Investor outlook 2021: Challenges, growing trends, and expectations from the Indian startup ecosystem

Investors YourStory spoke to believe that COVID-19 is just another opportunity to stand apart for the best founders out there. In fact, they can’t wait to meet and invest in entrepreneurs who won the pandemic.

Investor outlook 2021: Challenges, growing trends, and expectations from the Indian startup ecosystem

Monday December 21, 2020,

7 min Read

The year 2020 has proven to be a period of fundamental shift both for the Indian startup and investor ecosystems. For investors engaged in early to growth-stage investment activity, April and May were exceptionally challenging when they had to take a step back to calibrate their "investable" income during the pandemic. 

This was a time when stock markets took a beating and investors who run their own large businesses had limited bandwidth to expend. However, in the second half of the year, investments bounced back. 

According to YourStory MediaResearch, Indian startups raised a total disclosed funding of $8.4 billion between January 2020 and mid-November 2020 across 765 deals. This was a 30 percent decline compared to the funding in 2019. But, the overall investor sentiments remained positive.

For instance, LetsVenture Founder Shanti Mohan said that on average, the firm completed 8-11 investments per month since then and has completed 87 investments in 2020 versus 55 last year. 

On the other hand, Manish Kheterpal, Managing Partner, WaterBridge Ventures, claimed 2020 to be the busiest year ever with eight new investments and several of its tailwind companies across consumer tech (education, healthcare, gaming, etc) and B2B SaaS having moved up significantly the curve of maturity and scale in their business model, revenue, and profitability.

In a nutshell, 2020 has had several milestones — Reliance Jio raised investments from global conglomerates like Googleand Facebook, there was accelerated growth in sectors like healthtech, edtech, fintech, online gaming, OTT, among others, and the Indian startup ecosystem saw nine new entries to the unicorn club.

The COVID-19 pandemic also put the focus on businesses with strong fundamentals, that focus on the top line and bottom line consistently. Terms like ‘path to profitability’ and ‘unit economics’ were common in investor sessions throughout the year.

Funding trends

Image: YS Design

The year 2020 also marked a significant shift in investor interest across sectors. For most of the top sectors, the number of deals fell substantially or saw a significant fluctuation. For instance, across Q1-Q4, on average, the number of deals accrued by the fintech and financial services sector fell by almost 28 percent

On the other hand, some sectors surprisingly showed signs of positive growth and increasing investor interest. These include HR tech (159 percent), cleantech (119 percent), retail tech (66 percent), online gaming (59 percent), automotive/mobility (43 percent), enterprise software (37.6 percent), agritech (11.66 percent), and deep-tech (5.87 percent).

Investors also teamed up to look after their portfolio companies. They made sure startups had all the necessary support with crucial pivots, customer connects, as well as opening up next-stage global investor networks for them. 

For Hemant Mohapatra, Partner at Lightspeed India, the first instinct was to conserve cash.

While Orios Venture Partners’ Managing Partner Anup Jain ensured that the portfolio companies were protected. 

Investors further focused on quickly reviewing business models, with deeper diligence on ground-level operations and visibility to the path of profitability, tackling work from home and hand-holding, guiding, mentoring portfolio companies.

As the ecosystem readies itself to enter 2021, the anticipation and anxiety of stakeholders are at another level. YourStory reached out to several leading investors to understand their expectations, new trends to observe, and more

Investor outlook 2021

Image: YS Design

Outlook 2021: Expectations from the startup ecosystem

Investors believe that for the best founders out there, COVID-19 is just another opportunity to stand apart from the tire-kickers. 

Padmaja Ruparel, Co-founder of Indian Angel Network and Founding Partner, IAN Fund believes that India’s startup ecosystem observed issues created by the pandemic and the resultant lockdown and came to the rescue.

Hence, it is apparent that startups can bring solutions to real problems. In these months, startups also made India aatmanirbhar and the world is now looking at India. 

