With 660 deals, India startup funding over Jan-Sep 2018 blows past 2017 numbers

The total number of startup funding deals over the nine months ending September 2018 rose to 660 from 619 from a year ago.  The total number of debt funding rounds also rose to 44 from 27. Even though the amount of equity funding raised dipped 14 percent to $9.14 billion from $10.63 billion a year earlier, the larger number of late-stage deals rose sharply, signaling a renewed confidence in the Indian startup ecosystem.

If the first nine months of the year are any proof of the larger trends in the Indian startup ecosystem, then 2018 is looking like a particularly positive year. To begin with, a slew of startups – Zomato, Swiggy, BYJU’s, PolicyBazaar, Freshworks, OYO, and Udaan – all joined the unicorn club in the span of just a few months.

Secondly, while total equity funding raised by the Indian startup ecosystem fell, the sharp increase in Series C and Series D deals is a sign that investors are becoming increasingly confident in the ecosystem.

According to data compiled by YourStory, total equity funding was lower at $9.14 billion in the nine months ended September 30, 2018, compared with $10.63 billion in the same period last year, suggesting deal sizes are smaller this year. To be clear, what tipped the scales in last year’s favour was Flipkart’s $3.97 billion in funding raised, Paytm’s $1.4 billion, and Ola’s $520 million.

Similarly, the nine months ended September 2018 saw more than 24 startups raising over $100 million, with OYO topping the chart with $1 billion. In comparison, only 13 companies raised more than $100 million last year, of which two were massive rounds by Flipkart and Paytm.

Late-stage deals saw a significant increase in funding raised this year. For example, 40 Series C deals mopped up over $1.76 billion in the January-September period this year, compared with just $660 million across 16 Series C deals last year.

Similarly, there was a near 4x increase in Series D deals to $770 million across 16 deals this year, as opposed to $163 million across 6 deals last year. The story was similar across Series E and Series F. See infographic below.

Renewed investor confidence and interest

The increase in later-stage investments highlights a renewed commitment and belief in startups that have the ability to scale and boast strong fundamentals.

The surge in the number of Series C and D deals this year indicates a renewed interest and faith in the Indian startup ecosystem. These higher deals are primarily used to accelerate the growth momentum for these startups, in a show of confidence over these companies’ ability to win the market as well as launch or start out in different geographies (like in the case of OYO and Ola), and acquire other companies (like Swiggy, Zomato, OYO, BigBasket and DailyNinja).

“The base has broadened up. Two years ago, Series B was a gap in the market and it continues to be today as well. Companies that got funding over the last 2-3 years have done well and Indian startup economy is maturing which has resulted in more opportunities that are available for Series C players. We are moving towards a more holistic ecosystem over the next three years,” says Ashish Fafadia, CFO, Blume Venture Partners.

 For this reason, the drop in total funds invested in 2018 does not seem to be a major cause for concern.

“The small shifts in quantum and volumes don’t matter much. What I gather from my peers are that everyone is getting bullish again, and there will be more increase in deal sizes and number of deals. There definitely is a push towards more investments,” says Parag Dhol, Managing Director, Inventus Capital.

Does this mean we will experience the funding euphoria of 2015?

“Yes and no,” says Sanjay Swamy, Managing Partner, Prime Venture Partners.

“This time around, the bets are being based on companies that are displaying growth trajectory, higher quality, and that have solid fundamentals. In 2015, there was hope that the Indian startup ecosystem and market would grow, but today, there actually is strong local digitisation. Post Jio India and internet penetration has shown us that,” Sanjay adds.

Ashish says startup founders have focussed on unit economics for consumer companies and on serious value additions to B2B product companies and SaaS businesses.

The aftereffects of the Flipkart-Walmart blockbuster

Investor sentiment also received a major boost this year, thanks to the recent $16 billion Flipkart-Walmart deal. Prime Venture Partners’ Sanjay says the Flipkart-Walmart deal showed investors it was time to pay more attention to India.

“Yes, the fundraising for higher rounds has certainly become simpler due to more investor liquidity in the market post the Flipkart-Walmart deal,” affirms Greg Moran, Co-founder and CEO Zoomcar, which raised $40 million in Series C funding this year.

Another entrepreneur, who recently closed a Series C deal, adds that investors are more open to investing now that they have seen a blockbuster exit. The Flipkart deal was also the first public divestment by Japanese conglomerate SoftBank’s Vision Fund and it helped bolster SoftBank’s first-quarter operating profit, which surged 49 percent.

SoftBank recorded a $2.2 billion profit for its $100 billion SoftBank Vision Fund from the sale of its stake in Flipkart. Soon after, it invested $200 million in PolicyBazaar, propelling the online insurance aggregator into the unicorn club. Since then, SoftBank has been looking even more closely at its existing investments in the country.

Ujjwal Chaudhry, Engagement Manager, RedSeer Consulting, says, “The Flipkart-Walmart deal has also increased the transaction sizes in investments. It helped clear the negative air about the Indian startup ecosystem. It showed investors that Indian startups are capable of giving blockbuster exits.”

A bigger, deeper investor pool

Indian startups have also captivated the attention of a wider group of investors, according to experts and industry sources. In addition, a growing number of newer funds like Stellaris Venture Partners and Unitary Helion Ventures are entering the ecosystem. Several media reports also suggest that Kabir Mishra, Managing Partner at SoftBank Capital, is set to launch his new fund with a corpus of $250 million.

Mayank Bidwtaka, co-founder of peer-to-peer content generation platform Vokal, says, “There are new investors coming on board; especially the Chinese investors are looking at India with renewed interest.” Vokal raised Series A funding of $6.5 million led by Shunwaei Capital and Kalaari Capital.

In late 2015 and into 2016, even as other investors tightened their purse strings, the Chinese remained undeterred. Didi Chuxing backed ride-hailing player Ola in its $500 million Series F round at the end of 2015.

“The number of participants in the Indian startup space (early stage as well as growth stage) have grown significantly with contributions from foreign as well as a few domestic players,” says Ashish Fafadia.

Foreign investors like Shunwei Capital and BEENEXT too have increased their activities and footprint in India. Shunwei clocked 8 deals (vs 2 in the year-ago period) whereas BEENEXT doubled its deal count from 4 to 8. UTEC Japan (The University of Tokyo Edge Capital) also made its mark in deep tech investments by funding two healthtech startups’ Series A rounds (Bugworks - $9 million, Tricog - $4 million).

[Read more about Chinese investors’ interest in India in our Q3 2018 funding recap.]