What data tells us about the future of India’s tech startup ecosystem
VCs weigh in on the Series B and C crunch; healthtech and
fintech are the sectors to watch out for
Over $5.19bn was raised by India’s tech startup ecosystem during the first half of 2017, according to data provided by startup intelligence firm Tracxn. While this counts as a solid fundraising H1 as compared to 2015 and 2016, over 53% of the total capital raised went to just two companies — Flipkart and Paytm, which went on to bag $1.4bn each in April and May respectively this year.
However, the deal count is down year-on-year (YoY) by 27%, with only 396 tech startups getting funded, as compared to 547 in H1 2016. Here's a quick analysis of the data, with some industry inputs on the current funding climate for tech startups in India.
Breaking down the rounds stage-wise, the angel funding stage appears healthy, with 113 deals, as compared to 100 rounds in 2016.
However, there were 156 seed rounds in H1 2017, a significant fall from H1 2016, where 281 companies raised funding.
There were 68 Series A rounds in H1 2017, compared to 77 and 79 in H1 2015 and H1 2016 respectively. However, these companies collectively raised just $191.6M, which indicates a trend of smaller average ticket sizes, from the highs witnessed in 2015 ($412M) and 2016 ($262M).
There were only 10 Series C deals in H1 2017, the lowest since 2015 in terms of deals and dollars raised.
Only two Series D stage deals were done in H1 2017, again signalling a crunch in mid-stage venture capital.
“I think it is becoming tighter and tighter, the scrutiny is going up. It’s probably the lowest level it should go down to, but I don't expect it to go down further. It's a bloody tough time; Series B and Series C is tough,” said Parag Dhol, managing partner at Inventus Capital Partners, an early stage technology fund focused on Internet, software, mobile, and IoT sectors.
“The timelines for Series B and Series C have increased significantly. The hurdles, the questions asked, the people dropping out at the last moment. It's much harder,” he said. Reading into data from research firm Venture Intelligence, Dhol said VC activity was down 25% this year, and seems to be settling at a level that is 30%-35% higher compared to 2010/13.
“I like to classify various years as signal and noise, so 2014 and 2015 were clearly noisy years, and in 2016, it (VC activity) had tempered down; now the noise has disappeared. It's the signal now, so to speak,” he said, adding that there’s still a lot of capital available in the seed and Series A stages. “I don’t think the tap is closed,” he added.
“With a lot of ‘hot’ money departing, I think Series B or Series C is where there's a lot more of a crunch,” said Amit Somani, managing partner at Prime Ventures, a Bengaluru-based early-stage VC firm, in a phone chat with FactorDaily. “At the macro level, the crunch is in Series B. Series A is also kind of okay, beyond the 2015 binge that some of the larger VCs had,” he said.
Looking at the top 10 deals in 2017, it’s apparent that April and May were fairly busy months in terms of big ticket deals closed. Ola raised a Series G ($254mn) and Series H ($154mn) in April and June. Paytm Mall ($200mn, PE), and Delhivery ($138mn, Series E) were among other startups that raised over $100mn rounds. Swiggy raised an $80mn Series E round in May, the largest deal in the foodtech space.
“In 2017, things are definitely picking up much more than they were in 2016, which was much more modest compared to 2015, which was absolutely random. All kinds of ad-hoc things were getting funded, and so on,” said Somani.
A healthy year for healthtech and fintech
Consumer tech, fintech, enterprise tech, healthtech, and edtech were the top five funded sectors in 2017. Of these, enterprise tech companies saw a healthy number of deals and dollars, while fintech an all-time high in funding owing to Paytm’s $1.4bn round. Healthtech companies raised more capital in H1 2017 than in all of 2016.
“We think there’s a lot happening in fintech. It’s not payments, which are, by and large, done. The focus now is on financial services, financial inclusion, disruptive new technologies, and unbundling of banking-related tech,” said Somani, when asked about sectors that continue to see a high amount of VC interest and activity.
“There’re a lot of different things happening around banking tech, insurance tech, lending, health insurance. Now, GST will lead to all sorts of regulatory tech (regtech) as well,” he added.
Companies focused on Global SaaS products out of India would do well, although it may not make headlines in terms of dollars, Somani reckons.
“You’ll see a lot of interesting companies getting funded, and dominant companies getting created out of India. We’re big on SaaS and see opportunity there for larger ticket sizes. I think several of these companies are now going to break out," he said.
Consumer tech startups, ie startups focused on online retail, home improvement, transport, foodtech, and travel sectors, accounted for close to $2.6bn in funding in 2017. However, deal count in the sector fell YoY by 40% to 180 deals in H1 2017, from 297 in H1 2016.
“Clearly, consumer tech continues to be hot; one broad thing is that the rounds are dominated by a few large players. I don’t think that’s representative of the market. If the delta between the two years is just Flipkart and Paytm, is that really representative of the broader market?” Somani asked.
While the retail sector raised over a $1.64bn, the picture is clearer when subtracting Flipkart’s $1.4bn round from the tally. The sector seems tapped out, with only half the number of deals as compared to previous years. Deal count in the transport tech sector also appears to have dipped considerably, to single digits this year.
Other than Swiggy’s $80mn round, Indian foodtech startups witnessed a trickle down in deal activity with the YoY trendline indicating a winding down of investment activity the sector. Similarly, the home improvement space witnessed the lowest deal activity in 2017, with only three deals in H1 2017.
No home runs this time around
There were 57 exits via IPOs and acquisitions in H1 2017 according to Tracxn. The consumer tech space saw plenty of consolidation this year. Notable events include MakeMyTrip’s merger with Ibibo, Flipkart’s acquisition of eBay India,Housing.com’s acquisition by PropTiger, and Quikr’s acquisition of Babajob and Zimmber. All the M&A activity seemed to be driven by lack of profitability and intense competition.
“The unanswered question in Indian VC is the fact that our companies and VCs take too much cash to acquire an online customer. If that is indeed the case, then consolidation is the only way to go,” said Dhol, explaining why MakeMyTrip and Ibibo Group came together. A lot of notable exits happened in the secondary market, Dhol said. SAIF Partners reportedly made a 16x return on their $25mn MakeMyTrip investment, and made around $300-$400mn from a part-sale of its stake in Paytm.
“I don't think there have been many exits, and that’s a cause for concern, but you must also look at it from the vintage of the fund. Funds deployed from the 2006-07 time frame are under the greatest duress,” said Somani. "A lot of early VC funds around the 2006-07 time frame — the moment of truth for those funds is now. Most of the marquee funds are typically an 8-10 year vintage. Decade-old fund vintages would be under a lot of pressure because they have to return that capital. As the market matures, people who are coming in a bit later have an advantage,” he said.
Lead visual: Nikhil Raj
Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.