[2020 Outlook] What investors expect for the Indian startup ecosystem in the year ahead

India witnessed a steady rise in the emergence of unicorns in 2019, across segments like logistics, grocery delivery, B2B, and mobility. The nine unicorns born this year include Delhivery, Bigbasket, Ola Electric, Druva, Icertis, Dream11, CitiusTech, Lenskart, and Rivigo.

But will this trend continue into 2020? Will the valuations grow? And will startups continue to raise more funding?

We asked investors what they think lies ahead for the Indian startup ecosystem and their forecast is that 2020 will be a year where everyone will be 'cautiously bullish' and there will be a bigger focus on more capital-efficient business models.

Cautiously bullish: push towards a path to profitability

Sanjay Nath, Managing Director, Blume Ventures says, “(If you look) at the numbers, everyone is going to be cautiously bullish this year”.

“While companies and startups need to grow, there is going to be a push towards creating a positive business,” he says, adding that business models will be scrutinised more deeply.

And despite the global economic slowdown, capital flow into venture and private equity will continue as it runs in a seven to 10-year period. But Alok Goyal, Partner, Stellaris Ventures, cautions that there might be some distinction between early and late stage startups.

The first year of the new decade is likely to put a stronger focus on India versus global, while SaaS and core technology companies that target markets outside India continue to scale.

Sanjay believes B2B SaaS segment will continue to grow as these startups have cracked the capital-efficient business model and also have a global reach.

“There is money in the market but as investors, we are cautious in deploying; we have a sharper focus on sectors and spaces we want to invest in. Investors are also investing with a little more scrutiny,” Sanjay says. 

Later-stage funding may slow

This makes it important for startups to put defensible business models and plans in place. An investor might bet on a company based on the sector, but the business model needs to be completely in tune and the founder must specify how the funds will be deployed, investors say. 

Naganand Doraswamy, Managing Director, Ideaspring Capital, believes that while SaaS and B2B models are in focus, later-stage funding is still going to be slower. “You may need both on-premise and SaaS models, but you can’t get away without a SaaS strategy,” he says.

Alok agrees that later-stage funding will see a slowdown.

“Sectors like manufacturing and logistics will experience slower growth in the later stages. Essential services like healthcare and education will be evergreen, as long as people offer a strong value proposition. However non-essential sectors such as furniture may experience a funding crunch,” he says.

The key factors investors are betting on are growth in mobile internet users, explosion of data consumption, pervasive 4G coverage, and the expected rise in disposable income, driven by increasing GDP per capita.

India has over a billion consumers with unique problems to be solved in every sector. While funds like Accel have already closed their funds, deployment is more likely during earlier stages. This may also be the WeWork effect, with the industry feeling the need for course correction.

A maturing and growing ecosystem

Speaking of how 2019 fared, Tarun Davda, Partner and Managing Director, Matrix Partners, says, “2019 has been a record year for the Indian VC ecosystem, and a very active year for us at Matrix with over 20 new investments in the year.”

Tarun believes three key trends stood out in 2019:

1. Backing repeat/seasoned entrepreneurs, as seen with Matrix’s recent investments in FPL Technologies, Mosaic Wellness, DealShare, and others.
2. A strong deal flow at early stages (seed and pre-Series A). The year saw a significant increase in the number of early-stage investments.
3. Deep internet penetration in Tier II and Tier cities in India has opened up the market with monetisable/investable opportunities. Awaaz, YeLo, and DealShare are some of Matrix’s recent investments under this theme.

Sanjay Nath of Blume Ventures adds that 2019 saw the comeback of some large hedge funds that had been dormant in the market, especially in SaaS and Fintech.

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A maturing venture and entrepreneurial ecosystem

Most investors agree that this is an incremental theme every year. It was more apparent in 2018 and 2019, which saw several second-time entrepreneurs.

Alok Goyal of Stellaris Ventures says there has been a strong stratification of the venture ecosystem as well.

“There was a dearth of capital across stages, especially later ones. Now, you have funds across stages, with a focus on sectors.”

Sameer Brij Verma, Managing Director, Nexus Ventures, says 2019 was not just “stellar in terms of the investments made”, but also because there was a vast “increase in the quality of entrepreneurs”.

“I could see the startup ecosystem maturing. The average entrepreneur today is stronger, and more mature focused as compared to a few years back,” Sameer says.

He adds that the past two years have been “interesting for Indian startups”.

Alok agrees, adding that the year saw a lot of second-time entrepreneurs who came with experience in building for scale and helped grow younger startups.

“Also, the underlying friction of starting companies has reduced. Flipkart had to build its own logistics system, payments, etc, but today underlying barriers have significantly decreased. We are seeing a new wave of businesses because of large platforms that have reach,” Alok says.

Recurring themes: digitisation of SMEs, financial services, and education

What stood out in 2019 for Sameer of Nexus Ventures? Education, financial services, digitisation of SMEs and the B2B segment.

“We’re increasingly gravitating towards large profit pools and large markets. We're seeing that in healthcare, education, in some forms of financial services. We continue to look at the main theme around digitalisation of the economy. And that's a very large macro theme,” he says.

Sameer adds that the SME segment will continue to grow in the New Year.

Tarun, of Matrix Partners says 2019 saw the emergence of DINVIB (digitally native vertically integrated brands) consumer brands, social commerce, and fintech (neobanks) as strong sectors.

“We expect markets to deepen within each of these spaces in 2020 as well. We also expect increased activity and deal flow in growth-stage investments for 2020,” Tarun says.

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Increased focus on financial inclusion, social entrepreneurs, and agritech

The year 2019 saw Tiger Global investing in NinjaCart and others like DeHaat raising funding. And 2020 is likely to put the spotlight on agritech and impact-driven startups.

Deepak Menon, Chief Programme Officer, EMEA at Village Capital, agrees.

“I think it's a global trend…maybe more so in Southeast Asia, India, and the Middle East. Founders are looking to solve quality-of-life issues and socio-economic disparities,” he says.

He explains that startups are trying to solve hard problems on ground. Citing an example, Deepak says that a lot of people in the financial inclusion space that they work with have a professional background in financial services, banking, or insurance. They have dealt with clients, seen challenges, and are keen to solve them.

“They're trying to build business models to address some of these problems. The shift that we are increasingly seeing involves more people looking at business, getting these things right, and building for-profit models around impact,” Deepak says.

Avnish Bajaj, Founder and Managing Director, Matrix India, in conversation with Rajinder Balaraman, Director, Matrix India, in a recent podcast said,

“I think the biggest change that has happened is this growth-at-all-cost mindset has gone away. I think if people don’t recognise that… my advice to any founder out there would be please recognise that.”

All in all, 2020 is going to be a cautiously bullish year.

(Edited by Teja Lele Desai)

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