Investment Themes That Continue to Gain Traction for Venture Capitalists


The Indian government’s budget for 2014-15 is clearly an investor-friendly one with a slew of provisions and funds earmarked for start-ups in India. Also, a start-up fund worth Rs 10,000 crore is being mulled by the government. 

The beneficiary companies are usually small or medium-sized firms, requiring seed or early-stage funding for innovation and development of technology or products with high growth potential. High annual returns ranging from 25-75% are expected on such investments.

Promoting VC funding in India

Venture capitalism in India began in 1986 with the start of the economic liberalisation. In 1988, the Indian government formalised venture capital by issuing a set of guidelines. Initially, venture capital or VC was limited to subsidiaries set up IDBI, ICICI and the IFC, and focused on large industrial concerns.

In the early stages, venture capital investments were mainly in the manufacturing sector. However, with changing trends and increased liberalisation, companies in consumer services and consumer retail space emerged as top contenders for VC funding, attracting almost 50% of total VC investments. Other key industries included IT and IT-related services, software development, telecommunications, electronics, biotechnology and pharmaceuticals, banking and finance/insurance, public sector disinvestment, media and entertainment, and education.

Since 1988, ICICI has played a prominent role in promoting venture capital investments in India and currently manages funds over $2 billion.

In fact, India recorded a 13% increase in the amount invested against the global rise of 2%. At $45.8 million, India posted an all-time-high median value at the profitable stage in 2013, the highest value ever seen in any market across all of the development stages since 2007.

Several investment themes have emerged or are continuing to gain traction in 2021:

Consumer technology, fintech, and software as a service (SaaS) continued to account for 75%+ of all VC investments by value (in line with 2020). These sectors continued to see a significant expansion in deal size, indicative of a maturing landscape. SaaS specifically saw deal size expansion as marquee Indian unicorns became category-defining leaders globally, such as Postman in API management or BrowserStack in automated testing. A few emerging sectors stood out:

  1. Within consumer tech, several alternative formats of commerce saw significant funding, such as video commerce, direct-to-consumer (D2C) brand aggregator models, and short-form videos
  2. Online business-to-business (B2B) marketplaces saw traction as four new unicorns were created—large opportunity size driven by the pandemic-led inflection in digital adoption within B2B supply chains
  3. SaaS funding continued to see momentum as several category leaders emerged, addressing unique use cases
  4. Within fintech’s record funding in 2021, consumer and SMB-focused neobanks held a significant share
  5. Web 3.0 and crypto-based start-ups saw explosive growth raising up to $500M+ in 2021

Angel Investor Community in India

The active investor base in India also consequently saw a significant expansion, reaching 660+ from a base of 516 in 2020. Several seed funds and family offices debuted or raised funds for early-stage rounds, becoming more significant on the pre-seed to Series A landscape. Tiger Global and Sequoia Capital retained the top spots on the leaderboard in terms of deal volume and capital deployed, while SoftBank remained competitive on capital deployment, focusing selectively on large deals.

New investors made significant inroads into India in 2021: (a) several Tier 1 global VCs and crossover funds (e.g., Technology Crossover Ventures [TCV] and Dragoneer Investment Group) made large investments, (b) emerging domestic VCs gained presence (e.g., 3one4 Capital), and (c) global sovereign funds (e.g., Abu Dhabi Developmental Holding Company [ADQ], Qatar Investment Authority [QIA]) made direct investments. Sector-focused global and domestic funds doubled down (e.g., Ribbit Capital in fintech or DSG Consumer Partners in consumer tech). Further, traditional PE funds such as KKR or Warburg Pincus also demonstrated an increasing focus on growth equity deals. Most funds have also forayed into offering several portfolio advisory services spanning from recruitment to business development to help differentiate their capital.

What to lookout for in 2022

A couple of watchouts may continue to affect the ecosystem for a while: stricter IPO norms are expected from SEBI, regulatory uncertainty for a few sectors is likely to continue (e.g., online gaming and fintech), and a competitive talent market will continue to strain the ecosystem

Categories: Startups & SMBs

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