2018 witnessed a growth of anti-internationalism with increasing geopolitical tension and social unrest in parts of the globe. Data privacy and security went from being futile checkboxes to global concerns, so much that Senate invited and interviewed Mark Zuckerberg, Sundar Pichai, and Jack Dorsey to monitor the power and responsibility that comes with access to consumer data. Back in India, 2018 has proven to be a nebulous year for NBFCs and banks, starting with the Nirav Modi scam, ever-increasing gross NPAs, decreasing market valuations and recently, IL&FS debt crisis.
However, these setbacks have not prevented the robust growth in innovation and entrepreneurship. In fact, the year witnessed breakthroughs in technological innovations. It started off with SpaceX, Elon Musk’s rocket company, sending its most powerful system to space and in the books of history. This was followed by Google surprising the audience at I/O Conference with its Duplex AI Technology, interacting like a human voice.
It is becoming increasingly clear that the cusp of an upcoming fourth industrial revolution will primarily be driven by frontier technologies such as Artificial Intelligence (AI), Robotics, and Blockchain.
AI/ML and AR/VR are not new, but recent advances in computational power, a rise in data creation, reducing costs of data storage, faster graphics processing, and high-resolution displays have helped enabled their widespread use. There was a 120% funding growth in AI startups in India, with $150M invested in the space in 2018. Global spending on AR/VR is now expected to reach $17.8 billion in 2018, an increase of nearly 95% over the $9.1 billion estimated for 2017. 2018 has witnessed applications of AR/VR beyond gaming and into retail, real estate, live entertainment, recruitment hiring, and medical training.
In 2018, India saw an unprecedented value creation by startups. Zomato, Byju’s, PayTM Mall, Swiggy, PolicyBazaar, CureFit, Dream11, and Freshworks raised significant funding rounds. The $16B acquisition of Flipkart by Walmart was a landmark moment for the Indian startup ecosystem. The deal corroborated that such large outcomes are possible in India, generating substantial value for companies, employees, investors and other stakeholders.
Indian startups saw a 108% growth in total annual funding from $2B in 2017 to $4.2B in 2018. The key growth drivers of this shift were enterprise software, FinTech, Healthtech marketplace, and EdTech.
Shifts and trends driving the growth of Indian startups in 2018
- Consumption of digital content and power of regional languages: With the launch of Jio in late 2016 and data prices crashing in 2017, 2018 has enabled Indian users to access the internet at an unprecedented scale. India now has 250M+ digitally active users, consuming content for ~2.5 hours a day. By 2025, 800M+ will be spending 3 hours a day consuming content. There is a big market for India specific platforms to cater to the needs of non-English Indian internet users. Language, the relevance of content and community-building are drivers of adoption of such uniquely Indian platforms. The regional language users have grown by 13%, while English users have only grown 1%.
- An increased focus on agriculture: The total funding by end of 2018 is expected to stand at $86.5M. Market linkage, Precision AgTech, IoT have seen a lot of activity. There have been various government initiatives pushing for awareness, financial enablement and promotion of innovation in Agriculture. A target has been set to double the average income of farmer by 2022. In this year, startups such as AgroStar, RML Agrotech, and Sammunati are proving that there is an increasing interest of investors in the space. Beyond funding, startups seek funding and guidance. There is a growing tribe of business incubators and catalyzers providing the backbone support to the ecosystem, which are drivers of the boost. Thus, at Kalaari, we hosted our first Agritech event to enable cross-pollination and learnings for entrepreneurs to look towards for insights and inspiration. We explored applications of technology in agriculture, business models of start-ups in space and macro factors driving the Agri-tech wave.
- An upsurge in M&A activity and IPO’s: In 2018, there was a 15% YoY growth in M&A deals, with 75 deals in the first half of 2018. In terms of value, M&As involving Indian companies crossed $100B mark in 2018, recording over 100% growth. While acquisitions valuing over $100M were news to celebrate some years back, the later rounds of financing have now started to cross $100M. We have seen sizable startups acquiring newer categories, technologies and making acquisitions within the ecosystem. They might even look at investing in newer startups. It is a big trend, which will continue for a while. Some notable examples are, Capital Float acquiring Walnut, Zomato acquiring TongueStun, PhonePe acquiring Zopper Retail, PayTM acquiring TicketNew, Ola acquiring Ridlr among others.
