[Q3 2018 funding] Top deals account for two-thirds of equity funding raised by Indian startups

In Part 1 of the YourStory Q3 2018 Startup Funding Report, we focus on the top deals of the quarter, the growing Chinese interest in India, and the rising number of M&As in the startup space.

September ended with a bang with 15 announcements made in the last week alone, signalling that the euphoria, though somewhat cautious, is back. Even though the funding quantum in July-September was a shade lower than the comparable quarter in 2017, some interesting trends showed up which, investors believe, reflect the maturity of the ecosystem.

While the number of deals in the September quarter went up year-on-year, there was a marginal decline in the amount raised. According to data compiled by YourStory, this July-September saw $4.07 billion invested across 228 deals, as against $4.45 billion raised across 186 deals a year ago. The average deal size, therefore, was also smaller.

The top five equity rounds raised included hotel aggregator OYO, which raised $1 billion in the quarter’s biggest round, and also entered the unicorn club. B2B logistics player Udaan did the same with a $225 million Series B round, as did Policy Bazaar with a $238 million Series F round. The other significant deals were Paytm’s $300 million, and Ola’s $50 million.

Funds raised in the top 10 rounds (based on amount) totalled Rs 2.21 billion, accounting for 66.4 percent of total funding raised. With six companies raising rounds of $100 million each, the top 10 list has become a top 12 list this time around. Note that eight out these went to companies in the B2C space and the list was dominated by consumer internet or internet-enabled businesses. The sole exception was Five Star Business Finance, a Chennai-based NBFC.  

The slight decline in numbers doesn’t seem to be a cause for concern. Parag Dhol, Managing Director, Inventus Capital, says,

“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.”

Some believe it is too early, though, for quarter-on-quarter comparisons in the Indian startup ecosystem. Alok Goyal, Managing Partner, Stellaris Ventures, says, “The quantum of the dollars is harder to predict, one deal and fund raise can tip the scales over.”

An example of this is the debt funding raised. This quarter, it was $113 million across 13 rounds compared with $391 million across 11 rounds in the year-ago period. However, last year, Ola and Flipkart alone raised $156 million in debt. Overall, debt funding momentum in this quarter remained steady.

Valuations continued to climb, and it may not be long before the likes of grocer BigBasket, event bookings platform BookMyShow and fantasy sports platform Dream11 join the Unicorn club.

[For details on stage-wise, sector-wise, and city-wise funding, read Part 2 of YourStory’s Q3 2018 funding roundup.]

Up for Chinese, anyone?

Two themes emerged clearly this quarter: one was the increase in M&A activity and the second was the growing interest of Chinese investors in India.

According to data compiled by YourStory, as of September 30, Chinese investors had participated in 16 deals worth $1.5 billion this year. Last year, the figure was close to $1.4 billion but most of it ($1.1 billion) went to Flipkart and Ola alone. Just nine startups shared the remaining $285 million. With another three months left in the year, the Chinese will clearly be making deeper inroads into the Indian startup ecosystem.

Also read: Look East: the new direction for Indian startups raising funds 

With the US off limits, there is a renewed focus by Chinese investors in Indian startups, both late-stage ventures as well as Indian language startups. Sharechat raised funding with participation from Chinese investors twice this year, first in a Series B round of $18.2 million in January led by Xiaomi and Shunwei Capital, and the more recent $100 million round, again led by Shunwei.

The venture firm also invested in Vokal, TaxiForSure co-founder Aprameya Radhakrishnan’s new peer-to-peer knowledge sharing platform for non-English internet users. [Shunwei also invested in Indian language self-publishing platform Pratilipi, which raised $4.3 million in a Series A round in February 2018.] Newsdog, the news aggregator with a focus on Indian languages, raised $50 million in a round led by Tencent and others. The Chinese clearly love Indian language offerings.

But beyond that, the quarter also saw Shunwei invest in healthtech startup myUpchaar, and fintech startups LoanTap and Upwards. Xiaomi placed its bet on lender ZestMoney.

Amitabh Kant, CEO, NITI Aayog, in a press statement last week, said that Chinese firms had invested over $3.7 billion in India in the last three years. “Close to 15 percent of investment in Indian startups is from China, and we would like it to increase. A majority of the investments from China have happened in 25 startups.”

