What a year, what a year.
We all thought 2022 would be the respite from the pandemic, which finally appeared to be ending in the early months. Instead, we’ve had a rollercoaster of craziness.
The collapse of tech, equity markets, and crypto has happened in the last 9 months. Since the war, inflation has run riot. Interest rates have reached highs. The crazy party of 2021 ended with an abrupt stop.
The year felt longer than 12 months when we published our last predictions.
With 2022 coming to a stop, we can score ourselves. Like a teacher grading her mark sheet, we will score ourselves
2022 will have 2x more IPOs compared to 2021: India had 138 IPOs in 2022 compared to 134 in 2021. We had directionally expected more companies going public in a hot equity market, which did happen. But tech took a massive beating, with 12+ IPOs of companies like Pine Labs and Flipkart shifted to the future. Despite this, we still saw 8 tech companies go public. But a low score to begin our predictions (5/10)
D2C Brands will consolidate with 20+ acquisitions: 3 rollup unicorns were created in late 2021. In 2022, Mensa acquired 20 companies, GlobalBees acquired 18 with a target for 40, GoodGlamm acquired 11 companies. Smaller ones like Club10, Goat Labs, acquired 5+ each. The total in the rollups was 50+, making our prediction prescient (10/10)
The Creator ecosystem will see $100M+ of funding: FanCraze, creating cricket NFTs, raised $100M alone, ensuring we hit our goal. Our predictions on the usage of NFTs as creator monetization took off. YouTube’s Indian creators made 10,000Cr. Creator driven education saw PhysicsWallah raising $100M, Bhanzu raising $20M. Creator enabler Rigi raised $10M. We more than surpassed our prediction, which was quite a call as 2021 saw less than $50M (10/10)
2022 will have lesser unicorns than 2021 but more than 2020: In the first 3 months, India created 13 unicorns. We were extremely happy, but also stressed, because it would easily surpass 50 at that rate. But our prediction played out incredibly well. The year ended with 23 unicorns, with 0 being created in the last 3 months. The accuracy of our prediction deserves an extra point (11/10)
Deep tech startups will raise more than $1Bn in 2022: Web3/blockchain alone raised $650M in India. India got 2 AI unicorns in the form of Fractal raising $360M and Amagi raising $105M, with total AI funding easily north of $500M. Space-tech’s Skyroot raised $50M, with all 3 space tech companies raising rockets to the skies. Deeptech easily crossed $1Bn, a great year despite the onset of a funding winter (10/10)
Fintech will correct in 2022 from 2021 highs: $8Bn of funding in 2021 made fintech India’s most funded sector, including one of the world’s highest. In 2022, there was a deep fall back, with the sector raising $5Bn, a ~40% decline. Just like in every boom-bust cycle, like we had predicted, there was consolidation. 36 acquisitions happened, the highest ever, as the sector consolidated (10/10)
We scored an incredible 9.5/10 for a year of complete madness, making us madly predict the following year.
#1 India SaaS will be among the top 2 funded sectors, with the lowest mortality rates
2022 has seen the funding pedal hit a brake from the crazy acceleration in 2021.
$25B has been raised in 2022 (till Nov) vs. a record $41B raised in 2021. Moreover, the pace of unicorn creation which had rushed to 44 unicorns in 2021 has dramatically slowed.
Jan-Mar’22 saw 13 unicorns which dipped to 4 in the Jul-Sep’22 quarter. Surprisingly the liquidity crunch and investors turning increasingly cautious meant that there were no new unicorns in Oct and Nov this year.
Amid this, one silver lining sector is holding the ship steady in the turbulent VC landscape- SaaS. Even in Nov 22, three SaaS startups- Icertis, Amagi, and Contentstack collectively raised $340m (of the $3.5b invested by PE/VC’s in the month). The year also saw Zoho hit a remarkable $1B revenue milestone!
SaaS has historically been the most capital-efficient sector with the highest capital efficiency among the unicorns (Valuation/ Capital Raised). Much like Pharma and IT Services, which are resilient sectors in public markets during a downturn or uncertainty, SaaS provides a similar shelter to VCs in the private markets.
