COVID-19 was the crucible that Indian start-ups had to face in 2020, to emerge stronger, better, and more resilient than ever before. While the initial days did bring the uncertainties to the fore, the start-up ecosystem not only survived but thrived under the chaos and external stressors to become truly antifragile.
As we begin the new year, the lessons learnt in the year gone by and the agility showcased to thrive under chaos will act as the foundational layers for the forces set to shape 2021. Here are the top trends that will shape the Indian Start-up Ecosystem in 2021.
1. Investments will return to 2019 levels, if not exceed: While the investments in 2020 were significantly lower than 2019, recovery in deal pace and investments is markedly evident. The investment value in H2 2020 was not only 2X of H1 2020, but it was also at par with H1 2019. With an expanded start-up base, a strong pool of start-ups at seed-stage, and upbeat investor sentiments, we anticipate 2021 to be at par with 2019 investment levels, if not more so.
2. Unique and active institutional investor pool will expand in 2021: As per SEBI, as of September 2020, Venture Capital Funds (category in Alternate Investment Funds) commitments have increased 12% since December 2019, while funds raised have increased by 27%. Further, we have already witnessed 45-50% of institutional investors from 2019 return in 2020. Additionally, approximately 300+ unique institutional investors executed deals across 2020. Coupled with overseas VC, PE, and corporate investors, the Indian ecosystem will only become more competitive.
3. Sectoral distribution for investments and active start-up pool will become more heterogeneous: The percentage share of the top four sectors (Enterprise Tech, EdTech, FinTech, and HealthTech) is 43% compared to 49% in 2019. Furthermore, the composition of other sectors is also continuously shifting. In terms of investments, while a few sectors were the highest (Enterprise Tech, FinTech, EdTech, HealthTech), we witnessed an acceleration in deals in sectors such as HRTech, Gaming, Content, AgriTech, Automotive, SpaceTech, and Energy amongst others. All indicators are reflecting an increasingly heterogeneous ecosystem.
4. The deep tech ecosystem will take a significant leap to reach an inflection point: With 19% of all Indian start-ups leveraging deep tech, the adoption rate will continue to grow at historical 41% five-year CAGR. Factors such as increased digital adoption, expanding skilled and experienced talent base, need for advanced solutions, and strong policy support, will make the Indian start-up ecosystem richer by the end of 2021.
5. India is on track to have 50+ strong Unicorn club by 2021: 30 of the 38 active Indian unicorns achieved USD 1 Bn+ valuation in just the past three years. Our potential unicorn pipeline of start-ups with more than USD 50 Mn+ in cumulative funding, is also at an all-time high with the majority of them reporting growth during 2020 and a few already reporting USD 1 Bn+ valuation in secondary markets. As investments, returns, and markets stabilize, we anticipate India to add at least 9 to 11 unicorns in the calendar year 2021.
6. IPO pipeline for 2021-22 will strengthen significantly: Multiple reports suggest that start-ups such as Zomato, Delhivery, Policybazar, Freshworks, Nykaa, and Paytm are preparing for initial public offerings in the 2021-22 timeframe. Coupled with SEBI’s active policy discussion for special listing rules for technology start-ups, 2021 promises to be a year of exits. Lastly, increased focus on profitability and accompanied shift in founder playbook should allow the IPO pipeline for 2022 to be significantly stronger.
7. Corporate Open Innovation programs will continue to expand: Corporates are increasingly engaging with start-ups beyond acquisitions and investments. Corporate open innovation programs in India have been growing at 27% CAGR since 2018. With overall corporate participation lower than other ecosystem players and acceleration of digital transformation mandates, corporate open innovation programs are set to expand.
8. M&A pace will accelerate to an all-time high: Much like investments, the M&A pace has improved in H2 2020, compared to H1 2020. With travel becoming relatively safer, corporates revising their growth strategy, and decision makers becoming comfortable with remote deals (mainly due diligence), we expect 2021 to be an active year for M&A. Expected consolidations in sectors like EdTech, and start-up founders doubling down on M&A to accelerate growth opportunities, 2021 promises to be a record year.
9. Collaborations will strengthen the policy environment and India’s unique digital infrastructure: There is no doubt on the impact of collaboration on India’s response to COVID-19 and the resultant economic recovery. Central to this success was India’s unique digital infrastructure – India Stack – that efficiently allowed both social and private businesses to operate in a contactless and presence-less environment. Simultaneously, we witnessed an acceleration of the consent-layer of India Stack, National Health Stack, OpenGov, Digilocker, FASTag, and multiple digital initiatives through technology and policy action.
10. Geographical depth and breadth of the Indian start-up ecosystem will continue to expand: The number of start-ups outside major hubs (Bangalore, Delhi-NCR, Mumbai, Chennai, Pune, and Hyderabad) has increased significantly. Today, these start-ups constitute 28% of the total Indian start-up ecosystem, expanding at a higher than the national growth rate of 40-45% CAGR since 2015. Furthermore, we have witnessed the workforce moving back to tier-2/3 cities and global start-ups offering more remote jobs, due to COVID-19. These two fundamental shifts will allow experienced talent to stay, build, and grow from smaller hubs.
Innovation, collaboration, and entrepreneurship are the three key pillars that make the Indian start-up ecosystem as vibrant and dynamic at it is. Although 2021 promises to be a year to remember, the lessons learned in the last 12 months will become key as start-ups navigate the new normal.