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Why Are Technology Start-Ups Favoured By Investors?
To put the real economic value for the country in perspective, VC investments have played a vital role in strengthening the start-up ecosystem in India, behind only US and China globally, and having created >3 million jobs directly or indirectly over the past 8 years4.
2020 was a truly extraordinary year for Indian technology ecosystem, with COVID-19 dramatically accelerating digital trends across sectors and impacting core models of traditional businesses. This was also reflected in the high inflows of capital into digitally founded business models across sectors. Despite an economic slump in 2020, VC investments were close to close to ~$10 billion– higher than previous years except 20191. Add this to the growth of the technology sector, which witnessed the rise of digital consumerism, and is unlikely to reverse any time soon.
More than ever before, today, investors are favouring technology start-ups, given the rising potential for digital access in the coming years, as well as the slew of constant tech-driven innovations within the Indian start-up ecosystem.
Impact of the pandemic – High momentum of technology capital inflows
A few investment themes continue from prior years, including continued momentum in tech and software as a service (SaaS). There is a rise in fundraising activity with $3 billion raised by India-focused funds in 2020 – higher by 40% than in 2019, and 12 unicorns added in 2020 (versus 8 in 2019). This is the largest ever increase in unicorns in a single year (taking the total to 37 unicorns in India)2.
At the same time, we also witnessed a few non-regular themes getting accelerated by the pandemic.
This included the surge in investment activities within consumer tech (gaming, food-tech, ed-tech, media, and entertainment) with an average 4X increase in investment value over 2019. There has also been a slowdown in exits i.e., 70% lower exit value in 2020 vs 2019, most likely driven by depressed valuations and disruptions to business models.
Last year alone, the Indian tech start-up base saw growth at a scale of 8-10% (y-o-y) with >1,600 start-ups being added. A key reason for this is that tech-start-ups need small amounts of capital to effectively scale, grow quickly and break down users’ barriers to entry using technology. This is also the reason why in 2020, the top three sectors (consumer tech, fintech, and SaaS attracted ~75% of all VC investments by value – affording the maximum funding across industries.
That said, India’s evolving regulatory landscape has served as a lynchpin to bolster the start-up ecosystem.
A nurturing policy landscape
Easing compliance and access to funds
There has been a consistent and continuous improvement on the policy and regulatory front, with the government of India introducing several flagship programmes, including Atmanirbhar Bharat, Start-up India, and the AIPAC (Alternate Investment Policy Advisory Committee) – all dedicated to boosting the environment and start-ups. These have not only helped Indian start-ups keep their compliance costs low, all while enabling easy access to funding.
In fact, the wide array of favourable and nurturing schemes has led to an improvement in India’s ranking in the World Bank’s Ease of Doing Business – jumping 68 positions from 131 in 2016 to 63 in 2020.
New policy initiatives were also introduced to help turbocharge high-priority sector-specific segments – most led by technology. This includes the new National Education Policy (NEP) 2020, aimed at bridging the digital divide in India, and providing a thrust to edtech. Regulations for telemedicine and National Digital health Mission (NDHM) will also play a pivotal role in bolstering health tech in India.
Finally for investors, the government also introduced several new policy initiatives to improve the ease of operating alternate investment funds (AIFs) in India in 2020. The influence of the VC community in India is reflected in 849 active funds, according to a recent report3. Along with private equity, VCs have been able to grow the opportunities from US$ 10 billion in 2019 to US$ 50 billion in 2020.
Deriving resilience for a promising future
So far, the fortitude and resilience demonstrated by Indian start-ups in 2020 have been unprecedented and unparalleled. This has been in line with India’s can-do attitude of defying odds with exceptional innovation and extraordinary governance. To put the real economic value for the country in perspective, VC investments have played a vital role in strengthening the start-up ecosystem in India, behind only US and China globally, and having created >3 million jobs directly or indirectly over the past 8 years4.
Between January and June of 2021 in fact, the total capital inflow of Indian technology-driven start-ups stood at $10.8 billion across 614 funding deals. Moreover, there are multiple IPOs on the horizon that add to the enthusiasm5. These trends indicate strong investment activities going forward into the coming years, including 2021 and beyond.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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