The Indian VC industry is poised to shift gears next year with increased early-stage VC activity.
The year 2017 has been a rather muted one for the Indian VC industry, with a lack of blockbuster exits, down rounds for the startup bellwethers (Ola, Flipkart), and downsizing or closure of high-profile startups (Snapdeal, Stayzilla, Taskbob). But it’s not been all gloom and doom, with the fintech sector seeing significant activity, and players like Paytm, Policybazaar raising significant capital. 2018 promises to be a better year for Indian VCs, and below is how we foresee the year panning out.
Consumer tech, which saw frenzied investing activity in 2014-2015 and significant slowdown in 2016-2017, will see a comeback in 2018. Startups in entertainment, personal finance, consumer brands, and education especially will be favoured by investors. With increasing accessibility of the mobile internet, it has never been easier for companies to reach end customers. Though with the slowdown in the Indian economy, consumption sectors like e-commerce, travel will see limited growth. Startups focusing on engagement will see better adoption.
In 2017, there was a launch of more than 20 new VC funds in India, and many existing VC funds raised large new funds. Indian VC funds have raised in excess of $4 billionin the past two years, but new investments by these firms have decreased by more than 30 percent since 2016. Next year will see increased early-stage investing by these firms, with 2019 seeing a new peak in terms of deal activity. India has also seen an increase in micro VC funds, largely in line with global trends. We will see increased competition amongst funds for early-stage deals and a Series-B crunch later in the year. Large corporates will seek to increase M&A activity and reduce investment in startups. M&As will be focussed around acquiring startups which have unique IPs and strong tech teams.
Initial Coin Offering (ICO) has received significant hype in recent months and has emerged as an alternative to VC funding. Token sales have hit a new high with 1,000-percent jump over 2016 and a total of $2.8 billion raised in 2017. With ICOs facing regulatory scrutiny and transparency challenges, this new field will see a high-profile failure in 2018.
Enterprise tech, which was in favour in 2017, will continue to receive investor interest in 2018. As per a recent Nasscom-Zinnov report, the average funding for B2B startups in 2017 saw an increase of five percent, while B2C average funding saw a decline of 10 percent. Enterprise tech also suits micro VC funds, given that it is more capital-efficient and exits are possible on a smaller scale. The next Indian unicorn will be from this space and will be self-sustaining.
There has been increased activity in deep tech investments in India recently. Driven by lack of exits in consumer tech, many funds in India have experimented with Silicon Valley-style deep tech investments. Given India’s advantages of a large software workforce and availability of large data sets, 2018 will see these efforts bear fruit and a respectable startup emerge especially in the sectors of logistics, retail, marketing and fintech.
Full-stack deep tech startups that provide end-to-end services will see faster growth and hence will be favoured by investors especially those that target the Indian market. Full-stack startup has verticalised focus and the potential to disrupt using new-age technologies will create the next unicorns from India.
With the global population ageing rapidly, and with the promise of using artificial intelligence (AI) to reduce healthcare costs, there is a massive opportunity for startups to disrupt healthcare. India is also uniquely placed given that it has a more readily available large labelled dataset that startups can use to train their algorithms. Healthtech was traditionally hard to scale as it had long gestation cycles and significant go-to-market (GTM) challenges. AI and big data promise to help startups overcome these challenges.
AI is no longer a buzzword in 2018. Artificial Narrow Intelligence (ANI) has proven to be very effective in automating processes and creating real-world impact in 2017. In 2018, if a startup does not leverage AI in its products it will be tough for it to raise capital. Software as a Service (SaaS) companies are especially at risk if they don’t adopt AI. AI also helps startups build significant sustainable moats and M&A activity by non-tech companies for AI talent will create a talent war. Indian government will allocate massive budgets to improve AI capability in the country.
Overall, 2018 promises to be the year that the VC industry finds its feet. The industry has a healthy mix of portfolio diversification with consumer, enterprise, deep tech startups finding favour. The rise of sector-specific micro VCs augers well for the industry and will bring in fresh ideas.
Here’s wishing everyone for a rocking 2018!
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)