This apparently works for China as well. Says Parag,

“Chinese investors are looking closely at the Indian content market and are bullish about startups in India. We will see more startups getting investment from Chinese investors.”

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 next year, Tencent, Shunwei Capital, Fenqile and Plum Ventures and even smartphone maker Xiaomi tested the waters and came back for more. Most of these deals were Series C and beyond, though there were a few early-stage investments too. Of the BAT (Baidu-Alibaba-Tencent) trinity, two are already active among late-stage startups. It probably won’t be long before Baidu makes a debut too.

Let’s get back to the exit(s)

Exits are always much debated in India. How we don’t have enough good ones, how they’re all distress sales and how everyone is praying that Flipkart isn’t just a flash in the pan. Well, Q3 2018 saw 64 startup exits in Q3 2018 versus 57 last year. The biggest acquirers in 2017 were large corporates, mostly MNCs but also a handful of Indian ones. This year, by contrast, there are quite a few big startups on the prowl besides the likes of BYJU’s, which has a long list of acquisitions to its credit.

 Sreedhar Prasad, Partner and Head - Consumer Markets and Internet Business, Advisory at KPMG India, says this could be a growing trend. He explains,

“Large consumer internet unicorns are now becoming acquirers. They are acquiring newer categories, technologies and making acquisitions within the ecosystem. They might even look at investing in newer startups. It is a big trend, which will continue for a while.”

In Q3 last year, startups like Paytm, BookMyShow and Freshworks began acquiring startups. This year, OYO joined the fray with two acquisitions. Buying Weddingz in a cash-and-stock deal sees it expand into an adjacent area of wedding venues and vendors. Its acquisition of IoT startup AblePlus is meant to boost the use of tech in managing its hotels and other assets and offer self-check-in and smart locks. 

Global companies too began looking at Indian startups. US-based Cognizant acquired Noida-based SaaSFocus while NetObjex acquired Thiruvananthapuram-based blockchain firm Servntire Global. “This is another trend. Global firms and large Indian corporates are looking to acquire startups; they’re going beyond internet startups,” Sreedhar says.  

While the deals may not seem substantial and do include some distress sales, Parag believes the trend does show a positive momentum. He says,

“Most of these are money-backs or acquihires, but it still is a good thing. Especially when companies like Amazon start looking at Indian startups for acquisitions. So, even if the companies might not have been showing that much of traction, these are getting acquired for.”

Alok believes that M&A activity will be a form of consolidation for the space. He believes the logistics space is likely to see consolidation, as there are already several players in the space and newer players cropping up. Though the M&A market will be skewed towards the consumer market. Sreedhar believes agritech, food, fintech, and logistics are some of the key sectors to look out for.

Alok adds, “There are close to 50 million SMBs in the country, of which, 20 million are registered for GST and close to 10 to 20 million are registered on Paytm. There is growing SMB online activity, which makes it open for the larger B2B players to look at possible acquisitions.”

 Some key acquisitions this quarter include:

•   Amazon Pay acquired Tapzo

•   Ecommerce giant Flipkart acquires Liv.ai and Israel-based ecommerce data startup Upstream Communications

•   Zomato acquires Bengaluru-based B2B foodtech startup TongueStun

•   OYO acquires Mumbai-based IoT startup AblePlus Solutions and Mumbai-based wedding management platform Weddingz

•   PhonePe acquires Noida-based marketplace Zopper

•   Myntra acquires Mumbai-based omnichannel retail platform Pretr

•   BYJU’s acquires Bengaluru-based edtech startup Math Adventure

•   Swiggy acquires Mumbai-based on-demand concierge startup Scootsy

•   Paytm acquires Bengaluru-based savings management platform balance.tech

•   DailyNinja acquires Hyderabad-based hyperlocal startup 4amshop

•   CapitalFloat acquires Pune-based expense management platform Getwalnut

And let’s not forget Samara Capital and Amazon’s acquisition of the Aditya Birla Group’s offline retail chain More, which should give Amazon more muscle in the game.

[For details on stage-wise, sector-wise, and city-wise funding, read Part 2 of YourStory’s Q3 2018 funding roundup.]