A part of the third-largest startup ecosystem, Indian companies enjoy investors attention

In 2018, Chinese VCs pumped USD 5.6 billion in India, surpassing investments coming from the US, and Japan.

Photo by Anand Thakur on Unsplash

Home to more than 50,000 technology startups, and the world’s third-largest startup ecosystem, India has become a magnet for global venture capital (VC) and private equity (PE) firms as more and more unicorn companies are sprouting from the country.

Venture capital money flows more freely than ever in the country’s history, as not only US-based funds but homegrown investors and Chinese VC funds have started pouring their money in the country. Indian startups raised a whopping USD 10.9 billion in the first nine months of 2019, according to startup data tracker Tracxn.

Chinese VCs, who are now playing catchup with their US counterparts, believe they can play an important role in growing startup ecosystem in India as it’s very similar to what it was in China around a decade ago—both in terms of user behavior and business ideas. However, one difference they see is the eagerness of Indian entrepreneurs to grow their startup to a multinational level, which is not a very common trend in China. Companies such as Redbus, Oyo, and InMobi are testaments to this.

In 2018, Chinese VCs pumped USD 5.6 billion in India, surpassing investments coming from the US and Japan, according to Tracxn.

Last month, China’s leading business and tech news portal, 36Kr, in collaboration with Southeast Asia and India units, KrASIA and 36Kr India, respectively, unveiled a list of 10 Indian startups that Chinese investors find most notable. The honorees include Byju’s, BigBasket, CureFit, DailyHunt, Dream11, Delhivery, Oyo, Ola, Sharechat,  and PolicyBazaar.

Trendsetters in their respective industries, each of these startups has been able to create a dominant position for itself.

Diversified markets

For instance, eight-year-old Byju’s became the world’s most valuable edtech startup at a USD 5.5 billion valuation last year. Over the years, the poster boy of the edtech segment has brought in bountiful funding support that gives it a leg up to the entire industry.

In 2018, Indian edtech startups overall received close to USD 700 million in funding, of which USD 230 million was invested in Byju’s alone.

According to a Google-KPMG report, India’s online education market is set to grow to USD 1.96 billion and will have around 9.6 million users by 2021. With India’s Gen Z population—those born between 1996 and 2012—set to touch 472 million this year, 51% more than China’s projected 312 million, it’s no wonder that the edtech segment is at the cusp of an explosion.

Unlike the edtech sector, where homegrown startups have had a head start, Indian startups in the sectors like hyperlocal deliveries and mobility have been fighting tooth and nail with global rivals to hold onto their market share.

BigBasket is one among those startups. The Bengaluru-based grocery delivery startup has been battling with e-tailer giants Amazon, and Walmart-owned Flipkart, as well as fast-growing SoftBank-backed rival Grofers, and food-delivery unicorn Swiggy, which recently dived into the segment.

BigBasket became a unicorn earlier this year after raising USD 150 million in Series F from South Korea’s Mirae Asset Global Investments, UK government’s development finance institution CDC Group, and Alibaba Group, at a valuation of USD 1.2 billion. At present, it caters to 12 million users in 26 cities and claims to have 50% of the market share.

As smartphone users rose in India to about 450 million this year, and more consumers started transacting online, BigBasket grew along with the online grocery space, which is currently pegged at USD 1.2 billion.

The growth of e-commerce and hyperlocal sectors naturally led to the rise in demand for delivery and logistics services. One of the logistics companies that foresaw this demand was Gurugram-based Delhivery. Founded in 2011, it became India’s first unicorn in the logistics space in March 2019.

After hanging by the e-commerce’s coattails in B2C space, the sector is set to see another wave of growth as B2B e-commerce has begun to pick up in the country.  For example, the three-year-old e-commerce marketplace for businesses, Udaan, has already raised about USD 870 million to become the fastest Indian startup to enter the unicorn club.

Over the years, logistics startups have become investors’ favorite. In the first five months of 2019, the logistics sector witnessed a capital infusion of USD 6.25 billion across just eight deals, a six-fold increase from the amount it raised last year, according to local media Yourstory.

