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Last Updated : Jan 11, 2019 02:02 PM IST | Source: Moneycontrol.com

Podcast | Digging Deeper: The startup scene in India, and what 2019 has in store

The year 2018 or the startup scene, and what 2019 holds for modern entrepreneurs are the topics of our discussion as we dig deeper into modern Indian Silicon Valleys on this episode of Digging Deeper with Moneycontrol.

Moneycontrol Contributor @moneycontrolcom

2018 was a good year for startups in India. Last year’s themes were consumerism and digital adoption. The average age of startup founders in India is 28 years, and more than 9 percent of founders are women. It is estimated that India’s GDP could double in the next decade.

Some analysts and industry experts claim there is an increasing trend of contribution of domestic consumption towards GDP with urban and rural aspirations and behaviours blurring. Indians are now willing to spend on goods and services that assist them in their work, improve their education or take them up the value scale.

Further, with approximately 59 percent of our population expected to have internet access by 2021, the government push towards digital initiatives and the increasing affordability of smartphones, is expected to continue in rural as well as urban areas. With 500 million users, India could become a market where innovations are tested.

Media reports estimated that Bengaluru stood first in deal value and volume for start-ups, followed by Delhi-NCR. Mumbai placed third in the ranking both in terms of value and volume. Chennai and Pune rounded off the top five in terms of volume.

Another interesting statistic is that 40 percent of startups are begun in tier two and tier three cities. The year 2018 or the startup scene, and what 2019 holds for modern entrepreneurs are the topics of our discussion as we dig deeper into modern Indian Silicon Valleys with me Rakesh Sharma on Digging Deeper with Moneycontrol.

2018 - A review

TV Mohandas Pai wrote last week that, according to some media reports, there are an estimated 39,000 active startups in India. They raised $13.7 billion in investment in the calendar year 2017, throwing up 26 unicorns and 31 soonicorns. Last year, they raised $12.7 billion. Startups have created a total value of $130 Billion! Those are massive numbers. And yeah, soonicorns: they’re pretty much what they sound like - tech startups that are likely to see follow-on funding, and have the potential to scale to billion dollar companies.

To quickly review 2018 in terms of the start-up scene in India, Flipkart was a huge vindication for India’s numerous entrepreneurs. As Bloomberg noted, “Walmart’s acquisition of Flipkart validated for the Indian ecosystem that funding life cycles work, with every significant stakeholder making money. The outcome was real, and occurred at massive scale.”

Sweet words those, if you are an entrepreneur. Also, 2018, and the years before that, saw unicorn cohorts and other large tech startups leave to start their next new things. That resulted in a dramatically improved founder pool in terms of maturity, track record, ability to build big, and hire effectively.

Which makes sense, when you think of it. Why stop with the funding of just one company? 2018 saw several internet companies, such as food delivery apps Swiggy and Zomato, hotels platform Oyo, online insurer Policybazaar, B2B marketplace Udaan, software provider Freshworks, online retailer Paytm Mall and education technology startup Byju’s, enter the unicorn club.

On the other hand, the China effect proved quite real last year. When looking at the Content + Commerce + Community troika in the consumer internet space, China is here to stay. Chinese money went into 21 startups last year. Analysts noted that while sharing of ‘China Scale’ best practices and infusion of capital was welcome, we would do well to watch out for being ‘muscled out’.

YourStory reported that the number of deals closed in 2018 reflected growing investor confidence – 864 deals in equity funding compared to 830 in 2017. The number of debt funding deals also increased from 45 to 57. Some experts say Indian capital is only 10 percent of investments, and they would like to see this percentage grow.

To summarise, 2018 saw massive capital raises, especially for consumer category leaders who extended their ‘time to play and win’, as Bloomberg described it. However, it is imperative that in order to ‘make it’, start-ups have to build sustainable and defensible advantages. Else, they will eventually just run out of time and money.

Sanjay Nath, managing partner, Blume Ventures, an early-stage investor, told Livemint, “2018 was a year of building. Startups able to build and become growth category leaders, attracted late-stage capital. Swiggy and Oyo were two notable examples.”

