IBEF: December 27, 2021
With an increased demand for digitization in the wake of the Covid-19 outbreak, India's startup ecosystem saw a record investment of roughly US$ 36 billion in privately-held enterprises this year. According to Preqin, a UK-based investment data platform, venture and private equity investments surged thrice throughout the year, from US$ 11 billion in 2020 to US$ 31 billion in 2021.
The volume of seed-stage deals dominated this year, with roughly 396 deals totalling US$ 705.86 million, while around 166 series A investments totalled about US$ 1.67 billion, according to data through December 20. The majority of the funds went to pre-IPO funding rounds in companies like Zomato, Ola, Policybazaar, and Paytm, with the top 10 deals totalling US$ 5.58 billion, according to Prequin data.
Aside from an increase in the number of deals, Indian entrepreneurs raised larger financing rounds this year than in prior years, as risk capital investors stepped up to take bigger bets on high-growth companies early on. As a result, companies have been able to obtain greater valuations, with prices frequently doubling or tripling in subsequent fundraising rounds.
"Valuations are a reflection of an investor's exit expectations. 2021 has proven the full venture cycle for India. Some fabulous exits like Zomato, Nykaa, PolicyBazaar and others have increased exit size expectations, and consequently the valuations," said Alok Goyal, founder and investment partner at Stellaris Venture Partners, an early-stage VC firm.
He also pointed out, "markets have a habit of overreacting on both sides - in bull and bear cycles. We are seeing a bull cycle reaction right now and (won't) be surprised if there is a bearish overcorrection in the future."
The much stronger capital flow into high-growth companies is due to a combination of factors, including increased global liquidity and the relative attractiveness of startup investments compared to other asset classes. A 2021 upswing is expected to fade, but secular trends will persist in 2022.
Funds such as Tiger Global, Falcon Edge, Sequoia Capital, Accel, and Blume Ventures were the most active investors in 2021. SoftBank, which is known for its huge bets, invested more than US$ 3 billion in Indian businesses, making it the Japanese investment firm's largest infusion in India in a single year.
Unicorns, a term used to describe companies valued at USS$ 1 billion or more, have spawned by hundreds this year. A week in April saw half a dozen entrepreneurs join the unicorn club in a matter of four days, bringing the total number of unicorns to around 40. But it wasn't just unicorns that raised numerous rounds this year; high-growth companies did as well, signalling a strong desire to back the leaders. Cred, OfBusiness, Groww, and Cars24 are fintech startups whose valuation grew in the last year.
Vaibhav Agrawal, a partner at Lightspeed India, which has backed new unicorns of 2021 like ShareChat and Apna Co., stated, "Through 2021 we experienced a strong positive shift in the quality of founding teams, depth of markets, unit economics and exit opportunities via public markets. As a result, investors across stages felt comfortable writing larger cheques and taking more risk."
Unicorn founders believe that because there are fewer assets in late-stage funding deals, marquee investors are willing to sweeten the deal. "Founders (must) dilute less, and this cash can come in handy during rainy days," stated a top unicorn entrepreneur who raised funding three times this year stated.
With all of this capital, entrepreneurs have been able to move quickly to implement their plans to develop exponentially through inorganic methods, both vertically and globally.
Web3/crypto, SaaS, direct-to-consumer or D2C brands and fintech, business-to-business (B2B) commerce, ed-tech, and healthcare, according to most investors, will continue to draw capital next year as well.
Pranav Pai, cofounder, 3one4 Capital, an early-stage venture fund with investments in Licious and Koo, said, "Cycles will come and go, but the important takeaway here is that Indian entrepreneurs have access to the equity needed to get closer to their vision of being market leaders,"
He also added, "They are also taking this opportunity to strengthen balance sheets and prepare for the resilience needed to face a correction when it comes."
According to Kashyap Chanchani, general partner of The Rainmaker Group, a Mumbai-based investment bank, most mature businesses now have dedicated corporate development teams. An exit by sale is now a real option for founders. "Till two years ago, the majority of M&As would have been out of distress and lack of options," he said.
The year tech IPOs became a reality.
When Indian entrepreneurs spoke about an initial public offering (IPO), it didn't seem a viable option for a long time, but that changed in 2021. The year was a defining moment in the ability of technology-driven enterprises to access public markets, with the majority of them being rewarded by public investors as well.
This year, smaller companies like gaming business Nazara Technologies went public, but it was food delivery service Zomato's Rs 9,000 crores (US$ 1.19 billion) IPO that truly laid the stage for at least a half-dozen top-leading startups filing for an IPO in India.
Zomato's stellar listing this year has caused its founders to reconsider their IPO timeframes and consider it a genuine prospect for 2022 and 2023.
Others have raised roughly US$ 2.5 billion from public market investors, including Policybazaar, Nykaa, and Paytm.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.