Closely linked to logistics is the mobility sector. The segment boomed early with the entry of ride-hailing US behemoth Uber in India in 2013. What followed was the fierce discounting battle with homegrown mobility startup Ola and others like TaxiForSure. Subsequently, the sector consolidated and Ola emerged as the third most-valued unicorn with a close to USD 6 billion valuation. Founded in 2010, the ride-hailing company has expanded its tentacles to bike taxis and food tech and electric vehicles over the last three years. Even its electric vehicle arm, Ola Electric Mobility Pvt. Ltd., joined the unicorn club earlier this year.

Another segment that caught investors’ attention is vernacular content including short videos. Four-year-old Sharechat, one of the first Indian startups to tap the regional content market in the country has now become a darling of Chinese investors. As Chinese VC funds have seen this segment grow in their home country, it wasn’t difficult for them to quickly grasp the challenges and opportunities presented by almost a billion non-English speaking Indians.

The vernacular content market has lured not only Chinese investors, but also Chinese tech giants like ByteDance, which rolled out its short video services TikTok and Helo in India. While TikTok is targeted at tier 1 and 2 cities, the latter was launched to tap regional language users in India—its first such product globally.

Cheap internet data and better network connections, along with growing smartphone and internet penetration, have had a major role in increasing the regional content appetite of Indian users that has led to the meteoric rise of Sharechat and TikTok in the country. Consumption of content in vernacular language is not limited to short videos and entertainment space but has also seeped into daily news updates.

According to a recent report by research firm RedSeer, India had about 530 million internet users in 2018, of which 210 million were vernacular users, who engaged and transacted online and held an annual spending power of USD 300 billion. One of the regional language news aggregator in the country DailyHunt told media last year it had crossed 100 million monthly active users. It is in discussions to raise money from SoftBank and private equity investment firm Carlyle Group to make further inroads into regional language play.

Rise of the verticals

Over the past couple of years, other niche segments that investors want to put their feet down to test the waters include gaming, fitness, and digital insurance. So when Dream11 became the first gaming unicorn in India in April 2019, it piqued the investors’ interests in the country’s USD 500 to 600 million online gaming market.

The Indian online gaming companies that, till a few years ago were coping with the lack of a robust revenue model and paying customers, are now at a stage where they see users paying for playing games. Riding on the back of skill-based real money games—where users pay an entry fee to stand a chance of winning a significant portion of the amount collected from multiple players—online gaming companies are slowly scripting a success story for themselves.

In contrast to the gaming industry that persevered and reinvented itself over a period of time before it got global VCs to look at it, what sparked the investors’ interests in the health and fitness segment was the entry of high-profile and second-time entrepreneurs like Mukesh Bansal, co-founder of fashion e-tailer Myntra that Flipkart acquired in 2014. Along with Bansal, former Flipkart executive Ankit Nagori co-founded fitness startup CureFit in 2016 that has raised about USD 290 million in capital till date and is now valued at more than USD 575 million.

Financial services startups have also gained significant traction from users and investors alike as online payments picked up in the country with the rise of UPI (Unified Payments Interface), a government-backed payment mechanism, and its adoption by major players including Alibaba-backed Paytm, PhonePe, Amazon Pay, and Google Pay.

With the rise of financial services, eleven-year-old online insurance provider PolicyBazaar without making much noise entered the unicorn club last year. The digital payments market is projected to increase five-fold to over USD 1 trillion by 2023, according to a Credit Suisse report.

Then there is another bumper success story that Oyo has charted for itself in the segment as traditional as hospitality.  Started by 25-year-old Ritesh Agarwal in 2013, hospitality chain Oyo garnered a valuation of USD 10 billion this July. A star among the SoftBank-backed startups, Oyo saw a rapid success after SoftBank founder Masayoshi Son took an interest in Agarwal’s global vision. With 23,000 properties and 850,000 rooms globally, Oyo now claims to have become the world’s third-largest hotel chain. It is a leader in budget accommodation in India and competes with hotel aggregator startups such as Treebo and Fab Hotels.

For the Indian startup ecosystem, 2019 has been the year of unicorns. Of the 30 unicorns that country has at present, eight entered this much-coveted club this year. And if a report by Fosun RZ Capital is to be believed, India is likely to have 54 tech unicorns by 2024. What started as a testing ground a decade ago for US-based VC firms such as Tiger Global and Sequoia Capital, which were looking for the next big market after US and China, has now emerged as one of the most promising destinations for investors from China, Korea, Japan, and UAE.