Startup Street: Just Three Sectors Took Home 75% Of Venture Capital Funding In 2020
These three sectors saw VC investments rise even when total deal values in India fell due to Covid-19 disruption.
Consumer technology, software as a service and fintech were the red hot sectors in India’s startup ecosystem cornering almost three-fourths of venture capital funding.
Of the $10 billion invested by venture capital and private equity in 2020, $7.6 billion was directed towards deals in these three sectors, according to Bain & Company’s India Venture Capital Report 2021.
Both consumer tech and SaaS firms saw total investment rise on the back of bigger deal sizes. Fintech, on the other hand, saw fewer deals over the year earlier.
The three sectors outperformed even as India’s overall venture capital investments fell amid uncertainties due to the Covid-19 pandemic. The number of deals rose but were smaller in size. And the pace of VC exits from startups, too, moderated, the report said.
Consumer Tech: Growth Engine
In 2020, consumer tech funding increased 25% over the prior year, driven by more deals and bigger deal sizes.
Consumer technology startups—that include food-tech, edtech and gaming, among others—attracted the most investor interest, the report said. Total deal value in the sector has more than doubled since 2018, with edtech and food-tech accounting for the bulk of it.
While edtech has seen huge investor interest in the last two years, investments in 2020 in this space were significantly fuelled by a sharp uptick in users due to the pandemic-related lockdowns, the report said. This increased adoption is likely to sustain as changing behaviour will make users stick to these platforms, it said.
Online study and test prep firms like Byju’s, Unacademy, Vedantu and even executive education platforms like Eruditus continued to see investment traction.
The food-tech space, however, saw almost all of the total funds go towards just four late-stage deals. About 95% of the funding was consolidated between Zomato, Swiggy, Faasos and FreshToHome as investors focussed mostly on cloud kitchens and online food ordering.
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SaaS: Getting Mature
The SaaS space accounted for the second-highest quantum of investments, with total deal value growing 10% in 2020 over the prior year.
While the overall number of deals fell 40%, average size of deals increased across all segments, implying a maturing ecosystem, the report said. “Indian SaaS companies have evolved from a few upstarts in the 2010s to a multi-billion dollar industry today.”
The sector saw large investments worth over $100 million in firms like Zenoti, Postman, HighRadius, Eightfold AI and MindTickle as demand for enterprise software grew, it said. Firms disrupting underserved markets and replacing legacy IT processes saw increased interest and bigger deals, the report said.
Fintech: Driven By Payments
Investments in fintech increased marginally in 2020 as deals got smaller. But with the pandemic triggering a surge in digital payments, the segment remained the most attractive for investors.
VC activity in digital payments grew 20% compared to 2019—excluding Paytm's $1 billion fundraise—driven by large late-stage deals. Firms like Razorpay ($100 million), CRED ($81 million) and BharatPe ($74 million), all benefitted from the steady increase in volume and value of digital transactions.
Lending firms also saw higher traction. However, 60% of the total investments in the subsector came in the first three months of 2020, before the pandemic struck.
“While SME and B2C lending had gained traction in the last two-three years due to increasing optimism around consumer finance, these slowed down in 2020 due to the pandemic’s impact on business—low liquidity and higher levels of distressed assets,” the report said.
Insurance technology and wealth management firms remained largely pandemic resilient and continued to grow steadily.