Dev Khare, partner, Lightspeed India Partners, said , “...now...startups are scaling much faster than five years ago...There is already an infrastructure present for payments, logistics, infrastructure. When Flipkart started, say 10 years ago, they had to build the infrastructure. Today, startups can scale faster because the infrastructure is already present.”

Anand Lunia, managing partner, India Quotient, told Livemint, “Late-stage capital has spread out. And we have seen that unicorns will not just be restricted to e-commerce. This looks like the start of a good cycle.”

Which brings us to 2019.

What's 2019 looking like?

Before we get into what 2019 holds for VCs and start-ups, for unicorns, soonicorns and entrepreneurs, we need to bear in mind that the startup-investment game has alternating cycles of bubbles and busts. Just three years ago, the sector experienced a fair bit of turmoil.

If 2014 witnessed prolific funding activity, 2015 saw even more optimism from VCs. But that upturn went south by the fourth quarter of the same year! We saw a full-on funding drought in 2016 that led to shutdowns, scaledowns, markdowns, down rounds, downsizing - pick your descriptor.

Two years later, voila! Six out of the 10 most active VC firms have raised fresh funds totalling $1.7 billion. Tiger Global, a main player in 2015, didn’t make a comeback but there was a steady availability of capital for early-stage startups. In the late stage, SoftBank, Nasper-Tencent, and Alibaba pumped in hundreds of millions of dollars, transforming three-, four-, five-year-old firms into unicorns. VC investors insisted that their bullishness was par for the course.

Lunia of India Quotient insisted 2018 was no bubble. He said, “This is not a bubble. All the companies getting funding are backed by good numbers and performance. It’s only the ones that can justify these valuations that are attracting these rounds.”

Avnish Bajaj, founder and managing partner, Matrix Partners, said, “Of all the time I have been in venture capital in India, this is the time funds are in line with the market opportunity. Historically, there has been an oversupply of funds, but the market has now become deeper and wider.”

He added, “E-commerce has been underfunded for the past three years with low company creation. The Flipkart exit has changed the sentiment hopefully. Focus will be on omnichannel commerce, social commerce, video commerce, group buying, etc., and under-penetrated verticals.” Meaning early-stage e-commerce funding could be back this year.

Mohandas Pai concurs. He wrote, “The big funds are flush with cash and looking to invest large cheques. The recent $1 billion investment in Swiggy is a portent of things to come as they seek out opportunities to dominate the market. India should get between $12 billion – $15 billion in investments in 2019 as many soonicorns raise capital and break out.”

Startups will also provide employment at a time when jobs seem to be fewer. Pai wrote that demand for high-quality talent is rising and we could well see shortage of resources. But startups could add between 200,000-250,000 employees this year. He predicts that e-commerce, local delivery, and supply chain startups will lead the way on this.

2019 will have its share of unicorns as well. An Economic Times report estimated that companies like Delhivery, Lenskart, ShareChat, FirstCry, BlackBuck, etc., too could break into that club. Analysts claim that the number of companies that show strong growth and lower cash burn, and achieve IPO scale, will rise this year. Bajaj said, “India’s exit problem has not been solved but it is improving as the companies are reaching IPO stage.”

Sateesh Andra, Managing Director, Endiya Partners,told YourStory he believes larger companies that have proved themselves will attract investor attention.

But there is a serious challenge for these startups. Sales. India saw a massive spurt in online users following Reliance Jio’s entrance. But one Google-Omidyar study from August 2018 claimed that for every 50 million Indians who transact online, an equal number drop off.

Softbank: The big spender

The fact of the matter is that late-stage investments in India is dominated by SoftBank and Tencent-Naspers. As ET noted, “Their approach will have a bearing on the $100 million-plus deals in 2019. The other side of this story is the shifting of activity in consumer Internet investments to $20 million-plus rounds, which would go up to several hundred million.”

SoftBank Group Corp., in particular, is the biggest player in late-stage capita. It has invested in Policy Bazaar and Oyo Rooms and also doubled down on earlier investments like Paytm. SoftBank, which has billions of dollars to play with, will continue to drive late-stage activity in the Indian startup ecosystem.

