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How Indian startup ecosystem changed in 2020 | KrASIA Year in Review

Written by Moulishree Srivastava Published on 

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The Indian startup ecosystem has bounced back on the back of increasing tech adoption in the world’s second-most-populous country.

In the first week of March, Sequoia published a note to its portfolio companies, cautioning them about the black swan event of 2020–novel coronavirus. The half-a-century-old American venture capital firm outlined how startup founders could ensure the health of their businesses as the world stared at a healthcare crisis.

“Nobody ever regrets making fast and decisive adjustments to changing circumstances,” the note said, adding those “who survive are not the strongest or the most intelligent, but the most adaptable to change.”

A majority of startups in India, home to the world’s third-largest startup ecosystem, read that note and took the VC’s advice to heart. Nine months down the line, things have changed dramatically for the Indian startup community.

It has been a “surprisingly strong year for us,” GV Ravishankar, managing director at Sequoia Capital India told KrASIA. “The startup ecosystem, by and large, has benefitted post the initial lockdown to some extent. For example, the tech-enabled companies became the beneficiary of the lack of supply in the regular offline businesses.”

“In effect, the disruption in the economy has benefited a few tech-oriented sectors,” said Ravishankar.

The nation-wide lockdown in late March brought operations of offline businesses to a screeching halt. In the ensuing months, it forced millions of Indians to come and transact online for services like e-grocery, healthcare, education, and entertainment.

“People were forced to live together for at least 90 days. So while children, parents, and grandparents lived together, children taught their parents and grandparents how to use online services, and now they have found how easy and convenient it is,” said Anirudh Damani, managing partner of VC firm, Artha Venture Fund.

“This is what so many brands had been trying to do for a long time. Now we are talking about 150-200 million people transacting online as compared to 50-80 million before,” he said. “All of this has happened because of COVID-19, so in a way, it was a boon.”

Realizing the change India is going through, VCs have already poured about USD 8 billion in Indian startups this year, the data collated by Venture Intelligence shows.

Read this: Top takeaways from VCs in India from 2020 | KrASIA Year in Review

“Since the time Sequoia cautioned about a black swan event, things have bounced back very quickly,” observed Utsav Somani, India head of AngelList, a US-based digital market place that primarily connects angel investors with tech startups for early-stage deals.

From pandemic-induced lockdown and economic slump, lack of Chinese funding coupled with multiple bans on Chinese apps, to Indian conglomerates Reliance and Tata betting big on the startup space, 2020 has unfolded to be the most eventful year in a decade.

In the second part of the year in review series, KrASIA took a look at how startups have changed following these events.

Doing more with less

Over the last few years, a large number of consumer-facing startups had overlooked profitability and unit economics in their obsession with chasing growth as venture capital was abundantly available in the market. That mindset changed as entrepreneurs went through a two-month-long period of no operations during the lockdown and helplessly stared at the pandemic that was expected to stay even longer.

A majority of startups went into a course correction mode by cutting expenses to expand their cash runways. What they learnt in the process was how to do more with less resources.

“A lot of reflection has happened,” Sequoia’s Ravishankar said. “Everyone knew that there has either been a temporary setback or one has seen a temporary benefit. Startups took a step back to think about how to shape their business, what level of burn is acceptable, and how to manage their costs as well as people.”

Many early-stage startups even went back to the drawing board to re-assess their strategies.

“Instead of spreading themselves thin, a bunch of pre-Series A startups picked one or two sectors and went deeper into them,” Pratip Mazumdar, co-founder and partner, Inflexor Ventures, told KrASIA, which primarily backs enterprise and deep tech startups. “They looked at revenue opportunities that would help them in the long run.”

According to Ashish Taneja, partner at early-stage VC firm GrowX Ventures, the macroeconomic crisis has taught entrepreneurs how to be frugal and to focus on unit economics, profitability, and productivity.

“They now know they should be able to do a lot more with a lesser amount of capital, and that’s a big shift,” he said.

Building failsafe businesses

During the two-month-long nationwide lockdown in May and June, a majority of startups hit zero revenue. To make matters worse, relaxation and lifting of lockdown didn’t help startups as users heavily cut down on their discretionary spending.

“Rebuilding and regaining market share is not easy,” said GrowX’s Taneja. He believes startups would need different strategies and ways to engage with their user base. “Moreover, they know that they need alternative strategies to make sure they don’t lose it all if there is another crisis tomorrow.”

He added that it is thus critical for startups to diversify their offerings and provide alternate services. The investors and entrepreneurs KrASIA spoke with agree that startups are shifting their focus on building a resilient and sustainable business that can withstand any future crises, rather than setting up just a high-growth business.

Mazumdar from Inflexor Ventures said people in the startup community have started appreciating businesses that have a recurring revenue model because that can cushion the fall in growth or demand. “We are seeing more companies incorporating subscription-based revenue models and they are not just focusing on gross merchandise value anymore.”

