This article reviews funding in startup ecosystem during 2021 and trend line for 2022
During 2021, Indian start-ups raised over $42 billion in over 1500+ deals. This may be just another fact, but the numbers look overwhelming if we understand that Indian startups had raised an aggregate of $37 billion in previous last three years.
A very successful fund raise round in 2021 can be attributed to;
- Internet penetration in India crossed 50%. Similar bullish trends in funding volume have been visible in US and China when the respective markets crossed 50% internet penetration.
- Bearish outlook for China – this could be due to economic, regulatory and geopolitical issues and therefore alternate markets of scale.
- Successful exits for mature Indian technology companies through public offerings, thereby completing the full cycle of investment for a large number of funds over a ten year period
- Liquidity in venture capital market. Over 1500 new funds (small/large) entered Indian market and many existing funds raised substantial amount to be deployed in Indian market.
The year witnessed over 40+ startups getting billion+ dollar valuation or popularly known as UNICORN and India has now 85 unicorns. At the current pace, we are adding a Unicorn every 10 days! Is there any fundamental change in the Indian markets resulting in such generous valuations? Guess, this is a result of demand and supply. Supply of scaled startups still limited as compared to demand in the sector. Hence follow on investments in startups where product market fit is proven, especially in Series B and upwards, are happening at rich valuations. The same trend is expected to continue. Funded startups will continue to attract more and more capital, and that explains why around 125 deals pocketed $30 billion funding.
On the other end, over 950 early stage startup raised cumulative around $1bn of funds in 2021. If we exclude these mega deal outliers (100mn+ funding) and early stage funding, the picture looks different. We have balance 500+ startups raising $11 billion, which is around $22 million/deal. This clearly suggests funding bias towards series B and above deals. Startups are finding it difficult to raise Series A funds. This implies that inspite of bullish outlook, venture capital investors seem to be risk averse. They still feel comfortable investing in growth capital rather than risk capital.
We have been discussing with startups raising Series A funds and the common feedback :
- Not investing in categories where there is concentration of funds with large players. Some sectors like Edtech where Byjus, Unacademy, Upgrad and Reliance are leading the pack are clear examples.
- Investors demanding profitability and revenue model for Series A. Clearly looks like an excuse, when unicorns are being made out of startups with no revenue model and huge losses.
- Many funds have migrated from Series A to Series B. This is due to liquidity that the funds have to deploy larger amounts each year and clearly series A investments doesn’t gel their strategy.
At the same time, many founders and employees who have got liquidity from recent exits and IPOs, ESOP buybacks are pumping money in the ecosystem. This recycling of money from large investors to small startups will push more people into entrepreneurship and keep the flow of startups in the ecosystem. Our outlook for 2022, is built on fact that the share of unorganized economy still remains high and there are fertile grounds for technology startups to disrupt and create efficiencies. Large investors will continue pumping in growth capital, making more and more unicorns, making unicorns in decacorn ($10bn valuation). Risk capital would come from trickle down effect from these large unicorns and exits and successful entrepreneurs will continue deploying risk capital in the ecosystem to flourish. A good number of around 15 to 30 tech companies will find their way to successful public listing over next 12 to 18 months.