Trends to watch out for in 2019
As venture capitalists, we continually engage with the ecosystem and learn about trends that will drive the businesses in the next decade.
- Commercialization of DeepTech — We saw a record amount of funding go into DeepTech startups with ~$250M being invested in India in 2018. The majority of these investments went into startups which were in the product development and pre-revenue stage. 2019 will see a lot of growth capital being invested in DeepTech startups which have solved the commercialization puzzle and are able to get customers in India and abroad. We are bullish on the ability of Indian DeepTech startups to compete at the global stage and are excited to see the developments in sectors such as AR/VR, Blockchain & Distributed Ledger Systems, Robotics, IoT and Drones.
- Nationwide healthcare access — With the introduction of key initiatives such as the Digital Information Security in Healthcare Act, the e-pharmacy amendment to the Drugs and Cosmetics Act and the implementation of the world’s largest health insurance scheme — Ayushman Bharat, the Indian Government has made it clear that solving the accessibility and affordability challenges in Indian healthcare is of prime importance. This has provided a much-needed fillip for the sector as a whole and this will see a huge number of startups coming up as well as a significant amount of funding going into the sector in 2019.
- Voice over text — Voice interfaces have started to enter multiple disciplines such as banking, healthcare, and education. Voice assistants are already changing the way brands and consumers react. The paradigm shift will improve with personalized responses and contextual understanding. It is set to disrupt marketing and advertising functions as we know of now.
- Social commerce — Online retail is changing. Social apps influence the purchases people make. Thus, after the e-commerce wave, social commerce is seeing tremendous growth and potential. Social commerce is essentially reselling products online through social media (WhatsApp, Instagram, Facebook). As internet penetration in smaller towns and cities increase, social commerce gains further momentum. There are 20M+ online resellers including home-makers, small business owners and brands that even Flipkart and Amazon India have been unable to reach. We estimate the market at $10B today.
- Co-living and student housing — The traditional living market for students and working professionals are in the form of unorganized PGs and shared accommodations. Every year, 36M+ students relocate to a different city for higher education in the Indian subcontinent and on-campus student housing caters to <20% of the demand. Thus, we believe co-living startups will create a large opportunity for India by organizing, maintaining and standardizing this $40B+ market.
- Bike sharing — Short-haul and last mile commute are the largest components of urban commute, sized in billions of dollars. While public transport buses are inconvenient, cars and autos are expensive. To solve for this, models of dockless bike sharing are emerging for achieving last mile connectivity. There is a 20M+ daily ride opportunity today in India.
- Consumer lending — Due to high risk-aversiveness of traditional banks and NBFCs with limited geographical coverage, there is a $250B+ consumer credit gap today. Various forms of small ticket size and short duration consumer lending are occurring digitally such as check out financing, prepaid cards, and payday loans.
While about 4% of the country’s GDP was derived from digital products last year, it is estimated that within the next four years nearly 60% of India’s GDP will have a strong connection to digital transformation trends. By 2025, India is poised to grow into a trillion dollar digital economy and, we, at Kalaari, believe that this growth will be strongly accelerated by India’s technology startups backed by venture capital.
Going forward, as startups enable inclusive digital growth, we expect them to embrace India’s diversity and build ‘Hindustan Hamara’ business models, startups which are solving for uniquely India problems, that can scale rapidly.
These developments in the global innovation activity and the Indian startup ecosystem boost my optimism of executing our vision of supporting great businesses to be created in India.
With that, I wish you a prosperous 2019, a year marking new beginnings and achieving bigger milestones.
Acknowledging Chirag Gandhi, fellow @Kstart, for contributing to this article.
Note — Kalaari is currently an investor in Dream11 and Cure.fit.
Disclaimer: Views represented in this blog are personal and belong solely to the author and do not represent the views of Kstart or Kalaari.
Read more stories at The Perch: Kstart’s resource central for startups.
