Risk investors continue to pump in record funds into new-age emerging businesses in the country even as the overall macroeconomic activity has taken a hit amid a severe second wave of Covid-19.
Startups raised total investments of $7.8 billion in the first four months of this calendar year, which is almost 70% of the overall corpus of $12.1 billion raised in entire 2020 and more than 50% of $14.2 billion raised in 2019, data from US-based research firm PitchBook shows.
The average funding size has increased to $25.21 million so far in 2021, up from $14.94 million in 2020 and $18.41 million in 2019, as per data exclusively sourced by ET. There have been 402 funding rounds during January-April against 1,114 deals in 2020 and 1,036 in 2019.
This is one of the highest average deal sizes in the last five years. An increasing number of companies are raising larger rounds on the back of positive sentiments around the digital economy as the pandemic has forced companies and institutions across the world to speed up digital adoption. Increased global liquidity has further accelerated the pace of investments.
Investors and founders said the increase in deal flow is primarily led by significant liquidity in the venture capital space and overall bullishness in the technology sector across private and public markets, globally.
“It is a heady market and 3Vs of a bubble are at play – value, volume and velocity,” said Vikram Vaidyanathan, managing director of private equity firm Matrix Partners India that has backed companies such as ride-hailing major Ola and online payments firm Razorpay.
“We all know some correction is coming, but like after each correction in the past, things are likely to settle at a new high driven by deepening markets and founders getting better each year,” he said. “What’s different this time is businesses have meaningful scale in revenue with crisis-tested economics.”
IPOs, exits on anvil
With market leaders now considering public listing either through initial public offerings (IPOs) or special purpose acquisition companies (SPACs), investors are getting attractive exit routes, which in turn is attracting even more investors both local and global.
“Upcoming IPOs will be the final piece of the puzzle and most important milestone in the India digital story,” Vaidyanathan said. “So, we are long-term believers and super excited.”
New kinds of investors are looking to take advantage of potential IPOs likely to take place in the coming year or so. Funds like Falcon Edge have made record investments of $800 million to $1 billion, as ET reported in its May 19 edition. Others like D1 Capital and Dragoneer Investment Group are backing more local startups across growth and late stage.
This year has been phenomenal not only in terms of how global investors have scooped up deals and backed winning ideas, but also in terms of valuation bump-up seen by mature businesses, leading to many unicorns being created.
Since January, India has seen around 13 companies attain the unicorn status, that is, being a company with more than $1 billion in valuation. These include Digit Insurance, Innovaccer, Five Star Business Finance, Meesho, Infra.Market, CRED, Pharmeasy, Groww, Gupshup, ShareChat, Chargebee, Urban Company, and Moglix.
“There is huge capital chasing a smaller number of startups,” said Souvik Sengupta, cofounder of Infra.Market, a business-to-business startup for construction material. “Valuations are also high because investors are recognising companies that have handled a crisis like the first wave of Covid-19 last year, survived it, and also managed to grow at the same time. When you come out of crisis like that, these startups are seen favourably and investors are more confident about any future crisis, like the ongoing second wave. This separates the market leaders and others a bit, more and thus comes the premium (on valuation).”
Infra.Market became a unicorn earlier this year after Tiger Global, which first invested in it in December 2019, led a $100-million funding round with a jump of four times in valuation since its previous fund-raise.
The new bunch of unicorns are from a diverse set of sectors like B2B, social media, insurance, business-to-consumer (B2C), and
“Many factors like improved unit economics, better organic customer acquisitions have helped startups reduce their cash burn and create a roadmap to profitability,” said Ankur Pahwa, partner and national leader for ecommerce and consumer internet sectors at EY India. “Some of these companies are justified in quadrupling their valuations, especially for late-stage funding rounds as the potential and addressable market size continue to be massive.”
Sengupta of Infra.Market said B2B space is less risky than B2C, which has duopoly in sub-segments like ecommerce and food delivery. “These companies (B2B) have better unit economics, can become profitable faster (than B2C startups), and go public sooner,” he said. “Companies like ours, Zetwerk, Moglix and others, we are not taking away from each other, but rather the broader market.”
Moglix became a unicorn just last week.