Is India witnessing a golden era of becoming a springboard for a record number of unicorns (startups with valuation of more than $ 1 billion)? Will India get the coveted title of becoming the “startup capital” of the world? Well, just look at what is happening: In the current calendar year, India has witnessed the rise of 32 unicorns. In 2011, India had witnessed only 1 unicorn, which had risen to 11 in 2020.
Recently, MobiKwik, a digital payment company, entered the unicorn club after a few of its employees exercised their employee stock option plans. The fintech giant is planning to go for an initial public offering (IPO) by November first week at a valuation of $1.5 Bn - $1.7 Bn, according to Inc42.
Another company, Rebel Foods got the coveted status of a unicorn. It operates a network of cloud kitchens and digital brands with 450+ kitchens globally and raised $175 million in a round led by Qatar Investment Authority and other existing investors. Following in the footsteps of Zomato, it is believed that they are planning an IPO in the next 18-24 months. It has created well-known brands such as Fasoos, Behrouz Biryani, Ovenstory Pizza, and Mandarin Oak. The cloud kitchen sector has lately seen huge traction.
Before that, Licious became the first D2C (Direct to Consumer) unicorn in India. It is a tech-enabled fresh meat and seafood brand and raised $52 million from IIFL, Avendus Fund, and others. This sector has a huge market opportunity of $40 billion, which was well spotted by the founders. Many more startups will now be expected to join the D2C space. Funding for the D2C sector has been increasing but was not earlier considered attractive. This perception will hopefully change because of Licious!
Out of the 32 Unicorns which emerged this year, the highest number (7) was in the Fintech space -- Cred, Bharatpe, Groww, Digit, and others.
Reaching a unicorn status may need a series of investment rounds from Angels/HNIs, Angel Networks, Family offices, and most importantly Venture Capital Funds (VC). While it may be possible to become a self-funded unicorn like Zerodha or ZOHO, VC funding has gained prominence as it can provide momentum funding for a fast-growing company.
Valuations of fintech startups have been robust, as investors see the space as attractive and well-performing. Some of the active VCs in the Fintech space are Sequoia Capital, Nexus Venture Partners, Kalaari Capital, and Chiratae.
In all this sudden rush of startups, is there any opportunity for professionals? Do professionals -- tax practitioners, lawyers, and CAs -- need to reinvent themselves to cater to this evolving space? Here are some of the opportunities which professionals may want to consider.
1. Become a Founder of a Startup
A popular misconception is that only “techies” can launch a startup. This is simply not true. Startups are a team effort. Professionals may not be able to build technology, but definitely can conceive disruptive ideas which can, in turn, be built by a Tech Co-Founder!
With an in-depth understanding of the Company Flow, Financials, legalities in agreements, IPR, Cap tables, etc, it becomes easier for professionals to execute an idea, communicate with investors and ensure the overall financial health of the startup. Investors like to deal with founders who are aware of the financial projections, valuations, dilution and the cap table which makes the whole process smoother. Due to a better understanding of the fintech space, professionals have an opportunity to start a fintech company with simple solutions to problems which we may be facing in our professional lives as well.
Other than the usual fintech space including Insurance, regulatory tech, lending tech, payments tech, there can be other ideas around automating audit Tools, simplifying agreements, notarization, easy tax query resolving, or automating other miscellaneous compliances.
Not just fintech, there are startups in other spaces where professionals have been co-founders such as Infra.market (construction marketplace) or Licious (D2C Food Brand). Peter Thiel, co-founder of Paypal (the most successful online payment system in the world) who holds a degree from Stanford Law school has mentioned that being a law student gave him enough perspective about competition in the startup world which was fundamental in his founding venture with Paypal.
Professionals are generalists in knowledge of many fields and at the same time, specialise in some areas. With the huge proliferation of knowledge and skills available in the online model, professionals can now learn any new skills at their convenience. In fact, building tech is also now simplified by different startups using “no code” options to build and design websites or applications. Lambda School is one such startup based in Silicon Valley which has built its MVP (Minimum Viable Product) using “No Code tools”. It is now feasible to think of professionals building their idea to some extent using these tools and then take assistance from experts, after raising funds.
