor appetite for tech startups in the country as the pandemic accelerates adoption of digital services.

Over the past year, 15 companies from India raised capital at a valuation of $1 billion or more for the first time, according to CB Insights and company announcements gathered by Nikkei Asia. Ten of them became unicorns in 2021. By comparison, only two of the 16 companies from China that joined the list over the past year did so in 2021, according to CB Insights.

A successful listing of online food delivery company Zomato, which recently filed a draft prospectus with India's securities regulator, would set the stage for many of these unicorns to follow suit. Zomato, a loss-making company operating in a nascent industry once considered too risky to invest, is planning to raise 82.5 billion rupees ($1.1 billion), including through a pre-IPO placement.

"Indian internet has always been a story on the horizon," said one investor in Zomato. "But it's finally here."

India's new breed of unicorns are mostly purely online businesses that have benefited from a flood of consumers and businesses that have flocked to their services during the COVID-19 pandemic. Investors are watching whether they can maintain the momentum as India grapples with a deadly second wave -- new coronavirus cases have topped 300,000 every day since April 21, the highest in the world.

"Every business has been forced to figure out a digital way of selling online," said Harshil Mathur, co-founder and CEO of fintech startup Razorpay. "A lot of small traditional retailers who used to sell through offline channels have gone online. We also saw a large number of both individuals and freelancers starting to sell things on WhatsApp, Facebook and Instagram."

Transactions on Razorpay, which processes payments for online services like food delivery apps, surged to an annualized rate of $35 billion to $40 billion from $12 billion a year ago, Mathur said. The company was valued at $3 billion in a recent funding round, just six months after it reached the $1 billion mark in October last year. The latest round was led by its existing shareholders, Singapore sovereign wealth fund GIC and Sequoia Capital.

Other startups that became unicorns include Chargebee, which sells software that helps companies manage their subscription services; Meesho, which operates a marketplace for individual business owners that want to sell goods on social media; Cred, which gives reward points to credit card users who pay their bills on time.

India has lagged China in the size of its digital economy but is rapidly catching up. Investors say this is thanks to a surge in mobile phone users as well as government-led policies like the 2016 launch of the Unified Payments Interface, a real-time payments system that enables instant transfer of money between banks. UPI now accounts for the majority of online payments, and transactions surpassed 5 trillion rupees ($66.7 billion) in March, more than double the figure a year ago, according to the National Payments Corporation of India, which operates the system.

China still dominates the overall unicorn list in Asia with 138 unicorns, more than four times the number in India, according to CB Insights. Some of China's biggest unicorns are also much larger in size, such as Tiktok operator Bytedance, which has a valuation of $140 billion. India's biggest unicorn is One97 Communications, the owner of mobile payments app Paytm, worth $16 billion.

India's One97 Communications, which runs the Paytm mobile payment app, is also said to preparing IPO. (Photo by Kosaku Mimura)

Still, the rapid rise of India's unicorns signals a shift in investor appetite.

"We are considering allocating more capital to India in the future," said Ryu Muramatsu, founding partner of GMO VenturePartners, an early investor in Razorpay and Southeast Asian fintech startups. "There may be a correction in valuations in the short term. But compared to the past, companies have strong fundamentals."

Zomato's IPO will be an important indicator of whether the tech boom can gain momentum. With no track record of multi-billion dollar IPOs, skeptics say prospects of a profitable exit are highly uncertain. China, on the other hand, can point to a strong track record of homegrown tech companies going public, such as Alibaba and Tencent, which have grown into some of the world's most valuable companies.

One bottleneck for Indian tech startups to go public has been a regulatory rule that generally requires companies to be profitable for three years before they can sell shares to retail investors. But loss-making companies can go public if they allocate at least 75% of the offering to qualified institutional investors -- the route that Zomato, which posted a 23.6 billion rupee ($318 million) loss for the year ended March chose to take. If Zomato is successful, less-sophisticated investors will be more confident in backing loss-making companies.

"It's a structural shift," said Rahul Malhotra, an analyst at Bernstein. "Regulation has improved, companies are scaling, fundamentals are there. And the market is still underpenetrated."

Chinese investors and companies are the most likely to lose out if India's tech boom gains momentum. Once among the most active investors in India, companies like Ant Group, Zomato's second-largest shareholder, have been mostly forced to watch from the sidelines due to a new regulation that requires companies from India's neighboring countries including China to seek government approval before making an investment. Leading the latest wave of funding rounds are U.S. investors like Tiger Global Management and Sequoia Capital, which have raised billions of dollars for new funds in recent months.

The growing number of deep-pocketed startups will also intensify competition between Chinese tech companies. Those operating in India have already been hit hard by the Indian government's ban on more than 200 Chinese apps last year following a deadly border clash.

Chargebee, which has offices in India's Chennai as well as San Francisco, says the majority of its 3,500 customers are already from the U.S. and Europe. After raising $125 million at a $1.4 billion valuation, it plans to expand its footprint to Asian markets like India, Japan and Southeast Asia, according to a spokesperson.

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