Entrepreneurs and investors TOI spoke to said the startup ecosystem, like all spheres of the economy, saw a ‘K-shaped recovery curve’ in 2020. The strong got stronger and the weak kept getting weaker, they said. While the year of Covid gave rise to 11 unicorns, it simultaneously sounded the death knell for numerous upstarts. Even as entrepreneurs joined forces through M&As to tackle the pandemic, the absence of Chinese money in the ecosystem resulted in muted large dollar deals in an already difficult year.
Venture Intelligence (VI) founder & MD Arun Natarajan said that the year dealt a blow to later-stage tech ventures looking for growth capital as geopolitical tensions affected investment by Chinese investors in startups. According to VI data, Chinese investors participated in 24 deals in 2020, investing $410 million in all, compared to over $1 billion across 35 deals in 2019.
However, with the digital revolution picking up in the second half of the year, 2021 is expected to see demand and funding action return to the worst-hit sectors with a vengeance, and also reset the stakes of overheated sectors such as edtech, stakeholders said. Natarajan believes unit economics is going to be the guiding mantra in the startup world in 2021. “The days of deep discounts are behind us, and consolidation activity will continue as strong companies are likely to close massive bargains,” Natarajan said.
According to Krish Subramanian, co-founder of SaaS firm Chargebee, which raised a $55-million round in 2020 from American VC firm Insight Partners, the absence of Chinese investors may impact certain segments, but not enterprise SaaS — the biggest gainer of the pandemic. Subramanian said the automation and digitisation boom brought on by Covid is a huge positive for the SaaS sector. “SaaS firms are continuing to grow even in verticals that were massively affected by the pandemic in March-April like retail, spas & salons, etc. Digitisation is accelerating across industry verticals — whether it is front-office technology or back-office infrastructure,” he said.
Orios Venture Partners managing partner Anup Jain predicted a return to business for discretionary spend sectors like fashion, travel, real estate and entertainment from around June 2021. “In the interim, the hot sectors will continue to be edtech, health tech, agri tech, gaming, retail tech and wealth tech platforms,” he said. “Edtech will start cooling down, vernacular social network platforms will see investor interest, and entertainment action will shift from OTT platforms to gaming,” 3One4 Capital founding partner Siddarth Pai predicted. The end of 2020 already saw two new unicorns in the social content space with Dailyhunt and InMobi’s Glance raising over $100-million rounds from Google and others.
Matrix’s Davda believes users who transacted online for the first time during the pandemic will be hooked to consuming services on the internet, widening the customer base for tech startups. “I expect this trend to continue and grow even more,” he said.
In 2020, as of November, about 140 investment proposals valued at over $1.75 billion — mostly from China and Hong Kong — were on hold, boutique law firm Burgeon Law’s founder Roma Priya said. However, China’s loss was the US and Jio’s gain. “There has been renewed interest from the US, Japanese and Middle East investors in the Indian startup ecosystem, and this is likely to pick up in 2021 in the absence of the Chinese,” Pai said. Tarun Davda, MD of PE firm Matrix India, said the ecosystem was still buoyant despite restrictions on Chinese capital. “The recent fund-raise exercise by Jio has brought India on the radar of several marquee foreign investors and I think we all should recognise this is a big validation for the ecosystem,” he said.
The year also saw startups engage in heightened consolidation moves. Over 87 M&A deals worth more than $1.3 billion involved at least one startup in 2020, according to VI. In addition to marquee deals such as Byju’s buying WhiteHat Jr, and Reliance acquiring majority stake in Netmeds, there were several smaller strategic acqui-hires and distress sales among startups.
“The pandemic readjusted valuations to make an attractive proposition for acquisitions and help companies ramp up service offerings and increase market share,” said EY India e-commerce sector leader Ankur Pahwa. 3one4 Capital’s Pai believes consolidation action is just getting started, and will reach its peak in the first quarter of 2021.
Sanjay Swamy, Managing Partner, Prime Venture Partners believes “digital is going to rock” across all segments. “Any entrepreneur betting on the digitization of India in any sector will have a huge opportunity ahead of them – and those are the themes that investors will find most attractive, he said. “The bar on funding has gone up and investors are definitely expecting more from companies – this is something we see as a good sign,” he added.