Why this cycle could be a good entry point for LP’s looking at India’s Tech Market?

2020’s economic landscape has taken a battering, however, despite this unsettled, uncertain trading environment, there is one country that has seen investment activity only gain momentum rather than contract: India’s tech space. This year, Amazon invested USD 1 billion into its India operations, Mastercard announced plans to double its R&D activities in the Indian market (as well as a US$1 billion of investment), and the Indian conglomerate Reliance Industries (Jio Platforms) raised US$20.2 billion of investment post covid in a span of over four months, including US$4.5 billion from Google, and US$5.7 billion from Facebook. But what does this mean in the long-term? Is 2020 an outlier year, or is this only the beginning of India’s tech investment wave?

India in 2020 and beyond

Both the current state of India’s tech sector and its future outlook tells a positive story. GDP for 2020 has rebound to 6% - 6.5%, with this growth being sustained and surpassed over the next ten years at 7%-9%. Recently, Goldman Sachs and Morgan Stanley have shared an extremely bullish outlook on the future prospects of India Here. Couple this with the estimated 130mn households (500 million people) moving up into the middle-income bracket driving up retail consumption levels from US$878.4 billion from current levels to US$1.8T by 2030, as well as the inflow of US$49.8 billion of Foreign Direct Investment (FDI) in 2020 so far, and it’s no surprise India is predicted to be the fastest growing economy post-Covid. Of course, there are some indicators that investors will need to keep an eye on, such as Unemployment rate, Debt-to-GDP, Inflation, and Currency strength; however, these are probably more symptomatic of the world economy as a whole, rather than anything specific to India itself.

India’s early startup market

India’s startup scene has come a long way since its genesis in the early 2000s. The VC investing trend began in 2004, with capital flowing more into the Infrastructure segment than the tech space. However, the tech space saw an uptrend from early 2009-2012, especially in the e-Commerce space with the creation of homegrown Flipkart, Jabong and Myntra, etc.

As India’s mobile and internet accessibility expanded, 2013-2016 saw increased investment activity before heading into the renewed growth phase evident today, with marquee exits for investors, and strong startup activity in new sectors such as Fintech, Healthtech, EdTech around both Consumer-focused and SaaS business models.

Whilst the total value of exits has cooled, standing at $11.1bn in 2019, down from the $27bn in 2018, VC investments have grown from $550m in 2010 to $14.5bn in 2019 (over a 25X). The 34 Unicorns and 54 Soonicorns with a five-year unicorn-potential, as well as 12 out of the top 30 horizontal Indian SaaS startups having positive EBIDTA go some way to explaining one aspect of this subdued exit market.

Our Experience

India’s tech sector is clearly at an inflection point, but our experience in the space has given us some valuable take-aways:

1.        Indian startups are looking to go beyond the domestic consumer and build global B2B businesses.

2.       This burgeoning entrepreneurial community is not looking for just blind pool capital, but instead experience and local market expertise.

3.       Copycat models and a herd mentality approach as well as misunderstanding the ability of Indian consumers to open their “wallet for a value” leading to non-profitability issues and low returns on investments

4.       Rather than growth at any cost, startups are entering a more mature phase, focusing on fundamentals, capital efficiency, and superior customer experience.

5.       2020 has seen lower valuations, more consolidation, and fewer large cheques written, but this has forced a better mindset, with more firms looking to be cash-wise without needing limitless runway to survive.

6.       More PE funds are expected to enter in the next decade driving more exit opportunities for early investors

Could India win the global SaaS market?

One area of huge potential is the Indian SaaS (Software as a Service) market. While growth is visible across B2B & B2C and its variants, the success of Indian SaaS companies has been pathbreaking over the last few years primarily driven by these three factors:

1.        Access to product talent with deep tech experience in building, secure, scalable, successful global SaaS products

2.       Ability to experiment and validate product-market fit with the lowest cost

3.       Belief in building and scaling companies remotely, augmented with a high level of local SaaS community support

And the figures look good: In the SaaS market, revenues are expected to reach US$3.5 billion in 2020, growing to US$13 billion - US$15 billion by 2025. This market space has seen the creation of 6 SaaS unicorns, with 1,000+ SaaS companies of which 150 generate an ARR of over $1m. This space looks even more attractive when you recognise that 75% of the demand for Indian SaaS companies comes from overseas - a global market that is projected to be US$400 billion in the next five years. With SaaS funding growing at a CAGR of 15%, it’s heading in the right direction.

Why investors should look at entering the Indian market now?

India is seeing swift growth in both the digitisation and aspirations of an emerging middle class and their willingness to “opt and pay for a value”, and this investment cycle could well see the emergence of startups who will not only solve the problems that are specific to Indian market but also for the global market. As one of the fastest growing consumer markets in the Asian region, India’s tech space is a natural addition to the global investor’s portfolio. Indeed, the market is projected to reach a level of maturity in the next 5-10 years that will spur aggressive M&A markets into action, providing a great return opportunity.

Australia & New Zealand LP’s haven’t been the largest source of capital infusion in this private area yet(Though there is a reasonably good exposure into the public markets). Traditionally seen as ‘too hard’, India is certainly a complex market with various constraints that seem all the more daunting for those unfamiliar with this growing economy. A deeper level of due diligence is required but aligning with the operator’s experience in both Indian and global early-stage markets will ensure effective risk management of your portfolio, as well as optimising the potential for return on investment.

In my viewpoint, this new cycle seems to be an interesting entry point for Limited Partners who wish to tread the Indian tech space (Broadly SE Asian region). Whilst large corporations are already making their mark (REA Groups recent entry by acquiring significant control in Elara Tech), there’s a lot more potential out there for regional startups within the smaller addressable market who could think of anchoring their primary or secondary tech hub in India and leverage the vast tech resources and also slowly take a shot at one of the fastest-growing consumer markets in Asia. (Majority still like “Foreign” products and services (Pun Intended :))

If you want to understand some of the early-stage investment opportunities that we are tacking, feel free to send a message here on LinkedIn or e-mail me at kannan@networkonomy.co

Data Source: Bain Report 2019, RBI, NASSCOM, Tracxn, Inc42 & various other reliable sources. Opinions expressed are solely my own and do not express the views or opinions of any of my professional associations.