The Indian Funding Story 2020
Last week, we gave an overview of the state of the Indian tech entrepreneurship ecosystem with some interesting findings: Despite the corona crisis, the Indian tech entrepreneurship is growing and has produced until today 38 unicorns, with 12 new joining the club in 2020. This week, our partner YourStory released the ‘2020 Annual Funding Report’ that provides an in-depth analysis of the state of funding activities and key trends in the Indian startup ecosystem 2020.
On February, 1st the government announced the Union Budget 2021. Startups and MSME continue to play an important role in India’s growth story and its move to an ‘Aatmanirbhar Bharat’, a self-reliant India. Not only is the government seeking to revise the definition of small-scale startups, but has also allocated Rs 15,700 crore for the uplift of MSMEs as well as the introduction of an investor charter. Improving the underlying conditions to do business in India will remain key for its startup ecosystem to enter the global excellence club. However, as some of the key trends indicate, India remains on a growth track:
- Despite the Corona Virus affecting India, startups have opted to adopt the pivot rather than closing their business, compared to the years 2015 & 2016 that saw a huge market correction and contributed to the closure of many startups.
- The funding for unique startups has remained on similar levels compared to 2019, however, the overall funding has significantly declined in 2020.
- The number of deals with more than $100 million funding has reduced in recent years. These numbers indicate that there is a trend for investors in diversifying their investment portfolios and exploring new territories.
- The Corona pandemic has triggered a rise in technology adoption and new offbeat areas which increasingly attract investors.
- Tier II & III startup hubs are gaining traction among investors with a yearly growth of 6%.
- There is an inclination towards the IPO route of exit and a number of internet and technology companies went public in 2020.
The Covid-19 crisis has also contributed to other shifts in the Indian startup ecosystem beyond a change in funding patterns of investors. There are a number of sector trends that are affecting the Indian startup ecosystem:
- Overcrowded hospitals during the peak of the crisis have triggered an upswing in telemedicine and online delivery of health services. Fitness & wellness apps, solutions that support video and audio doctor consultations as well as online pharmacies gained ground as the lockdown compelled people to stay at home.
- The corona virus has exposed India’s inadequacies in the healthcare system, especially the patient-caregiver ratio remains a concern. This has given rise to the use of AI, ML and other automation technologies in the healthcare sector.
- The education sector has been one of the frontrunners in the past years, the shutdown of schools during the curfew has given rise to edtech startups and e-learning platforms.
- Coding classes have been mandated form Class VI onwards to prepare the youth for the digital century to come. This has triggered a new wave of live coding startups with coding becoming one of the buzzwords of 2020.
- SaaS adoption has been one of the key trends in 2020 especially given the ‘new normal’ of remote work. It is likely that a number of companies will hold on to the concept, giving rise to more adoptions of enterprise software. 2020 also saw an increased penetration of vertical SaaS companies across sectors including healthcare, B2B retail and e-commerce. SaaS startups that build plug-and-play API solutions also saw an upswing.
- The focus in the e-commerce sector is shifting from electronics and apparel to food and grocery giving rise to a new vertical in the e-commerce sector.
- The pandemic disrupted supply chains, especially in the agriculture sector, leaving farmers with unsold produce and huge losses. B2B agritech startups have jumped on this opportunity and are working to bridge the gap between famers, traders and buyers by offering aggregator marketplaces.
- The Corona crisis has also increased customer consciousness for safer and more hygienic food. The demand for farm-fresh food is increasing and online direct-to-consumer platform are gaining traction. Farm-to-consumer startups recorded a 10x reduction in their customer acquisition cost.
- The economic crisis proceeding the Corona virus is urging people to look for alternative investment opportunities. Discount trading apps and online brokerage platform have become very popular. A few fintech player also launched stock trading options on their platform to benefit from the trend.
- Unified Payment Interfaces (UPI) have been a success story in India. With the need for more cashless and contactless payments, UPIs are reaching new highs. Compared to 2019, UPIs registered a 70% growth.
- With people being confined at home, the gaming sector has been growing significantly in 2020. Previously being an underfinanced sector, the gaming sector is attracting new investors.
2015-2020: The State of Funding in the Indian Startup Ecosystem
Since the boom year 2017, startup funding has steadily decreased reaching a total value of $9.9 billion in 2020, a 17% decline compared to 2019. However, the funding amount remains almost triple the amount compared to 2016 that saw a total of $3.9 billion funding. The number of deals over the years have remained at similar levels, indicating smaller funding rounds and a more cautious approach by investors. Bangalore, Delhi-NCR & Mumbai remain the startup hubs, however, cities like Kolkata, Ahmedabad and Chennai are increasingly gaining investor attentions. The most active funds in India are Sequoia (241 deals), Accel (165 deals) and Blume (112 deals). Looking at the sectoral distribution over the past five years, the fintech sector is the most popular sector among investors with a total share of 25.4%, followed by e-commerce with 20.8%, transport with 9.7%, travel & tourism with 7.8%, edtech with 7.7%, foodtech with 7.6%, cleantech with 6.7%, healthtech with 5.5%, logistics tech with 5.1% and automotive with 3.7%. In 2020, for the first time in the period 2015-2020, edtech made its way to the top three sectors for investors. However, with new technologies entering the market, it is expected that investors further diversify their portfolio in the future.
What is in store for 2021?
- It is expected that funding will increase but will be smaller in ticket size.
- 2021 will see a number of IPOs from companies such as Zomato, Delhivery, Freshworks, PolicyBazaar, Nykaa, Flipkart and Ola.
- Some experts are predicting that India will hit 100 unicorns by 2025, despite a strong M&A/IPO pipeline.
- As everywhere in the world the number of deep tech, B2B & SaaS startups will grow.
- With Aatmanirbhar Bharat gaining traction, it is expected that more regional startups will emerge.
The article is a summary of the new YourStory report on the ‘2020 Funding of the Indian Startup Ecosystem’. The full report can be accessed here: https://yourstory.com/cs/uploads/2020Fundingreport-1614686629287.pdf