VC Perspective on the Indian Startup Ecosystem in 2022

The year 2021 will be remembered as the year when the Indian venture eco-system reached a critical juncture. Most start-ups were able to generate growth and experience tailwinds after navigating through Covid disruptions in 2020. A total of $38 billion in capital was raised, breaking the previous three-year record. India has added 44 unicorns, averaging one every 10 days.

The capacity of start-ups to access public markets and execute successful IPOs was perhaps the most hopeful feature. Zomato and Nykaa were the first to go public, and they will pave the way for many more in the future.

Innoven Capital has released the Startup Outlook Report 2022, which will provide important information to all stakeholders interested in the venture eco-system.

According to an industry research, three out of four company founders predict the fundraising environment would be even stronger in 2022 after a record $38 billion poured into India's startup ecosystem in 2021. According to the Startup Outlook Report 2022, over 92 percent of founders who attempted to raise capital in 2021 had a positive experience, and 75 percent of them expect the environment to improve this year. 83 of the 100 startup owners polled have a larger predisposition for growth over profitability, which includes fintech, SaaS, D2C, B2B, logistics, and education. Almost 44 startups joined the coveted unicorn club of companies valued at more than $1 billion in 2021, during an investment frenzy.

“2021 will be remembered as the year when the Indian venture ecosystem hit an inflection point,” said Ashish Sharma, managing partner of InnoVen Capital India. “Perhaps the most promising aspect was the IPO story, with Zomato and Nykaa leading the way.”

In 2021, 84 percent of founders (92 percent of all founders who attempted to raise financing) had a positive fundraising experience, according to the research, which is now in its seventh year. This is a big increase from 2020, when only 54% of entrepreneurs felt this way.

While the Covid-19 pandemic has caused India Inc. to focus on good financial measures and profitability, 83 percent of startup entrepreneurs say they are more concerned with growth than with profitability.

According to the data, only 20% of companies polled claim to be Ebitda profitable, with 51% aiming to turn Ebitda positive in the next two years.

Following the success of successful initial public offerings, such as those of Zomato and Nykaa, 71 percent of entrepreneurs believe that an IPO is the most likely way for investors to exit. This is a big rise from 2020, when only 47% of founders agreed. According to the research, IPOs in India are the most desired exit option for 58 percent of founders, compared to 30 percent in 2020.

“This report is part of our continued effort to gauge the current sentiment, as seen through the eyes of entrepreneurs,” Sharma added.

Interestingly, the founders polled identified rapid commerce (grocery delivery) as the most overhyped area, while healthtech was chosen as the most underhyped.

The debt firm InnoVen Capital has offices in India, China, and Singapore.

Byjus, Swiggy, Infra.Market, Eruditus, Pharmeasy, Shiprocket, Elasticrun, Oyo Hotels & Homes, Dailyhunt, CureFit, Vedantu, boAt, Licious, Udaan, Ofbusiness, Zetwerk, Moglix, Firstcry, Mensa Brands, Blackbuck, Rebel Foods, Cars24, Spinny, Slice, BharatPe, and Pepperfry.

Exit Option

Furthermore, the report finds that mergers and acquisitions remain the second most likely exit option, which is largely consistent with the 2020 survey, while 71% of founders prefer IPO exits, a significant increase over previous years. AgriTech and logistics start-ups are the most eager to do an IPO in India, preferring it to other exit options. It also shows that 84% of founders had a positive experience raising capital in 2021, and 75% believe the fundraising environment will be even stronger in 2022.

According to the survey, the majority of founders prioritised expansion over profitability, with 83 percent picking growth as their primary emphasis. Employment is predicted to rise in 2022 as more businesses enter the market, with FinTech, D2C, AgriTech, and HealthTech hiring the most.

Government Policy

The government's work was rated as satisfactory to excellent by 39 percent of respondents, down from 45 percent in the 2020 study. The primary area of concern, as it was last year, was a stable and predictable regulatory environment.

Fintech respondents overwhelmingly preferred regulatory environment stability and predictability, while EdTech respondents chose stricter IP protection legislation and Logistics listed digital infrastructure as a major topic.

Impact of Work from Home

The shift away from traditional office culture has remained consistent, with 54% of start-ups using work-from-home (WFH) or hybrid models. This pattern is likely to continue in 2022. However, there is no agreement on whether Covid has had a positive impact on culture. Half of the founders believe WFH has had a positive impact on productivity and innovation, while the other half believe it has resulted in a lack of teamwork/collaboration and a difficult work-life balance.

In addition, Quick Commerce was named the most over-hyped sector, while HealthTech was named the most under-hyped. While the survey concluded that the Indian startup environment has improved, improving gender diversity remains a concern. Only 30% of the start-ups examined had more than 20% women in leadership roles, down from 33% the year before.