Niren Shah, MD at Norwest Venture Partners India, said, “SoftBank is a positive force for the Indian startup ecosystem….(it) has large pools of capital that are helping fund late-stage venture companies in India. This is helpful and welcome for our ecosystem, since it allows a focus on growth and scale and provides a cushion on the timing of the IPO.”

Where will all the money go?

In early-stage investment, trends show that fewer startups are receiving large investments. From angel funding to Series B rounds, total investment rose from $3.11 billion in 2017 to $3.47 billion in 2018. However, the total number of deals decreased from 1,234 in CY17 to 946 in CY18, according to data platform Tracxn.

Lunia of India Quotient said, “In the early stage, it is now mostly high tech – drone, AI-based health tech, machine learning and SaaS...Entrepreneurs have realised that (their) opportunity is in core tech. However, there is a long gestation period. The segment has to evolve.”

Samir Kumar, MD of Inventus Capital, concurs. He claimed, “We see great opportunity in Internet of Things, ML- and AI-based applications, enterprise applications built on blockchain, enterprise SaaS, and niche B2C Internet companies.” Kumar believes 2019 will see increased funding momentum given the closures of many funds and good exits in recent times.

A Mint analysis predicted much the same. It said Deep Tech startups - meaning, businesses driven by artificial intelligence, machine learning and the Internet of Things - saw record funding last year. Robotics startup GreyOrange’s $140 million led by Peter Thiel’s Mithril Capital was the biggest of the lot.

According to that news outlet, investors believe the rising interest in niche technology segments is driven by a growing talent pool. It added that sectors like healthcare have huge potential for deep-tech disruption, with models of predictability and a broad reach that can make up for India’s poor doctor-patient ratio. Sounds like a tall claim, doesn’t it?

The companies, and the analysts, believe it is possible because deep-tech startups are scaling up faster and facing fewer challenges in monetizing business models. That said, volumes fell for the third straight year from 63 in 2016 and 58 in 2017 to 39 in 2018, indicating larger ticket sizes for a smaller number of successful startups.

Another likely trend is Indian startups going global. Sure, we saw Oyo and Ola go international in pursuit of newer growth avenues but could more businesses go down this route, given the high expectations at mammoth valuations?

Anirudh Damani, managing partner with Artha Venture Fund, an early stage investor, said, “The valuation of these firms is with the assumption that they will expand abroad.” Ideally, one would like to believe that startups have competition in their DNA because they are brought up being compared with their global peers.

From that point of view, it is natural that these startups would go global. Investors expect this trend to continue considering that startups are raising large capital with the intention of going global. Niren Shah added, “Indian startups are coming of age and some of them have not only perfected their product-market fit within India but also see that their business models can easily transition to a larger market outside India.”

Shah’s analysis is based on the fact that when a startup has been successful in India, it has, in effect, cracked important elements such as scale, cost, innovation and driving revenue in a low GDP per capita market. He said, “We are increasingly seeing Indian startups using this these factors to their advantage to go international.”

So, about 2019

The general elections, the state of the economy, and the trajectories taken by large global investors operating in India will play a role in how the venture-investment climate shapes up this year. The ability of big internet firms like Paytm and Ola to demonstrate growth and generate cash will also be watched keenly.

The bottom line is, India’s one-billion-plus consumers present unique problems in every sector. Remember what we spoke about tier two and tier three cities?  Anup Jain, Managing Partner, Orios Venture Partners, told YourStory that this year, he wants to meet startups that will solve the problems of the next 300 million consumers who live beyond the top six cities of India.

He said “Sectors that let large sections of population access better lending terms, healthcare, and education to improve their lives can become larger businesses than any that we have listed on bourses today. All of this has to be done with a mix of technology and offline methods and will require deep belief from investors and entrepreneurs alike. I expect bigger and more charismatic founders taking centre stage in 2019.”

Will the enthusiasm for startups continue? How many soonicorns can graduate to becoming unicorns? Who will these bigger and more charismatic founders of 2019 be?

Moneycontrol is the place to find them all. Thank you for joining us.
First Published on Jan 11, 2019 02:02 pm
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