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India Venture Capital Investments Remained Strong, Reaching $10 Billion In 2020

Growth in deal volume, signaled strong fundamentals for India’s start-up ecosystem with new business models keeping pace with the challenges seen in 2020.

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Despite the Covid-19 pandemic, India witnessed continued momentum in venture capital (VC) money flows with total deal value reaching $ 10 billion in 2020, the highest across all years barring 2019, according to Bain & Company’s India Venture Capital Report 2021. India maintained its robust position among the top five startup ecosystems globally, with 7000 new start-ups founded in 2020 along with the emergence of 12 new unicorns to take India’s unicorn tribe to 37. 

The report, done in partnership with Indian Private Equity & Venture Capital Association (IVCA), highlights the dramatic impact of Covid-19 in accelerating digital trends, which was reflected in VC money flows and the emergence of new and digitally founded business models across sectors. The top three sectors—consumer tech, SaaS, and fintech accounted for nearly 75% of all VC investments by value, with consumer tech attracting the maximum funding. 

“2020 was truly extraordinary as we saw Covid-19 have a significant impact on our economy and healthcare systems, while also accelerating digital adoption across sectors,” said Arpan Sheth, partner at Bain & Company and one of the report’s authors. “This adoption led to a continuation of trends seen over previous years, including strong deal flow, focus on consumer tech and SaaS and continued growth in start-ups.” 

The year 2020 was also noteworthy for the Indian VC industry with some moderation seen over the high growth observed in 2019. While the total deal value declined slightly to $ 10 billion in 2020 from $11.1 billion in 2019 due to smaller average deal size, deal volume grew by 7% with approximately 810 VC deals versus 755 seen in 2019. Growth in deal volume, signaled strong fundamentals for India’s start-up ecosystem with new business models keeping pace with the challenges seen in 2020.

In terms of key sectors, consumer tech, SaaS, and fintech continued to lead the way, accounting for 75% of VC investments in 2020 and 14 of 22 deals which were more than $ 100 million in size. Subsectors including edtech, foodtech, gaming and media and entertainment in consumer tech; verticalised solutions within SaaS; and payments within fintech recorded a massive increase in investments, accelerated by the pandemic. While consumer tech investments grew by 25% over 2019, there was a significant surge in the usage of edtech platforms, as well as growth in the average deal size in foodtech as compared to 2019, with large investments leading to the surge seen in gaming. 

Sriwatsan Krishnan, Bain & Company partner and co-author of the report said, “While 2020 saw $10 billion in VC investments, which is the highest ever barring 2019, we also saw a few themes play out differently, especially in terms of smaller deals on average compared to multiple mega deals seen in 2019. We also saw a noticeable shift towards specific segments seeing traction during and after Covid-19 such as edtech and foodtech, clear signs of maturity in SaaS, and pace of exits slowing down. Overall, we are bullish on VC investments going forward, given the dry powder available”. 

According to Bain & Company, the Indian SaaS ecosystem continues to mature, accounting for the second-highest quantum of investments after consumer tech. Compared with 2019, overall investment value in SaaS grew at a moderate pace of 10%, but there was a significant jump in average deal size to $25 million in 2020 versus $14 million in 2019. This illustrates the increasing maturity of the SaaS ecosystem in India across horizontal business software, horizontal infra software and vertical specific business software. Investments in vertical specific software have grown the fastest, clocking approximately 60% growth over 2019. Similarly, fintech investments grew in 2020, to $1.2 billion versus $1.1 billion in 2019, with payments being the most sought-after segment. 

Active VC funds in India, which have been on a steady growth trajectory over the last four years reached a total of about 520 in 2020. In parallel, fundraising saw significant activity with a record-breaking $3 billion raised by Indiafocused funds. In addition, India-focused dry powder, which has remained stable over the last four years, ended 2020 at $6 billion indicating strong investment activity going forward. 

“"Despite the pressure of Covid and amidst geopolitical tensions, the India focused VC funds raised significantly more money than previous years. India needs more than 2.5% of GDP to come in the form of VC/PE investments for the $5 Trillion target, i.e. around $125B or ₹8.75 Lakh Crore. The Government of India, ministries, regulators have stepped in to support Startups and Domestic as well as Global VC funds in 2020 and it continues to do so. The IVCA and its members are exploring the untapped pools of domestic capital that can be made available through Indian Pension, Insurance funds, as well as corporates and HNIs for AIFs and in turn for Startups" said, Rajat Tandon, President, IVCA. 

On the flip side, VC exits declined by about 70% to $1.3 billion in 2020 from $4.4 billion in 2019 due to the adverse impact of the pandemic on businesses and VC portfolios not reaching maturity in 2020. One-third of the exit value came from edtech and about 20% from foodtech, sectors that also saw a spike in end user adoption and funding activities during the pandemic.

The annual report calls out the start-up ecosystem of India, which remains strong with 12 additional companies achieving ‘unicorn’ status in 2020, taking India’s unicorn tribe to a total of 37 and only behind the US and China globally. Currently, of almost 110,000+ start-ups in India, about 9% are funded, implying significant room for further investments. 

In the wake of the pandemic, the report also acknowledged several initiatives and policies from the government, which are aimed at improving the health of businesses post lockdown, and have enabled availability of funding and easier compliance requirements for start-ups in India, especially in edtech and healthtech. Flagship initiatives such as AtmaNirbhar Bharat, Startup India, Digital India, and the Alternative Investment Policy Advisory Committee (AIPAC) continue to improve the environment for investors and start-ups alike