Early-stage investments in SME sector grew 8.5X in 2020: Impact Investors Council India

Digitisation of the nascent SME segment accelerated trends that were prevalent pre-pandemic, according to an IIC India report titled “2020 in Retrospect”.

Investments in tech-based ventures for small and medium enterprises (SMEs) grew by 8.5 times last year, according to an Impact Investors Council (IIC) India report titled 2020 in Retrospect.

IIC India is a not-for-profit industry body focused on building the Indian impact ecosystem. It is supported by more than 50 impact investment funds and foundations. Early-stage ventures for digitising SMEs is one of many categories under ‘Technology for Development’.

Investments in the nascent SME Tech segment grew from $6 million in 2019 to more than $51 million in 2020. Education and technology for development were the only impact investment categories that grew in an otherwise grim 2020.

“Rural India got recognised as a market to reckon with last year,” said Rema Subramanian, Managing Partner of Ankur Capital, at an IIC India webinar in early March.

“Startups are recognising there is a target segment in rural India — as producers, consumers, and supply chain folk. The digitisation and change in behaviours have happened in the segment, which is here to stay.”

The IIC India report named staff management ventures PagarBook and FloBiz, which offer tools for GST billing, accounting, and inventory management for SMEs, to illustrate the trend. “Investors were quick to put their money into SME Tech solutions that addressed the urgent demand for digitisation to enhance efficiency of SME businesses,” the report added.

It noted a similar change in the ‘agriculture’ category with precision agriculture, sustainable farming practices, and tech-based market linkage models leading the way in early-stage deals. Farm management and enterprise software as a sub-category saw six deals in 2020 grossing $10 million of capital raised.

Opportunities in SME finance under ‘Financial Access’ as a category also saw enhanced interest with 17 deals grossing $310 million of capital raised by companies like Veritas Finance Ltd, Aye Finance, Finova Capital, and SMEcorner

“Fintech enterprises typically leverage technological support, automate and improve financial services to provide last mile solutions to the unbanked and underserved,” the IIC India report stated.

However, investments in both agriculture and financial access fell by 21 percent and 49 percent respectively, compared to 2019. The overall impact investments industry dropped by 25 percent to $2.6 billion in the year of the pandemic.

“Some limited partners like physical meetings to gain confidence and trust, which didn’t happen because of the pandemic,” says Pinakh Shrikhande, Director of HealthQuad, a healthcare focused venture capital fund that invests in early-stage healthcare companies in India. 

Mukul Gulati, Managing Partner of emerging markets fund Zephyr Peacock, concurs, saying that funding activity picked up only in September 2020, as travel restrictions were in force.

“There is a silver lining here,” says Mukul, “Businesses that were reluctant to modernise, whether it was embracing digitisation, working with other partners, wholesalers or other distributors, had to accept the new reality. That trend has accelerated.

“Small businesses now need to have a competitive advantage that has something to do with technology, access to customers, or a proprietary trained workforce that does things that larger competitors don’t,” he tells SMB Story.

From a global perspective, India’s stock as an impact investment destination will only rise because of its identity as a technology-led nation, says Maggie Flanagan, who leads the Lemelson Foundation’s Developing Country Entrepreneurship Initiative in Portland, Oregon.

“The pandemic highlighted weaknesses like access to working capital, which is still inhibiting growth for companies,” she says. But it doesn’t change the allocation to India for investment because unlike many other low-income countries, India has disruptive breakthrough technologies, strong science and technology, and innovation systems.

“We’ve been focused on R&D-based enterprises in India, and we see the ability to adopt technologies to (build) novel platforms, a talent base that knows how to do that, and rapidly commercialise that while being efficient with capital to leverage those opportunities,” Maggie explains. “We just saw how sure those capabilities were in the response to COVID-19.”

Digitisation is widely expected to further development in financial intermediation, easing of payments, agriculture, logistics, food production and healthcare services, says Jaap Reinking, Director for Private Equity at Dutch development bank FMO.

Edited by Saheli Sen Gupta


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