Outlook 2021: India may have 2-2.5X more unicorns, says Pankaj Makkar of Bertelsmann India Investments

“Before COVID-19, we were happy with a $0.5 billion outcome for a company at a $20-50 million valuation. But what used to be a half a billion to the one-billion story has very easily started to look anywhere between a two to three-billion dollar story to me.”

COVID-19 has changed the dynamics of operation for startups across the globe. The story is no different in India, says Pankaj Makkar, Managing Director of Bertelsmann India Investments, in a recent interview with YourStory.

According to Pankaj, 2020 started with chaos and introspection. However, as the curtains are drawn over the year, one can predict a more stable future for the ecosystem. 

“For the VC industry, 2020 was full of chaos. I hope 2021 brings a lot of good news and stability across all areas. Vaccines are coming, and once they start administering them under emergency use, we will be at the end of the COVID period,” he says.

Pankaj said it will be possible to assess which sectors will benefit, which will succeed, and which should be averted. “We have started to evaluate new deals from that perspective. We are quite positive about most sectors built by technology companies, especially touchless.”

He said the market depth had fundamentally changed in India, and we would see a lot more unicorns, by virtue of that.

“If we all thought that India would have X number of unicorns, we feel this will become 2 to 2.5X unicorns. The startup and venture capital ecosystems have become more mature. Businesses that have come in after 2015 are operating very sensibly, in terms of unit economics, burning cash, and more. This translates into building very sustainable businesses that are valuable and may offer a good exit at some point,” Pankaj says.

The year 2020 led to nine new startups joining the unicorn club, and even saw the birth of a decacorn, BYJU'S, which followed in the footsteps of Oyo (2019) and Paytm (2018).

Pankaj focuses on the many important trends that can play a crucial role in changing the overall growth parameters for the Indian startup and investor ecosystem in 2021.

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SMBs to become the sector in focus

The two key categories of consumer internet businesses that continued to accelerate even amidst the pandemic were:

• Those providing physical products in a touchless fashion (shopping online)
• Those offering virtual products or services (education, teleconsultation)

Pankaj emphasises on another category, which in his words is growing “tremendously” — SMBs.

During the lockdown, the small kiranas and small businesses were forced to go digital. Going forward, Pankaj believes that the next big wave will be consumer internet companies focused on building digital products and services for SMEs in developing markets, including India.

Fintech will showcase silver lining

The chaos in the financial services industry and the intervention from the government in various banks have ensured they are flush with liquidity.

At some point, once consumer confidence comes back, people will start borrowing again. At this point, banks – due to digital adoption across India – will be a lot more open to working with fintechs. 

“This indicates a positive sentiment, from a five to seven-year view,” Pankaj says.

Edtech acceleration will continue

Amidst greater adoption of online education, at student and institute levels, the massification of education will keep getting accelerated for the next four to five years. Significant distribution of online education production comes in here.

The government’s opening up education sectors, innovation in content, personalised learning, and distribution of content will be key focus areas in the sector going forward.

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Mid-stage VCs to focus on COVID beneficiary sectors

Early-stage investors may continue to remain COVID-diagnostic, but Pankaj feels mid to growth-stage investors such as BII will have “COVID-beneficiary companies” in primary focus.

These are sectors that have been pushed for acceleration at least five years in advance due to the pandemic and are ready to showcase good results by 2022 or 2023. Companies that have remained COVID-neutral (not affected much) or COVID-laggards (badly hit) lie at the farther end.

“We try to distinguish between what we call permanent damage and temporary damage. If there is the visibility that demand may return at some point of time, funding can be accessible at some stage,” he says.

Investors to explore more white space startups

BII has so far added 17 startups to its portfolio. Most are disruptive in nature and can be termed as category creators, including Pepperfry (online furniture), Licious (meat), Shiprocket (logistics), and Agrostar (agritech) among others. Pankaj says investors will continue to explore such startups in India in 2021.

“I think that there are significant white spaces in a country like India, where you can build very valuable companies. But, it's very difficult to build some of these businesses because you just don't have to build a simple product and sell it; you have to build everything around it,” he says.

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Stakeholders to explore more consolidation opportunities

According to Pankaj, the ecosystem will observe three key merger and acquisition trends going forward:

• In sectors that are relatively mature — The top two-three players have fought for five to seven years of their lives. Now, when getting incremental growth by virtue of revenue or users is becoming difficult, the only way they can grow is by buying their competitor and making good exits for investors. 
• To enter adjacent sectors — BYJU’S acquiring WhiteHat Jr to add coding skill to its core test preparation segment is an example. Acquired companies can be small but will offer capabilities that will help in growing their portfolio of the same set of consumers. As platforms mature, they still have growth in their core business.
• To gain more investment — Two or three smaller companies will merge because they are not being able to attract money on their own due to COVID. Merging can offer investors a much bigger, larger, and diversified view and bring funding. 

The way ahead for BII

BII will look at six to seven direct (new and follow-on) investments in 2021, from their total goal of 10-11 investments. The primary focus will be on assessing the funding needs of portfolio companies to help them tap into the opportunities they are eyeing.

Notably, BII did not make any direct investment in 2020. However, it increased its stake in portfolio companies such as Licious, Lendingkart, Shiprocket, and LetsTransport. 

Going forward, the VC firm aims to continue to “look at many other spaces with an open mind” for interesting SME services and production play, provided they can build a large business and are going after a large market.