Much of it also concerns the nature of business models where recurring revenues, high tenure contracts & stickiness lend predictability in revenues. 2023 will also see a higher focus by companies to cut costs and improve efficiency, providing strong tailwinds to startups solving these areas.
In 2023, we expect VC funding in SaaS to have a neck-and-neck race with Fintech, the OG of VC funding. It should be among the top 2 VC-funded sectors in the year.
We are bullish on several themes, including DevOps, Vertical SaaS, Cybersecurity, SaaS spend management, cross-border AI/ML plays, and SMB SaaS in India. We will be actively tracking startups in the area.
Further, in the tough year of 2023, when capital preservation, profitability, cutting burn to extend the runway will be the clarion calls to survive, we expect SaaS to have the lowest mortality rates across sectors, measured as the # of dead startups in the year.
This will be due to two main reasons. Startups in the space find it relatively easier to break even and self-sustain in the year. There will be a higher scope for consolidation in the space aided by market leaders/late-stage startups who are comfortably funded and actively looking for reasonably priced inorganic expansion opportunities.
#2 Five or more unicorns will be repriced
2021 was the year of crazy liquidity.
COVID led to a global economic downturn with no clarity on when the virus might be wiped out. The Fed opened its purse strings to keep credit flowing to reduce the economic damage inflicted during the 2020-21 era.
It purchased US Govt. and mortgage-backed securities and lent to the highly impacted segments. As Jerome Powell, Chair of the Fed Reserve remarked in Apr 2020, the US would deploy these lending powers to an unprecedented extent. While COVID did recede globally (ex-China) by mid-2022, few had foreseen indigestion and the adverse effects the ample liquidity would cause.
The ease in monetary policy, quantitative easing, and repo operations gave higher funds for banks and institutions (public and private to lend). This led to VC funding shattering all records in 2021. Globally $643b was deployed with 92% growth YoY. The crazy velocity percolated to India with the birth of 44 unicorns and 4x growth in VC funding to $38.5b.
Unicorns were celebrated and a few raised funds multiple times through 2021. In the deployment frenzy, sustainable growth took a backseat and growth at all costs and expensive acquisitions to gain market share became prominent.
A lot of bad behaviour built in 2021 unravelled dramatically in 2022.
As the Fed started shrinking its balance sheet and tightened liquidity, investors caught a cold virus hard to treat in 2022. The tech meltdown led to VC’s IRR nose-diving and the valuation of their private companies crashed. Many unicorns raised at crazy multiples, intoxicated by the effects, were visible throughout 2022.
Some raised convertible rounds/ debt to keep their valuation intact.
2023 is expected to reset valuations for at least 5 (10%) of the 65+ unicorns born in 2021 and 2022. While few extended their runway by raising a debt round or doing aggressive cost cuts in 2022, that will become increasingly tough as they look to raise a fresh equity round in 2023.
The 2021 grads will be priced more rationally and face much more pain as their valuations stay flat or need to accept a down round.
While this will be painful for the founders and their investors, the short-term pain will help cut the flab and move to a much more sustainable and stronger startup ecosystem in 2023 where ‘resilient’ and ‘profitable’ unicorns take centre stage.
#3 Funding will be higher than 2019 but lower than 2022, with less than five tech IPOs
We expect the total funding poured into the Indian ecosystem to surpass pre-pandemic levels, steady with our long India bet.
But we also expect it to be slower than 2022, which itself was slower than 2021.
Many capital shops have raised new funds and would look for great opportunities to invest across the geography. However, the overall funding levels will remain under that of 2022 as the markets spend the first two quarters of 2023 in uncertainty about an impending recession.
The recent sting of crashed-and-burned bets will be soothed by ever-evolving product strategy and innovation, as we expect investors to adopt a wait-and-watch strategy.
Many large hedge funds have all but exited the Indian market in the near term. With their portfolios hammered globally, we do not think they will have the bandwidth to invest in India.