Startups need not be disruptive tech-based ideas only. One can have a startup offering professional solutions solely to startups. This ensures a specialization that ensures the ability to advise the founders in a better way on the various steps of the ladder. Every startup needs a stack of services out of which Tax and Accounting are the most basic and also important. These are usually outsourced by startups at the early stage as the startup team needs to be lean and cost-effective. Not everyone can do tax and accounting, hence a startup founder, who for example may be an engineer, will not know the ABC of accounting or tax at all, and hence would approach a professional. Professionals have a huge opportunity to provide these essential services across geographies to startups, who can focus on scaling their business. These services can be bundled for startups -- company formation, direct and indirect taxes, accounting, payroll function, costing, financial modelling, government registrations, etc.
Being an early member of a startup can be an exhilarating experience and having a professional can add a lot of value to the startup. Though most of the functions are handled by startup founders themselves at the initial stage, often, founders may have very little knowledge of Finance.
A Professional may have varied knowledge and can be helpful in fields such as financial modelling, business model, tax compliance, drafting agreements, fundraising, cost-benefit analysis, valuations, patent registration as well as other sorts of Government registrations. However, there may be few complex matters such as FEMA laws, SEBI laws, company structuring, ESOP, etc, where help can be taken from an expert in the field. However, having a person employed in the startup who is aware of the basics will ensure that the startup gets proper professional help.
As soon as a startup is legally born, the first person the founders reach out to is a Professional. Right from company incorporation to listing the company for an IPO, the services of a CA/CS/Lawyer are indispensable.
Day-to-day activities such as bookkeeping, GST payments, to complex activities such as IP registration, Company flipping to USA/Singapore, compliance with RBI and FEMA laws for Foreign investors, etc need professional advice. There is a huge opportunity to focus on the startup ecosystem, network with upcoming founders so as to provide them services right from inception till they scale to an IPO!
Professionals can help these startups avail benefits which they probably may not even be aware of. There are many benefits available from the Government which are available after the MSME and DIPP registration which startup founders may be unaware of --- 50% reduction in patent fees, Bank loan subsidies, etc. Besides, professionals can help startups avail Income tax benefits under section 80-IAC, guide them in Angel Tax under 52(6)(viib), etc.
Valuation Services also form a huge chunk of services that startups require. With every funding round, a new valuation report is required which only a Registered Valuer or Merchant Banker can provide. Term Sheets and Subscription and Shareholders Agreements (SSHA) also require drafting and negotiation to ensure that the rights of each party are taken care of.
Indian as well as Foreign Investors are making huge investments in startups. Hence, a whole array of FEMA, RBI, and Foreign laws come into the picture which requires in-depth expertise. There is a huge opportunity in specializing in such laws which need to be grabbed by young professionals who are still exploring!
Due to a deeper financial understanding, it is easier for Professionals to evaluate companies based on market opportunity, financial projections, and due diligence. Professionals as investors understand the key terms of the agreement in a better way than many others. Investing in startups has 1x Risk but can have 100x or unlimited returns, unlike other investment options which itself makes it such a lucrative opportunity. One may diversify their funds into various sectors and startups at various stages, depending on the thesis of investment.
Not just as Angel investors, one can also advise or even form family offices to allocate certain funds into startups. Other than that, there is always demand for professionals as analysts or partners in VC and PE funds. New funds are being formed by industry leaders, corporates, startup founders turned investors, etc.
Professionals can also act as mentors and guide these startups where they hold a stake to help founders avoid mistakes and failures.
With a professional, a startup gets holistic advice. As there is huge potential overall in the startup ecosystem, it is important for Professionals to wisely choose what aligns with one's passion and follow that path, as the choice is huge. The rapid growth and rise of the startup ecosystem is here to stay and it is upto professionals to grab the various opportunities which are now available in this space.
This article was co-authored by CA Ninad Karpe, Partner and CA Lipi Panchmia, Analyst at 100X.VC for the Students e-journal Jignyasa of The Chamber of Tax Consultants.