Global consultancy firm Bain & Co said venture-capital funded Indian start-up ecosystem has reached escape velocity with Venture Capital (VC) funding reaching record $38.5 billion in 2021.
It expects the VC funding momentum to continue in India during 2022, given dry powder (liquid funds available for use) raised over 2020-21 and depth in the ecosystem, but with shifts in pace and quality of deals.
Focus will probably shift to larger rounds in quality assets as deal making returns to a more measured pace. Compressed multiples in global public markets are likely to have a trickle-down impact on private markets, leading to rationalisation in valuations. The report also sees the IPO momentum moderating this year and a pipeline of 15+ tech-led start-ups considering listing will likely adopt a wait-and-watch approach depending on public markets’ recovery.
Crypto, blockchain-based technologies, health-tech and agri-tech are new sectors that will probably see emerging growth, Bain & Co said in its India Venture Capital Report 2022.
Banner year for VC investments
The year 2021 was a ‘banner year’ for VC investments in India as a meteoric 3.8x growth over 2020 led to $38.5 billion in capital deployment, it added. India added 44 unicorns, surpassing China’s 42 in 2021 and leapfrogging to third place in terms of total active unicorns globally (after the US and China).
The annual ‘India Venture Capital Report 2022’, released in collaboration with Indian Venture and Alternate Capital Association (IVCA), said that the exponential surge in investments was driven by a dual impact – as both deal volume (1,545 deals in 2021) and average deal size ($24.9 million per deal in 2021) doubled relative to the previous year. The year also witnessed a record upswing in “mega rounds” of $100 million-plus investments, as global and domestic VCs led 92 large ticket size rounds across market leaders in e-commerce, online food delivery, fintech, edtech and gaming.
“Investing momentum in India was driven by a pivotal convergence of tailwinds several years in the making”, said Arpan Sheth, Partner at Bain & Company and an author of the report. “Maturing digital infrastructure fundamentals, ranging from access to cheap and ubiquitous data to UPI-led payment rails in confluence with increasing depth in the start-up ecosystem and growing investor confidence as capital, saw exits through public IPO and private secondary routes led to an exceptional year for the Indian ecosystem”.
Continuing the trend from the previous year, consumer technology, fintech, and software as a service (SaaS) accounted for the lion’s share of VC investments at 75 per cent of the overall deal value in 2021. A few themes stood out within these areas – within consumer tech, D2C brand aggregators saw spate of investments; similarly, within fintech, neo-bank players held the prime position. More importantly, emerging sectors also saw growing interest as evidenced by a sharp rise in investments in online B2B marketplaces with four new unicorns created, while Web 3.0 or Crypto and blockchain-linked technology start-ups saw upwards of $500 million in total funding.
“While larger deal sizes in traditionally dominant areas such as e-commerce and SaaS were indicative of increasing maturity of these sectors, several new areas of investment focus emerged. Online B2B marketplaces, for example, saw the creation of four new unicorns led by an inflection in digital adoption across B2B supply chains. Similarly, Web 3.0 and Crypto/blockchain-based technologies witnessed growing interest as 40+ early-stage deals crossed $500 million+ in overall investments,” Sriwatsan Krishnan, Bain & Company Partner and co-author of the report, said.
In 2021, several interesting shifts in the investor landscape were also noted as traditional PE funds demonstrated interest in growth equity deals for technology companies, while, on the other end of the spectrum, several new seed funds debuted with a focus on early-stage deals.