They accounted for a significant portion of the large-scale funding done in 2021 and early 2022.
Riding the funding tide in 2021, several startups eyed the equity markets to raise funds as their businesses mature.
Many unicorns and late-stage startups made their public debuts or solidified plans to go public.
Since the beginning of 2021, 11 Indian startups – Paytm, Nykaa, CarTrade, MapmyIndia, EaseMyTrip, Delhivery, Fino Payments Bank, IndiaMART, Nazara Technologies, Policybazaar, and Zomato – went public with a combined valuation at IPO of over $70 billion.
Capital superabundance made it possible for many others to prioritise growth over profitability and dream of going public like some marquee names had been able to.
Many younger companies took cues from prevalent conditions and evaluated this as a good time to try and test new models, lower hurdle rates and grow at any cost.
While most onlookers were left bickering over the importance of growth over profitability and vice versa, 2022 would bring a snowstorm to cloud their vision.
As many as 23 startups were aiming to turn in their Red Herring Prospectus drafts in 2022, but just a few made it public.
Those who had to hold their horses were Droom, OYO, boAt, Snapdeal, and PharmEasy. Market conditions have remained unfriendly, and more panic traversed the street as Nykaa and Paytm’s prices plummeted further after the post-IPO lock-in periods ended.
More than $18 billion was wiped out across five renowned listings.
Our perspective is that in the next year, we will see fewer than 5 Indian tech IPOs. Firms will focus on getting lean and surviving the turmoil before dipping their feet in the public market. Teams will be more resilient as a result of this bear market, whether publicly or privately held.
#4. Climate tech will emerge as a strong theme with $100M+ VC funding
In 2017, a heart-wrenching video of a starving polar bear sent shockwaves dubbing it to be the ‘face of climate change’.
Fast forward five years, the situation has only worsened with the air quality deteriorating, ice caps melting and fresh water running out.
2022 saw muted funding overall in India, although certain pockets of optimism showed promise in 2022 and investors will be actively tracking it in 2023.
Climate tech was one such sector with the EV space being the torch bearer. The geopolitical negotiations and economic urgency to work towards climate-related agenda with a coordinated focus will put climate tech in the spotlight in 2023.
India, with its huge base of engineering and tech talent will be the R&D centre for innovations around key themes in climate tech such as EV, carbon credits, circular economy, pollution reduction. The Govt. push and commitment to become net zero in emissions by 2070 will further accelerate the push.
Few companies in solar, EV have been building their solutions for the last 4-7 years. As they hit PMF and look to commercialise their solutions, investors will be eager to back such plays in 2023. Moreover, they have started ticking the technology validation and market sizing and acceptance risks which was a key contention point for investors in climate tech.
In EV, the confluence of technology maturing, Govt. policies that reduce the cost of ownership and provide subsidies for charging infrastructure, consumer acceptance and the ecosystem coming together will provide a definite spark to funding in 2023.
In clean energy, major corporates have put down the gauntlet to become India’s and the world’s largest renewable energy producer. Adani is building 3 gigafactories as part of its $70b spend on clean energy by 2030. Reliance is planning to spend Rs. 75,000 cr over the next three years with 80% of it to be spent on building 4 gigafactories.
Massive investments by these conglomerates will push downstream innovation in solar modules, wind turbines, hydrogen electrolysers, and battery chemistry and encourage clean bio-energy and sustainability funding.
Some interesting areas we will be keenly tracking at AJVC will be the carbon credits market, water conservation, pollution reduction and bio-fuel startups. Overall, we are bullish on Climate Tech being the force of good in India and lighting up the world.
We expect $100m+ in VC funding in Climate Tech in 2023.
#5 Fintech will mature, remaining the highest VC-funded sector in 2023
Fintech has been the undoubted VC favourite over the years.
With how the market looked in 2022, it is a good time to rewind to see how we got here.
