What successful unicorns do well and what unsuccessful ones don’t

India has the third largest unicorns in the world, after the US and China. These 100+ unicorns, with a combined valuation of over $350 billion, are always in the news. However, the less popular side of the story is that only a quarter of these unicorns report profits. As investor patience is getting thinner by the day, this club of unicorns is vertically divided, though unevenly, into two categories – those who make profits and those who suffer losses.

Early investors in unicorns may want to consider divesting their holdings to secure their profits. This can be achieved through a strategic sale or IPO. Private market activity is currently less pronounced, leading to an increased focus on public markets. However, a public listing is no guarantee of continued success, as investors favor companies that demonstrate profitability. In the startup space, companies need venture capital funding and suffer losses in the early years to grow. However, profitable startups challenge this assumption and prove that a focused approach works. Venture capital is not always necessary; even a bootstrapped startup can become a unicorn and generate consistent profits.

CRED, a leading unicorn valued at $6.5 billion, invested over ₹2,000 crores solely in marketing, creating quite a buzz around it. During the same period, the company’s cumulative losses exceeded ₹3,000 crores. On the other hand, Zerodha, a leader in discount brokerage, was generating profits and high customer acquisition numbers every year without spending much on advertising. While Zerodha has eliminated the marketing function from its value chain, it is an extreme example of the fact that customer acquisition costs must be in line with the market size and revenue capacity of the company. Excessive capital expenditure raised from venture capital firms to build brand awareness or promote a product can lead to losses.

Successful unicorns have a clear understanding of the market segment they are targeting. For example, Zerodha focused on the discount brokerage segment, catering to those who wanted to trade but needed a simplified process. Dream11 is a fantasy sports platform, while Razorpay provides payment gateway services. Being clear about their boundaries and value proposition has led to their success.

On the other hand, Ola, which started as a passenger transport company, entered the electric vehicle market and is fighting two battles at once, suffering losses on both fronts.

Diversifying revenue streams from complementary products and services is one way to mitigate risk. For example, Zerodha’s foray into mutual fund offerings. Within its defined boundaries, Zerodha took years to perfect its core segment and only then started offering something new.

Businesses without a differentiator cannot beat their rivals. No matter how good their value proposition is, it is a competitive parity scenario and not a competitive advantage if it is the same as their rivals. It is difficult to generate profits as consumers do not see the differentiator to choose the company’s offerings every time a product or service is used. Successful unicorns have created a uniqueness that rivals do not offer. Payment gateway is an arena where differentiation is difficult to create as it is a B2B business. However, Razorpay’s success has been its unique offering to customers and Zerodha’s easy-to-use platform has played a key role in this.