The year 2019 was a blockbuster one for startups in India, drawing a record number of international investors. According to research firm Tracxn, the startup community raised about $14.5 billion in funding – a significant jump from $10.6 billion in 2018. Data from Tracxn further reveals that 1,894 startups were founded last year, out of which nearly 50% (887) received funding.
Also in 2019, nine Indian startups joined the Unicorn club and four got publically listed. OYO Rooms, Paytm and Udaan were among the startups to grab the most valuable deals, followed e-commerce player Delhivery.
Naturally, the expectations from 2020 were high, if not even higher. Although the year started off well for startups and investors alike, the outbreak of novel coronavirus or COVID-19 soon dampened their spirits. With many sectors coming to a near halt, budding ventures began anticipating the worst – a severe liquidity crunch. As it turns out, their fears were justified. Public markets are crashing and venture capital funds have become extremely cautious towards their spending. Deep-pocketed global investors, too, have decided to put off some large deals for the time being. But while the overall scenario looks grim right now, let us see how the pandemic is impacting India’s startup funding scenario.
Funding activities dropped drastically in March
Startup funding for March 2020 dropped by over 50% as compared to the previous month, reveals data from Venture Intelligence. The startup data tracker reported that Indian startups managed to raise only $354 million across 34 deals, down from $714 million secured in February across 46 deals. At $1.74 billion (across 126 deals), startups also saw a 22% year-on-year decline in investments for the first quarter of 2020. The numbers reflect a significant slowdown in funding activities, primarily caused by a sluggish economy coupled with the ongoing nationwide lockdown.
India’s revised FDI policy likely to hurt startup investments The Government of India has recently tweaked its Foreign Direct Investment (FDI) policy in a bid to limit “opportunistic takeovers/acquisitions of Indian companies” amidst the pandemic. As per the revised guidelines, any investor of a nation that shares land borders with India will now require government approval for making any investment in India. While the move to curb hostile acquisitions is well-intended, it can create an additional funding obstacle for home-grown startups.
This is because China is one of the biggest stakeholders in the Indian startup ecosystem. Industry reports suggest that 18 out of 30 Unicorns in India are backed by Chinese investors and VCs, including the likes of Tencent and Alibaba. China alone has made a total investment worth over $8 billion in Indian companies, which outweighs all other neighbouring countries combined. Now that it has been mandated for all Chinese investors to get government nod, larger funding rounds will likely take longer than usual to close. It is also expected that funding will dry up, adding to the woes of startups that are already struggling with cash flow.
Growing investor interest in certain sectors
The COVID-19 crisis has brought a change in startup investment patterns. Venture capital firms are shifting their focus from tech-centric startups to the ones operating in sectors such as FMCG, online grocery delivery, home entertainment etc. Apart from that, startups in EdTech, FinTech and cyber security are witnessing an increasing user demand, which in turn is luring investors. Also, the government itself is offering Indian startups $130K to develop an encrypted video conferencing solution after that can work on multiple platforms.
The pandemic has undoubtedly affected the startup funding scenario in India, but it has also created new opportunities for startups that can adapt to the current environment. Some companies are already showing trend-defying growth, which is giving a ray of hope to VCs and angel investors.
While it is too early to gauge the long-term impact of coronavirus, we can expect a positive turn towards the end of the year. However, in order to achieve that, a concerted effort is required from the government along with VCs and corporates.
Apoorv Ranjan Sharma is Co-Founder and Managing Director, 9Unicorns