With the birth of over 20 new unicorns in the last 18 months, India has experienced some record-breaking wins in the start-up space. Of these, the 12 unicorns born in 2020, were the highest ever in a year for the country. With the rise in average deal size, funding rounds closing in shortest possible time and startups raising more capital than planned, there has also been a significant surge in deal activity across sectors, since early this year. Additionally, a leading food delivery platform’s foray into IPO this quarter, clearly spells the coming of age for Indian start-ups.
As per the KPMG International’s Venture Pulse Q2 2021 Report, India has set a record in Asia, with its VC investments flying through the roof to as much as USD8 billion in this quarter. The sudden attention from global investors, who are keen on investing in the world’s second-most populous market, signifies the potential of the country’s promising young entrepreneurs. Consequently, it also underscores the spirit of innovation and vast scale digital adoption both on the business side and the consumers’ end. Let’s look at the key aspects that make India’s booming startup landscape, attractive to global investors.
Who is investing?
Investment in India is driven not only by VC investors, but also by more traditional funds, who want to make the most of the broad applicability of digital business models in the pandemic. In fact, the Venture Pulse Q2 2021 Report shows that the top 10 deals in Asia are spread amongst five countries: Indonesia, India, China, Singapore, and South Korea.
Given the success of many IPOs over the past year and a growing sense of missing out, a growing number of less typical VC investors are increasing their focus on the VC market, including private equity players, pension funds, sovereign wealth funds, university endowments, and family offices. While some may have had a small percentage of funds allocated to alternative investments such as VC historically, they are now increasing their allocations.
Moreover, hedge funds and mutual funds are also putting money in the VC market because they see low-risk opportunities to make returns off companies expected to go public within the next twelve months. The influx of these non-traditional players is only increasing the already enormous amount of liquidity in the market.
A large number of unicorns likely reflects the ongoing trend of VC investors focusing on their existing clients, using their investments to allow them to bring on people, fuel their sales and their valuations.
Who is attracting investments?
The immediate answer is that more and more tech-enabled companies in India are raising funds from the capital markets. The massive magnitude of technology and internet penetration across the urban as well as rural landscape of the country is responsible for the growth of tech-driven ventures. This opens a new avenue for early, mid and late-stage financial sponsors to cash in on their investments.
Diverse companies are attracting VC investment in India, in particular those focused on direct-to-consumer offerings, including e-commerce, food delivery, hyperlocal grocery delivery, video sharing, and gaming. Moreover, investors continued to pour money into EdTech, even as food delivery platforms continued making some handsome gains.
Due to the pandemic induced lockdown that forced people to stay at home, which scaled the demand for online deliveries even for essentials such as groceries and expanded the consumer base of these new companies. With agility in their DNA the startups were successful in realigning, and in some cases even resetting themselves to cope with uncertainties and the rising demand.
Be it online learning or remote working, there was a sea of opportunities waiting for them to tap into. The cornucopia of consumers onboarding themselves into the digital space to survive the new normal has accelerated the growth of tech-enabled ventures.
What’s India’s potential ahead?
Observing the current trend, it is anybody’s guess that VC investment will continue to be strong in Asia, particularly in areas such as fintech, e-commerce, edtech, health and biotech, and logistics. As more and more tech-enabled companies in India raise funds from the capital markets, it opens a new avenue for early, mid and late-stage financial sponsors to cash in on their investments. This is a significant shift from an exit route available to financial investors previously, which will only increase the monetary allure of these businesses.
According to KPMG International’s Venture Pulse Q2 2021 IPO activity will be a key area to watch heading into Q3’21, particularly in India. If the food-delivery startup that recently filed an IPO and others have a positive showing and are very well subscribed, VC investors will likely gain additional confidence in the country’s potential. The pandemic has really expedited the need for digital transformation, for innovation, and for doing business better in general.
Many established companies globally have come to the realisation that they don’t need to innovate from scratch and that a better approach might be to partner with or invest in startups that can help them accelerate their transformation in ways that better align with the new normal. This is where a gamut of Indian startups backed by the ease of doing business, advanced technology and innovation, emerged as the ‘cool kids’ on the global investment block, waiting to further sprout, bloom, flourish and grow.
The author, Anand Vermani, is Partner and Co-Head at Corporate Finance at KPMG in India. The views expressed are personal
First Published: IST