Unicorns breed unicorns

Recently, the electric vehicle's arm of Ola known as Ola Electric Mobility raised $250 million in funding in a round led by Japanese investor SoftBank to attain the much-hyped “unicorn” tag. Meanwhile, Paytm Money, the venture centred around mutual funds and other financial services is slated to very shortly raise $1.2 billion at a valuation of $5 billion, and become the third unicorn from the One97 Communications stable, after Paytm and Paytm Mall.

A unicorn birthing another unicorn is quite a nascent phenomenon in the start-up ecosystem here. Experts say this is a welcome move in a market which is obsessed with unicorns. A CB Insights report has ranked India 4th globally (behind the USA, China and the UK) in terms of the number of unicorns which are presently 17. The report mentioned that globally there are over 361 unicorns, collectively valued at $1.1 trillion.

“The beauty about Ola and Paytm is that they have been able to expand on their existing product/service by adding a new vertical and this shows great focus and is a great trend,” says Rajat Tandon, president, Indian private equity and venture capital association (IVCA).

Experts say various factors go into the making of a sub-unicorn by unicorns. “When a division within a venture becomes too large or too successful to operate on the basis of the parent company, it could make sense to move it out and create a subsidiary. It is a known phenomenon that the market discounts the overall value of a holding company to less than the combined value of subsidiaries within that company. Therefore, I can see why it makes logical sense for a large division or subsidiary to branch out into an independent organisation,” says Anirudh Damani, managing partner at Artha Venture Fund.

According to Harsh Shah, co-founder, Fynd, the moment there is an external investor interest or regulatory pressure to showcase at arm's length, or existing investor pressure to unlock value, subsidiaries are spun off to fulfill these objectives.

Once a subsidiary is spun off, it is relatively easier to help it raise funds, expand and grow; courtesy the goodwill generated by the parent unicorn amongst both the investor community and the consumer network. “Thus, subsidiaries of unicorns becoming unicorns is highly possible, thanks to the brand equity of the parent unicorn,” feel experts.

Shah says spinning off subsidiaries legitimizes companies working on multiple businesses with the proof that external investors will not just value the primary business, but also any other businesses that are being incubated.

Experts feel that going ahead; perhaps Swiggy and OYO can spin-off subsidiaries and help them grow to the unicorn level. “If the unicorn is a platform play such as Ola, it can create subsidiaries that could utilise the mother company's platform to create a viable business model which could itself become a unicorn someday. For example, Swiggy Access (which operates the cloud kitchen model) could become a unicorn someday that operates on the Swiggy platform. I could see OYO creating unicorns out of the multiple business lines it has entered into and out of its operations in China and South East Asia,” says Damani.

Benefits aside, carving out subsidiaries can at times have a negative bearing on the start-up ecosystem as a whole, feel experts. “As the subsidiaries grow in size and stature and become unicorns themselves, their large size and potential could suck away the capital that is available in the sector, putting significant competitive pressure on the smaller first movers,” says Shah.

There are also certain distinct risks the parent unicorn might have to encounter post the emergence of the subsidiary-turned-unicorn. Experts feel any venture that goes in for a structured and strategic line extension takes in some risks, as it has to safeguard itself from the resulting confusion in consumer minds about its identity and what its subsidiary stands for. “Secondly, poor results at the subsidiary or its winding down can cast negative aspersions on the parent unicorn. Like for instance, Ola had acquired FoodPanda India and HolaChef. With a clear divergence from its traditional ride-hailing service, Ola struggled with its foray into food tech. The stakes lie high and if the subsidiary fails, the impact can be experienced by the parent company as well,” says Damani, adding that the success of the subsidiaries will be directly proportional to the independence the leadership of these companies will enjoy and their ability to execute successfully.