The stratospheric valuations seen across the sector were largely due to the vastness of the market opportunity; the untapped potential with millennials and the salaried Tier 2 population itself was sizable. E-commerce was booming, and fintech formed the base layer of this stack. Fintech companies were driving innovation in products and business models, expanding accessibility and reach across the industry.
The quantitative easing and subsequent tightening measures adopted by the Federal Reserve in the pandemic era have had far-reaching effects on all economies. The economy runs like a machine, which significantly overheats with each rate hike announced to curb inflation. Sky-high American CPI prints were an indicator of what was to come to the rest of the world.
Rising inflation in the country meant that people had less to spend and consume, weakening commerce further. In turn, the fintech services’ demand collapsed severely.
With the funding taps shut and consumer demands at a post-pandemic-era low, fintech firms everywhere began facing severe downturns, and India was no exception to the norm.
However, the fittest survived the toll, and the payments vertical continues to be a strong suit. Two words – policy and innovation.
2022 has seen the RBI recognise the importance of digital lenders in the economy and implement measures to regulate their growth. The guidelines for Digital Lending and Data Protection bills credit the theme by formally recognising digital lending and setting up the much-required legal structure to protect consumers.
UPI has been the foremost force in changing India’s payments landscape, and things have only looked stronger after the announcement of the account aggregator system, Sahmati.
Sahmati aims to bring fragmented, siloed user data into a wide-ranging view in real-time and function as a framework for seamless, safe and swift data sharing between financial information providers (FIPs) and financial information users (FIUs).
Despite these efforts, India is still struggling to bridge the credit gap for its “thin-file” citizens across tier-2/tier-3 cities and rural areas alike, which brings us to our next prediction.
Despite the positive fundamentals, the Indian landscape is showing despite global macroeconomic issues and the massive demand for microloans from said “thin-line” citizens and MSMEs, we expect microfinance shops to find their flight this year. Public banks working with digital lenders will become more mainstream as a co-lending model.
Resilient businesses will weather the storm, and even with signs of consolidation, we expect fintech to remain the top sector drawing VC funding in 2023
#6: Two or more D2C roll-ups will consolidate in the sector’s moment of reckoning
3 unicorns scaled in the roll-up space, with another 3 having raised a large amount of capital.
All of these rollups were copying the success of Thrasio in the US. Thrasio itself replaced its CEO and laid off people.
India’s D2C rollups will face their test with fire, as money dries up.
The big challenge of consumer brand roll-ups in India is finding good targets for acquisition. Many companies have raised significant amounts of money to acquire consumer brands but have struggled to find brands that meet their criteria for acquisition. This may be due to the intense competition in the Indian market and the lack of differentiation among many of the available brands.
In India, there is also the “big gets bigger” effect
The top brands in a particular industry tend to dominate the market and capture a large share of the available demand. This makes it difficult for smaller, acquired brands to compete and gain market share, leading to the failure of the acquisition.
In many cases, it is only the top 4 or 5 brands in a particular industry that matter, and acquiring non-top brands can be very challenging.
These roll-ups rely on the scale benefits to drive growth and profitability.
However, in India, it can be not easy to achieve scale benefits due to the diverse and fragmented nature of the market. As a result, the acquired brands may struggle to realize the expected synergies and may not perform as well as expected.
In comparison, companies such as Nestle, Unilever, and P&G tend to only stay in the brand and consumer lines where they are the top 3 players. The three are the OG “roll-up” plays that have built and acquired brands. This allows them to leverage their market position and achieve scale benefits more effectively.
The furious financing in the category will drive the industry to consolidation.
During the abundance of capital in 2021, many consumer roll-ups were funded, even though the market may not have been able to support them. This led to oversaturation and intense competition, likely leading to the failure of many of these acquisitions.
We expect it to be a challenging year for the rollups, as they will have to prove out their viability. With the original company that spawned these struggling, it is hard to make a case for smooth sailing in a smaller market like India.
We expect at least two will consolidate or shut down as they run out of steam in 2023.
Writing: Bhoomika, Keshav and Aviral Design: Omkar and Saumya