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Key factors that will define India’s investor ecosystem in 2021 | KrASIA Year In Review

Written by Moulishree Srivastava Published on     7 mins read

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Apart from evaluating deals remotely, a number of other factors would shape up investors’ community in the world’s third-largest startup ecosystem in 2021.

As we come close to wrapping up 2020 after a flurry of unexpected events–pandemic, financial slowdown, India-China border clashes, anti-China sentiments, and sudden spike in digital adoption–things are turning out to be better than ever for the Indian startup ecosystem.

Investors are rushing to pump in money in Indian startups, particularly in the sectors that have benefitted from the rising tech adoption. This is evident from the fact that India minted 11 new unicorns this year as opposed to nine in 2019, with three of these companies landing in the elite club earlier this month.

While the year brought sea of changes in India’s startup community, it also evolved the country’s investor ecosystem in the country. Although the biggest change that all investors have probably come to terms with is evaluating deals remotely, there are a number of other factors that would define and shape up the investors’ community in the world’s third-largest startup ecosystem in 2021.

From active to aggressive

Even though major investors did not write checks for a few months due to the pandemic, VCs in the country have poured in about USD 8 billion between January and November, according to data collated by Venture Intelligence. When combined with PE funding, this figure soars to USD 34 billion, thanks to the anomaly that Reliance created when it raised over USD 25 billion from global investors for its digital venture Jio Platforms and retail arm Reliance Retail.

Investors who KrASIA spoke with believe as the country goes through digital disruption, the pace of investments is likely to further pick up.

“The whole COVID thing is a bit of a game-changer. Initially, people were waiting to see which way things would turn, but now there is a fair amount of clarity on how consumer trends are shaping up,” VS Kannan Sitaram, venture partner at Fireside Ventures, which invests primarily in consumer brands, told KrASIA. “Since there is a lot more clarity now, the pace of investments is going to pick up.”

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Read this: In Southeast Asia, tech leads through the pandemic and beyond | KrASIA Year in Review

According to Anirudh Damani, managing director of early-stage venture capital firm Artha Venture Fund, the investment thesis for a lot of VCs have either changed or evolved.

“VCs are getting more aggressive now because they are seeing a growth in online transactions,” he said. “When we talk about online transactions, they are just a bellwether. There is an entire ecosystem that moves behind that–logistics, packaging, fintech ecosystem, and customer service ecosystem.”

“So VCs are going out and investing in the entire ecosystem because they realize that this change is permanent now,” he added.

While investors have pumped in money in the tailwind sectors like edtech, health tech, gaming, and SaaS, among others, much of that capital has gone to leading use cases or categories within those sectors. However, next year, investors are likely to back niche but upcoming verticals across these sectors, which would deepen and expand the market.

Conjuring the dry powder

Despite a steep fall in funding from Chinese investors in Indian startups this year due to change in FDI laws, and SoftBank restraining itself from making big bets in the country, the Indian startup ecosystem has no dearth of capital. A number of global and domestic VCs closed their India dedicated funds amid the pandemic as they believe there is no better time to invest in companies that would shape the Indian startup scene in the coming years.

For instance, this year, Sequoia closed USD 1.3 billion India dedicated fund, Lightspeed India raised USD 275 million, and Elevation Capital (formerly SAIF Partners) announced the close of USD 400 million fund. Meanwhile, tech titan Google set up a USD 10 billion fund to back the country’s digital ecosystem.

And this trend wasn’t just limited to the American investors. Abu Dhabi-based holding company ADQ launched USD 300 million venture capital fund called Alpha Wave Incubation fund for India, while Singapore-based Beenext closed two funds with a combined pool of USD 160 million, one-third of which is earmarked for India.

Similarly, early-stage Indian VC firms that have raised or are in process of raising capital include Venture Catalyst, 3One4 Capital, Inflexor Ventures, PointOne, Fireside Ventures, and SucSEED among others. Indian corporates like Reliance and Tata are also looking to make investments in local startups.

Read this: Top four trends VCs in India would bet on in 2021 | KrASIA Year In Review

Moreover, almost two dozen new investors including Bond and Makers Fund have entered India this year according to Venture Intelligence.

