Indian VC outlook Strong & Optimistic For 2021

By Rachita Sharma 2020 will remain one of the most talked-about and extraordinary year for the world and India alike. As the global pandemic knocked on our doors in March 2020, nobody knew how or when this guest would bid us adieu. While we are still reeling with the aftermath of the pandemic (with Covid cases rising significantly lately, we could be heading towards the second wave), one thing has been observed, ie: the resilience of the Indian economy. While the GDP was slated to fall by eight percent in 2020, forecasts by the International Monetary Fund (IMF) expect a strong rebound in 2021.

Owing to the Covid 19 induced lockdown, there was also a rapid adoption of digital trends across all sectors which in turn affected VC activity positively. Bain & Company's recently released `India Venture Capital Report 2021' peered into the rear view mirror to analyze how the Indian startup eco-system and VC landscape perform during 2020. And we are happy to report that the outcomes look rather positive.

2020 saw strong deal flow with almost $10 billion being invested in startups. The number is higher than all previous years other than 2019. The VC landscape saw a sharp rise in fundraising activity as marquee funds such as Sequoia, Elevation Partners, Falcon Edge, and Lightspeed all closed new India-focused funds in 2020. While overall deal size decreased by 15 percent, there was an upsurge in the number of deals. The number of startups also grew significantly along with the number of new Unicorns going to 12 during 2020.

India VC Deal Landscape
2018-19 were marked by a sense of optimism in terms of VC activity. 2020 was also expected to move in the same direction until Covid 19 happened. While deal values saw a 60 percent decline during April-June 2020 as compared to the previous quarter, life soon returned into VC activity, which reached pre Covid 19 levels in the third and fourth quarter of 2020.

As compared to 2019, the total deal value did decline slightly to $10.0 billion in 2020 from $11.1 billion in 2019. However, deal volume grew by seven percent over 2019 with 810 VC deals being cracked in 2020 as compared to 755 seen in 2019.

The momentum was brought along by growth in the number of smaller deals. There were over 500 deals with a value of less than $5 million in 2020. Collectively, 22 start-ups raised over $100 million in 2020 from VC and growth equity investors, with the majority concentrated in consumer tech.

Most Favorable Market Segments
Consumer tech, SaaS, and fintech emerged as the key sectors that received the most investments, accounting for 75 percent of VC investments in 2020. Key subsectors included edtech, food tech, gaming, and media and entertainment in consumer tech; verticalized solutions within SaaS; and payments within fintech.

Consumer tech investments grew 25 percent as compared to 2019. Of all subsectors in consumer tech, Edtech emerged as the clear winner with a host of high-value deals. While Byju's raised close to $1 billion through 2020, other players such as Unacademy, Eruditus, and Vedantu also raised a considerable amount of investment. Additionally, Zomato's $660 million deal drove up average deal size in food tech as compared to 2019, while large investments into Dream11 and MPL led to the surge seen in gaming.

2020 also saw the Indian SaaS ecosystem maturing. It accounted for the second-highest quantum of
investments after consumer tech. Average deal size grew significantly across horizontal business software ($20 million), horizontal infra software ($35 million), and vertical-specific business software ($37 million).

Investments in vertical-specific software grew the fastest, clocking 60 percent growth over 2019, driven by a $160 million deal in Zenoti. Horizontal business software also witnessed many large deals including Eightfold AI ($125 million), HighRadius ($125 million), and MindTickle ($100 million), while Postman's $150 million deal was the biggest investment in horizontal infra software.

Investment in fintech continued through the 2020 payments segment saw largest deals getting closed in Razorpay, CRED, and BharatPe. Lending and insurtech also continued to dazzle through 2020. Bigger deals were seen in both lendings as well as insurtech, including MoneyTap ($70 million) and Rupeek ($60 million) in lending, and PolicyBazaar ($130 million), Digit ($84 million) and Acko ($60 million) in insurtech.

Expounding on the findings of the report, Ankur Bansal, Co-Founder & Director, Blacksoil, says, "The pandemic has given impetus to the digitalization of traditional business models and many talented Indian entrepreneurs have taken this as an opportunity to start innovative businesses in 2020. Sectors like fintech, consumer tech, ag-tech, and SaaS are expected to grow tremendously in the coming years as consumers and businesses across India are starting to adopt new technologies at a rapid pace. Edtech and food tech saw increased usage during the lockdown and it would be interesting to see if the same is sustained in the long run. Blacksoil has always been active in these sectors and would continue investing in the right opportunities."

Investors & Fundraising Landscape
According to the report, India is now home to 520 active VCs, with new players such as Inflection Point Ventures, Avataar Venture Partners, and Coatue Management, among others foraying into the market. Other than the number of VCs, fundraising also grew significantly in 2020, with $3 billion being raised for India-focused funds. Of them all, Sequoia Capital's India Venture Fund VII ($525 million) and India Growth Fund III ($825 million), were the major pushing factor and accounted for 40 percent of the total funds raised in 2020. Sequoia Capital and Tiger Global were VCs with the highest number of investments in startups and the highest deal values respectively.

The report also stated that India-focused dry powder has remained stable over the last four years, ending 2020 at $6 billion, which indicated strong investment activity going forward into 2021 and beyond.

Speaking about the prospects of growth in 2021, Deepak Gupta, Founding Partner, WEH Ventures, says, "The report captures many salient facts of the startup ecosystem. Interesting to note that there is a significant dry powder going into 2021 which augurs well for continuing strong VC activity. Also, exit activity is expected to pick up after a somewhat subdued 2020.”

Ankur also added, "The deal flow is robust despite the macroeconomic slowdown and dry powder available with VCs being stable over the last 3 years, which shows that the overall global outlook towards the Indian startup ecosystem has been positive."

Exit Landscape
The optimism seen in investment activity through 2018-19 was an impact of marquee exits that boosted investor confidence. This is one of the significant areas that experienced a decline during 2020. As compared to $4.4 billion in 2019, VC exits decline to $1.3 billion in 2020. Sectors that saw increased end-user adoption saw high exit values such as edtech that accounted for one-third of the exit value and food tech accounted for 20 percent.

However, experts believe that the exit outlook remains positive for the next few years as most of the top VC funds' portfolio is yet to reach maturity since 2020 saw a gap of 1­2 years on average between the funds' average holding period and portfolio age today. Coupled with an upward-moving economic climate post-pandemic, will bring about recovery in exits going forward.

Start-Up Ecosystem In India
A shining beacon of hope amidst the bleak year has been the constant growth in the Indian startup ecosystem. Now home to a total of 37 Unicorns, 12 of which joined the club in 2020, India now has over 110,000 startups. Nine percent of them all are funded. The number of startups have been on a constant rise; increasing 17 percent YoY between 2012 and 2020. The country is also witnessing the emergence of new startup hubs such as Hyderabad, Pune, and Chennai. The constantly growing segment has also contributed to the creation of over three million direct and indirect jobs over the last eight years.

To conclude, Ankur, says, "2020 was a black swan event that had a material effect on most of the businesses and potentially diminished valuations, negatively impacting exits. Exit momentum is likely to grow in the coming years as the economy goes back into the growth phase and many companies in VC portfolios start to hit scale.”

The road ahead for the Indian startup and VC ecosystem looks positive through 2021.