The funding rebound

The VCs KrASIA spoke with believe the funding activity in the Indian startup ecosystem has bounced back since the third quarter of the year. Although it’s to be noted that sectors such as edtech and enterprise SaaS that are seeing the tailwinds due to the pandemic have bagged most of the venture capital.

“This has been the best year for us in terms of funding,” said AngelList’s Somani. “We have closed 70-80 investments this year, the highest in the last few years of our existence in India.”

Somani said many investors, who have got stellar returns from stock markets, have made bets on startups as other traditional asset classes like real estate failed to deliver.

Moreover, there is enough “dry powder” or unused capital with major VC funds including Sequoia, Lightspeed, Elevation Capital, 3One4, and Inflexor Ventures having announced close of their new funds in the last few months.

Despite the pandemic-induced slowdown, India blocking Chinese VCs from investing in the country, and SoftBank refraining from making new bets, investors feel there hasn’t been an actual funding crunch. And that the deal activity, specifically in early-stages, has been on par with the last year, if not more.

Ensuring additional availability of capital in the ecosystem are conglomerates like Reliance and Tata who are now aggressively eyeing startups. Many private equity (PE) firms are also seeing the value in startups, unlike before.

Overall VCs and PEs have pumped in USD 34.6 billion across 699 deals in the country since the beginning of the year, according to Venture Intelligence data. This includes combined USD 26.5 billion raised by Reliance Jio and Reliance Retail from global PEs.

Tapping new opportunities

With an increase in tech adoption, a lot of startups tweaked their offerings to suit the changing needs of customers. Many edtech startups shifted their focus from just selling enterprise tools to schools to enabling live classes. Similar changes were seen in sectors like health tech, enterprise productivity, and remote working solutions, where founders built products and services for the post-pandemic world. This also resulted in an increasing interest from the VC community.

In an interview with KrASIA, Akshay Bhushan, partner at Lightspeed India said he’s now focusing on companies that are catering to the changes brought by COVID-19.

“There has been an acceleration in the new use cases across the tech sectors. For instance, before the pandemic, schools were not the big users of technology in any form, but today, practically all schools are running online,” said Sequoia’s Ravishankar.

Furthermore, the Chinese app ban by India in the second half of the year gave a leg up to startups that were building short video apps and gaming platforms. Then there were some niche areas that surprisingly saw good traction with traditional businesses going digital, opening newer potential opportunities for startups, said Anil Joshi, managing partner at Unicorn India Ventures.

“Post the lockdown, we thought business won’t pick up in some enterprise-oriented companies in areas like cybersecurity, but they also did well,” he said.

Zooming on remote work 

The long-drawn lockdown etched a strong imprint on the way startups function as the larger startup ecosystem shifted to working remotely. The work-from-home scenario has changed the way companies engage with their employees, customers, and investors. And many VCs believe that the new way of doing business is here to stay for long.

“Remote working would persist post-pandemic as well,” Bhushan, told KrASIA. “A lot of founders have been agile, in terms of transitioning their companies to remote working.”

It has also changed the way entrepreneurs look at hiring talent and building their company.

“Talent is a raw material that drives success for startups. And remote working has shown that the best talent does not have to be physically proximate to a company,” Bhushan added. He believes it has also increased productivity as now companies are not geographically constrained to hire the best talent.

Startup

For instance, up until last year, a startup would prefer to hire people in and around the city it is based in, so that the team could meet up, brainstorm, and build solutions together. Ever since they have been forced to work from home, companies have realized they can do everything, from idea exchange to product development remotely.

“It is an opportunity to build a global and diverse team with best in class capabilities. That world is flat is truly coming along now,” said Taneja from GrowX.

Levelling up

The pandemic has put Indian founders and entrepreneurs through a litmus test of leadership, measuring them on the parameters like whether they have been able to quickly adapt to the changing world, navigate their business through the crisis, and tap the new emerging opportunities. Thus, the way investors are now looking and assessing entrepreneurs is different.

“VCs have spent a disproportionate amount of time with their portfolios this year, working on strategies to survive and thrive,” said GrowX’s Taneja. Along the way, many startup founders had to take hard decisions like laying off people, which is one of the qualities investors look for in entrepreneurs.

“Some entrepreneurs are equipped to handle that but most can’t,” added Taneja. “So your sense of a good entrepreneur who can truly deliver in tough times has also changed.”

Consequently, it has become more difficult to land checks, even though there is no dearth of capital for startups at present.

Investors are now focused on unit economics (making money at the basic unit level) and are asking tougher and smarter questions to founders because of the uncertainty in the ecosystem, believes AngelList’s Somani.

Nonetheless, VCs who spoke with KrASIA concur that Indian entrepreneurs have dealt with the black swan event quite well and have come out stronger, more resilient, and more productive.

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