The venture capital industry comprises four major players: entrepreneurs seeking finance, investors seeking large returns, investment bankers seeking to sell firms, and venture capitalists who profit by creating a market for the other three.

Start-ups are typically high-risk, high-cost endeavours. As a result, external capital is usually sought to spread the risk of failure. In return for taking on this risk through investment, investors in new companies are able to obtain equity and voting rights. A venture capitalist invests in an entrepreneur’s concept, develops it for a short amount of time, and then exits with the assistance of an investment banker. As a result, venture capital enables start-up businesses to get off the ground and entrepreneurs to realise their visions.

When pandemic-related closures went into effect in 2020, venture capitalists themselves predicted doom. Sequoia Capital warned investors that the “coronavirus is the black swan of 2020,” while Angular Ventures claimed that “the global VC market has completely locked down.”

While the pandemic and its accompanying economic uncertainties are far from over, the recent reports suggest that the VC industry has been “more resilient than many other sectors of the global economy”. According to Bain & Company's India venture capital report 2021, VC flows remain robust, with strong deal flow, continued momentum in good industries such as consumer technology, fintech, and software as a service (SaaS), significant fund-raising activity, and tremendous growth in the number of start-ups and unicorns.

At the same time, the report indicates a decrease in average deal size, an increase in investment activity in a select set of consumer tech sectors, including edtech, foodtech, gaming, and media and entertainment, and a slowdown in exits, likely due to lower valuations and disruptions to business models.

Defining moment

Regardless of the economic toll of the second wave, 2021 is shaping up to be a defining moment for the venture capital industry. According to Venture Intelligence data, the first half of 2021 saw $27.1 billion (442 deals) in investments, up from $20.4 billion (433 deals) in the same time the previous year. In the first six months of 2021, PE-VC investments in India grew by 33 per cent year on year.

In the venture capital business, a ‘unicorn' is any start-up with a valuation of $1 billion, a ‘Gazelle' is a start-up that is most likely to go Unicorn in the next two years, and a ‘Cheetah' is a start-up that might go Unicorn in the next four years. According to the Hurun India Future Unicorn list 2021, India is home to 51 unicorns, 32 gazelles and 54 cheetahs.

Sequoia Capital is the largest investor in the gazelles and cheetahs, followed by Tiger Global, with 37 and 18 investments, respectively. FinTech, e-commerce, and SaaS account for 49 per cent of the unicorn list. India's unicorns are now valued $168 billion, and has the world’s third-largest unicorn ecosystem, after only the US and China.

Govt initiatives

The Indian government has launched a number of initiatives to support the start-up ecosystem. Following the epidemic, various government measures and policies targeted at boosting the health of enterprises post-lockdowns, such as Atmanirbhar Bharat and Startup India, have assured the availability of capital and simplified compliance requirements for start-ups in India.

India is one of the world's major fintech marketplaces, with a fintech adoption rate that is 87 per cent greater than the worldwide average (64 per cent). In the Indian fintech sector, digital payments are the market leader. The government’s FDI regulations, which enable 100 per cent FDI in B2B, e-commerce, and 100 per cent FDI through the automatic route under the marketplace model of B2C e-commerce, contributed to the e-commerce sector’s tremendous development during the exceptional Covid-19 epidemic.

The new National Education Policy (NEP) 2020 re-imagines education in India with a primary focus on bridging the digital gap, giving edtech a significant boost. Telemedicine regulations and the National Digital Health Mission (NDHM) will almost certainly play an important role in promoting healthtech in India. In addition, the government announced numerous new regulatory efforts in 2020 to make it easier to operate alternative investment funds in India.

Covid-19 played a significant influence in drastically speeding digital trends across industries, venture capital money flows, and the creation of new, digitally formed business models across sectors. Venture capital investments, and continued improvement on the policy and regulatory front by the government have all played critical roles in boosting India's start-up ecosystem, especially during periods of economic uncertainty induced by Covid.

The writer is an Assistant Professor at Mahindra University, School of Management, Hyderabad.

Related Topics