“The amount of capital which is there is huge. So I don’t think there is going to be a crunch because of the lack of Chinese capital,” said Utsav Somani, partner at AngleList, who, in May, announced iSeed, a micro VC fund to back about 30 early-stage startups.

“We are seeing more angel investors coming into the ecosystem. The stock market returns have been stellar, and at the same time, other traditional asset classes like real estate have not delivered on their performance,” said Somani. That is the reason why people are looking for the next alpha to invest in, which has led them to the startup ecosystem, he added.

Raising the bar

After going through the first-ever crisis since the inception of the Indian startup ecosystem, entrepreneurs have evolved in terms of how they think, handle contingencies, and operate. This, in turn, has changed the kind of qualities investors look in founders before backing them.

“The thresholds have changed. What was good then is no longer good now,” said Ashish Taneja, partner at GrowX Ventures “Everyone is thinking about how to raise the bar.”

During the pandemic, VCs spent a disproportionate amount of time with their portfolios this year, working on strategies and making sure they come out of it strong. In the process, they required many startup founders to make hard decisions.

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

Even if a startup has good deliverables like average recurring revenues, investors are assessing founders in a different way, because “we have seen worse with a large set of entrepreneurs, and we now have a different lens or filter to evaluate people and opportunities,” added Taneja.

Diversifying bets, going deeper

Industry veterans that KrASIA spoke with believe many VCs may be looking to diversify their bets in a bid to reduce future risks.

“If you look at portfolio constructs of major VCs, usually three-fourth of their portfolio is consumer-oriented companies. Probably, a quarter goes to B2B across deep tech guys, Saas companies, and B2B enterprise space,” said Taneja.

According to him, one major lesson for VCs is that they now don’t want to be in a scenario “where they have invested in 30 companies, and all of them are consumer-oriented, and all of them are going through the same challenge.”

Many investment firms are thus looking for opportunities to back B2B companies. This would give a fillip to areas like deep tech, Taneja said. “We are seeing some good deep tech startups taking shape, and I think we will see more and more dollars following them from larger VCs who earlier shied away from this sector,” he added.

Furthermore, as investors worked with their founders to navigate their portfolios through the pandemic and the slowdown earlier this year, they have realized they need to spend more time with their companies in order for them to thrive. Thus they may choose to invest more capital in fewer startups, as opposed to lesser money in a large number of companies.

Taneja said since investing in startups require working together with founders, investors would be better off spending quality time with a handful of startups.

“VCs would go for depth as opposed to width, going deeper with the money and the time they spend. So there is going to be more concentrated bets.”

Private equity entering the Indian tech ecosystem

With the larger startup community growing rapidly on the heels of a sharp rise in digital transaction and consumption, private equity (PE) firms have started looking at some of the growth and late-stage tech companies.

Taneja believes backing tech-based companies hasn’t been a  sweet spot for private equity players, but now they are starting to see value in these ventures.

According to Gopal Jain, managing partner at Indian private equity firm Gaja Capital, COVID-19 has brought scale and financial maturity to the tech, internet, and e-commerce sectors, which is what PEs value. Gaja Capital recently invested in e-commerce delivery firm XpressBees and SaaS automation platform LeadSquared.

“Covid-19 has made technology in India a growth capital opportunity or a PE opportunity, which, prior to the pandemic, was largely a VC opportunity,” he said.

This is evident from Jio Platforms’ USD 20 billion-plus fundraise from marquee global PE firms like Silver Lake, KKR, General Atlantic, TPG, Mubadala, and Abu Dhabi Investment Authority, among others.

Furthermore, Jain believes that the venture capital ecosystem in the country has enhanced both the scale and quality of young emerging businesses, which has led to a 10x growth in the number of new businesses in India.

“If earlier hundreds of new companies were getting created, now thousands are getting created,” he told KrASIA. “That is great news for us because every VC-backed business requires growth capital at some stage.”

Jain said since these startups already have exposure and experience of working with venture capital, they have some sort of discipline and governance on how to spend that money for maximum returns.

“In a way, they have been through the primary school of investing. This is a big plus for us as opposed to investing in companies, which may be financially mature and grown-up, but are not sophisticated (in terms of experience).”

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