Still seeking solutions to the startup valuation conundrum

By Ganesh Natarajan

Aggressive growth in digital investments by medium and large organisations in every sector in every part of the world has made it a stand-out 2021 for the technology sector. It may have been the “annus horribilis” for many companies in other domains but the “never say die” attitude of IT and BPM firms from India and the extraordinary rise of the B2B SaaS and digital economy firms has made revenues and profits accelerate for most significant tech firms. Let us look at the reasons for success, the pathway towards sustained glory and the pitfalls that could also await industry players.

Tech and tech-enabled services
The year has been marked by the alacrity with which Indian IT, engineering and IT enabled business process firms rose to the Covid challenge in 2020, continuing their offshore services from home in all significant cities and engaging with clients to see what additional digital interventions could be done to lead clients to accelerated digital success. This has resulted in excellent organic growth with healthy deal pipelines and larger contracts for management services; full services Indian players could see a “new normal” of $8million-$9 million annual contract values for outsourcing deals.

After the early years of digital transformation where only a few sectors, notably financial services and retail, participated with full gusto, the current demand has been broad-based across all domains and the robust growth of healthcare and recovery of investments in the manufacturing and travel sectors will create multiple new opportunities for Indian firms. As mentioned in our book Accelerating Digital Success, service providers are moving up the consulting value chain, understanding that success happens with new customer and supply chain partner journeys, business process optimisation with technology, mastery of data management and the use of predictive and prescriptive analytics, and investments on comprehensive digital upskilling and a 24X7 digital culture.

The biggest challenges are now on the supply side, with the Indian industry likely to face credibility challenges with high levels of attrition because of lucrative offers with long-term flexibility in “work from home” being made available by many multinationals. The Indian industry will have to look at innovative retention and employee engagement practices and slowly bring stability to the employee pyramids during 2022.

The startup value conundrum
The amazing march of the unicorns has been a truly exhilarating feature of the year with a variety of firms, from fintech to edtech and deeptech participating in the new valuation stories. Naturally, the exciting revelation has been the success of digital economy startups such as Zomato and Nykaa, underlining the new business models that are here to stay.

A sobering feature has been the sluggish IPO of PayTM, which demonstrates the impact of government entry into a sector with platforms such as UPI that end up democratising access and bring pricing to levels where the path to profitability of private players appears hazy. The year has ended with more questions than definite answers with “back to basics” questions being asked about the valuation of entrepreneurial stories in digital without a clearly understood business model and expansion strategy. The more recent success of Latent View Analytics underlines the hypothesis that value creation to the business models of incumbent majors is still a big creator of revenues, profits and traditional market value mechanisms.

An encouraging feature of this year’s changes at the top level has been the induction of Ashwini Vaishnaw and Rajeev Chandrasekhar into the ministry of electronics & IT. As a previous study conducted by some of us on the contours of the trillion-dollar Digital India opportunity had outlined, the revival of growth in the IT services and products companies could take revenues to $400 billion in the next five years but the $600 billion will come from digital platforms like UPI and the Jan Dhan, Aadhaar, Mobility (JAM) accelerators and can create myriad entrepreneurial opportunities in digitally enabled agriculture, skills, education, SME manufacturing, etc., where the much-awaited high productivity and large job creation opportunity can be seized and the country set on a decade and more of 8 to 10% GDP growth.

The year 2021 has truly been a watershed year for Indian tech and a tech powered India and the pathways for the next decade have been well and truly illuminated.

The writer is chairman of Honeywell Automation, 5F World and Lighthouse Communities Foundation