The sudden imposition of the lockdown and mass social hysteria among consumers left millions of businesses reeling in the past six months, leaving a $320 Bn dent on the Indian economy. In the context of the Indian startup ecosystem, this market uncertainty made investors wary about making new investments in startups. The widespread cash crunch and cost-cutting measures to extend runways led to massive layoffs at Indian startups.
As people adapted to the new normal, however, so did the Indian startup ecosystem. Compared to Q2 2020, both the funding amount and deal count recovered by 167% and 46% respectively. However, the funding amount still remains 32% lower compared to Q1 2020, whereas the deal count was 25% higher in Q1.
The recovery in this quarter can largely be attributed to sectors such as enterprise tech, media & entertainment and fintech which combined accounted for 58% of the total $2.8 Bn funding and 39% of the total deal count (261).
When compared to Q3 2019, both the funding amount and deals in Q3 2020 remained relatively low, indicating the adverse impact of the pandemic on startup investments in 2020.
In fact, the total funding amount in Indian startups in Q3 2020 was the lowest in the past three years for the same quarter.
Given the current trend, we predict that the total annual funding in the calendar year 2020 will remain relatively lower compared to the previous year. As per Inc42 Plus analysis, the annual funding amount is estimated to plunge anywhere between 11% to 36%.
Startup Funding Picks Up Pace In Q3 2020
Between January to September 2020, so far $8.1 Bn has been invested into Indian startups across 652 funding deals. Out of which 51% or $4.1 Bn was in Q1 2020. Whereas in terms of deal count Q3 2020 had the highest contribution, accounting for 40% or 261 out of the 652 deals recorded this year (as of 25th Sept).
India’s Top Startup Sectors In Q3
According to Inc42 Plus analysis, enterprise tech stood as the top-performing sector in Q3 2020. The increased demand for digitalisation among Indian SMB’s has opened new business opportunities for both established and emerging SaaS companies, providing them an upper hand when it came to investor confidence in the past few months.
Freshworks with $85 Mn in fresh funding from Steadview Capital was at the top in terms of large rounds, followed by Observe AI ($54 Mn) and Hasura ($25 Mn).
With four mega funding rounds ($100 Mn and above) in Q3 2020, the edtech sector dominated in terms of big-ticket deals.
India’s Top Startup Hubs In Q3
The skewness of capital inflow towards the top three startup hubs of India— Bengaluru, Delhi NCR and Mumbai is evident throughout the year. Out of the total $8.1 Bn raised in 2020 till the third quarter, a whopping 90% ($7.2 Bn out of $8.1 Bn) went into startups based out of these cities.
Naturally, in the case of deal count too, the top three startup hubs dominated, accounting for 83% or 527 out of 634 deals till Q3 2020.
Despite numerous vanity startup promotion schemes and programmes that seek to increase capital inflow for startups in smaller cities and towns, venture capital investments are highly skewed towards the top three startup hubs— Bengaluru, Delhi NCR and Mumbai. In Q3 2020 alone, these three hubs accounted for 93% ($2.6 Bn out of $2.8 Bn) of the total funding.
The Revival Of Seed Funding
Given the risky nature of seed-stage investments and the inclement financial climate from March onwards, it was no surprise that seed funding plummeted massively in Q2 2020. Seed-stage deals in Indian startups witnessed a meteoric fall of 40% in Q2 from Q1 2020, which is the highest among all other stages, but in Q3, seed funding seems to have made up lost ground.
Enterprise tech and media and entertainment were the top sectors in seed-stage funding in Q3, while ecommerce — driven by massive D2C adoption and investor activity — and enterprise tech topped the charts at the growth stage or Series A and B rounds.
In contrast to the seed and growth stage, the late-stage was primarily dominated by consumer services and edtech startups, with Unacademy entering the unicorn club with a mega funding round towards the end of the quarter.
M&As Come Into The Limelight
With the high cash burn and increased difficulty in raising new funding rounds, the only option for investors to garner significant returns on their startup investments is through mergers and acquisitions. Therefore, with deteriorating economic conditions and investors looking out for positive economies of scale, we expect more exits through M&A’s. The growth in M&As in Q3 2020 is a clear indication of a consolidation wave, stronger in some sectors than others.
Similar to the funding deals, the exit deals in the Indian startup ecosystem also seem to stem from the sudden lockdown imposed in late March. The restrictions on transport, travel and increased social distancing hampered the talks and deal flow in the Indian startup ecosystem, but nevertheless, M&As have picked up in the past quarter.
Unsurprisingly, with six mergers and acquisitions, edtech startups witnessed the highest number of exits in Q3 2020, followed by enterprise tech. The most notable exit this quarter was BYJU’S acquisition of WhiteHat Jr for a whopping $300 Mn in an all-cash deal. The deal has brought the programming and coding segment in edtech into sharp focus.
The Top Investors Of Q3 2020
Venture capital funds — Sequoia Capital, Accel Partners gained the top slots, while, early-stage investor — Mumbai Angel Network took the third slot with 7 deals.