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You should gear up for more venture capital activity in India this year as deal momentum seen in calendar 2020 is expected to continue into 2021 as well, according to a new report by global consultancy Bain & Company.
The outlook for VC investments looks strong going forward with investment activity recovering to pre-Covid19 levels in the second half of 2020, after a 60 per cent drop in deal value during April-June 2020 compared to January-March 2020, said the report titled “India Venture Capital Report 2021”, released ahead of the tenth edition of Indian Venture Capital & Private Equity Association’s annual conclave.
Despite Covid-19, there was a strong VC deal flow in 2020 with $10 billion in VC investments, although slightly lower than the $11.1 billion investments seen in the previous year. This is even as deal volume grew by 7 per cent to 810 VC deals in 2020 as against 755 seen in the previous year, the report showed.
In 2020, the top three sectors—consumer tech, SaaS, and fintech— accounted for nearly 75 per cent of all VC investments by value, with consumer tech attracting the maximum funding.
Consumer tech investments grew 25 per cent over 2019, with certain segments seeing massive increase in investments, accelerated by the pandemic, including edtech (6.1x), foodtech (4.1x), gaming (2.7x), and media and entertainment (2.4x).
There was a significant growth in number of small value deals in 2020 (500 deals <$5 million in value in 2020 vs. 390 in 2019) led to decline in average deal size to $12.4 million compared with $14.7 million in 2019.
Fund raising
The year 2020 was a record breaking year for VC fund raising for India investments, which reached the highest level ever in 2020 at $3 billion, up 40 per cent year-on-year.
India-focused dry powder has remained stable over the last four years, ending 2020 at $6 billion. This indicates strong investment activity going forward into 2021 and beyond, the report highlighted.
Venture capital deal momentum is expected to continue into 2021 given the “adequate dry powder” available, continued fund raising for India investments by VC funds and multiple new funds investing for the 1st time, the report noted.
The top ten investors participated in 20 per cent of the VC deals in 2020. While Tiger Global leads in deal value, Sequoia leads in deal volume.
The number of active VCs in India reached 520 in 2020, an increase of 110 since 2018. Some new funds that started investing in Indian start-ups in 2020 include Inflection Point Ventures, Avataar Venture Partners, and Coatue Management, among others.
Exits
VC exits declined to $1.3 billion in 2020 from $4.4 billion in 2019, to the extent of 70 per cent. Muted exits were driven by the impact of the pandemic on businesses, potentially reducing their valuations and therefore making it an unfavourable time for investors to cash in on their investments.
One-third of the exit value came from edtech and 20 per cent from foodtech—sectors that also saw a spike in end user adoption and funding activities during the pandemic.
While exits declined by over 50 per cent in 2020, they are expected to recover over the next 1-2 years as portfolios mature and Covid’s impact on business volumes recedes, according to the report.
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