Investors would be therefore looking at Indian startups as 

  • Innovative solutions to real-world problems
  • Building local solutions instead of importing solutions
  • Solving for sectors like healthcare, biotech and agritech

Adding to this, Paula Mariwala, Founder and Co-president of Stanford Angels, highlighted three basic tenets to be expected from the startup ecosystem in 2021:

  • Disciplined, resilient founders: Going forward, as we all prepare to emerge from these unprecedented times to face the new normal, it is expected from the startup community to be more agile, innovative and resilient but still chasing growth albeit with a more disciplined approach, stronger teamwork and collaboration.

  • Agility: As we prepare for the new normal, ability to deal with uncertainty and agility to pivot.

  • Scaling: While certain sectors are definitely booming but a lot of consolidation is on the cards for example, in sectors like edtech. We are now living in times where “geography is history” – this has opened up huge scaling opportunities using digital transformation across sectors.
Overall, expectations from the ecosystem is more empathy, collaboration, discipline, innovation, and a strong focus on digital adoption across sectors and functions. 
Investor outlook 2021

Outlook 2021: Emerging new trends in the new normal

Orios Ventures’ Anup believes that work from home is the most visible trend as a way of working that is a complete antithesis to the coworking trend that became dominant for startups vs legacy companies in 2020. 

This will continue in 2021 as well. Also, the ecosystem is maturing and we will see less first-time founders and more second-time founders, former startup employees, and former VCs getting in the game.

For Lightspeed’s Hemant, not much is "new" as it is "now accelerated". 

“I'd expect the world to get digitised much faster — a 10-year transition will happen over just one to two years. We at Lightspeed continue to look at large markets such as edtech, content, SaaS, healthcare, fintech, and ecommerce where we expect the significant behavioural shift to fully digital solutions,” he added.

Some other trends which the investor ecosystem looks forward to in 2021 are: 

  • Self-sustainable companies: India will see self-sustaining companies with strong foundations, catering to the tweaked customer behaviour. These will raise money for growth.

  • Growing India market with “Bharat” customers: This will enable an increasing number of innovative ventures. It will also call for a strengthened procurement and supply chain in the country, in line with the Prime Minister Modi’s clarion call for “aatmanirbhar”.

  • Digital and tech first: Interactions with entrepreneurs have moved online. Investors are also largely meeting online with their teams. Startups have quickly moved internal systems, as well as business models to integrate digital transformation rapidly. Technology is the new infrastructure and companies will leverage these for cost efficiency, scale, and transparency.

  • Disciplined fund raise with rational valuation: Founders and investors alike are preparing for an uncertain future leading to better cash management. With revised projections, valuations will be more rational.

  • Focus on Tier-II/III towns: Shift to work from home has resulted in a shift in the workforce from large cities to small towns. As “geography becomes history”, the workforce demographic and consumer profiles will also change drastically, leading to new opportunities in many sectors.

Road ahead for investor community in new normal

While pent up demand will create some positive energy in many sectors, investors will need to proceed with caution to be ready for uncertainty. However, the pandemic has also created many opportunities as communities, businesses, and countries prepare for the new normal. 

Investors, thus, have to be ready to take some risks and invest in these opportunities and support innovation. In addition, the spirit of collaboration must continue amongst stakeholders to encourage entrepreneurial energy. The investor community must continue to work together and initiatives like the ACT grant should be used to promote innovation and impact.

Rohit Goyal, Managing Partner, Windrose Capital, and Vikram Gupta, Founder and Managing Partner, IvyCap Ventures Advisors Private Limited, echo this further. The new normal has made the case for the Indian startup ecosystem even more promising.

Accelerated tech adoption and unique demands of the huge Indian market will lead to a lot of value creation domestically. 

“It’s time for investors to have a more aggressive outlook in terms of investing and enabling innovations operated by disproportionately mission-driven founders. Also, due guidance on the nuances that will make a difference in the long run. The right strategy for operations and sustainability will be imparted to them that are essential for brand development. Knowledge exchange is key to the success of any venture,” they added.

Edited by Saheli Sen Gupta