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Ending On A High Note: Will Q4 2019 Buck The Historical Trend Of Slower Investments?

Ending On A High Note: Will Q4 2019 Buck The Historical Trend Of Slower Investments?

In Q4 2018, Indian startups saw 162 deals, 20% lower than the quarterly average of 2018

Early stage deals are expected to continue to fall due to market conditions, systemic hurdles

Lending tech has emerged as a primary focal point for investors looking at the fintech sector

For the past three years, investment activity in terms of deals and funding amount has remained considerably low in the last quarter compared to the quarterly average of past quarters in the same year, as observed by Datalabs by Inc42.

This trend is apparent when looking at the ecosystem funding reports for 2017 and 2018. The quarterly funding deals in the last quarter in both years stood at 195 (2017) and 162 (2018), 21% and 20% lower compared to the quarterly average of deals in the same year respectively. Similarly, in terms of funding amount (without outliers), the fall was 27% and 24% respectively for 2017 and 2018.

If we look at the funding numbers so far for 2019, as of the first week of November, the ecosystem has witnessed about 89 deals and $1.7 Bn amount being invested.

The average amount in terms of quarterly funding deals and amount is 161 and $2.7 Bn. According to “Indian Tech Startup Funding Report Q3 2019” report by DataLabs, the Indian ecosystem might only see a minimal surge of 1% in the total deal count recorded in Q4 2019 compared to the previous quarter (Q3), contrary to past year trends.

But the fact is that the slowdown of the GDP growth along with a drop in private consumption expenditure has resulted in an overall downfall of business confidence. This could have a toll on the venture capital activity on the Indian startup ecosystem as well.

Overall, if we compare the venture capital activity in the Indian startup ecosystem to the previous years, a slowdown is seen in the compounded annual growth rate of both deal count and the number of unique startups funded, which are in negative — -6% and -7% respectively.

So far in 2019 (From January 1 to November 8), the fintech, enterprise tech, ecommerce, consumer services and media and entertainment sectors are at the top, both in terms of deal count and unique startups funded. The top five rankings of sectors are quite similar to the previous year, with the only difference being that in 2019, the healthcare sector has been replaced by the media and entertainment sector. These trends are expected to continue influencing the funding activity in the last quarter as well.

Overall as per DataLabs estimates presented in the report “Indian Tech Startup Funding Report Q3 2019” the ending quarter of 2019, Indian startups are expected to witness a capital inflow worth $3.37 Bn over 196 funding deals. This will largely be driven by the late-stage investments in the most active sectors — fintech, enterprise tech, ecommerce, consumer services and media and entertainment.

If these numbers are reached, this would be the first time in the past three years that final quarter will not witness a downfall in the count of funding deals.

Fintech: In The Limelight Throughout The Year

The fintech wave in India has largely been a result of the rising popularity of payments-centric startups — primarily mobile wallets or payment gateways. However, over time, the spotlight has turned to lending tech startups offering credit solutions to individuals, SMEs or those making unique credit models.

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In 2019, the top-funded fintech startups included PhonePe, Cred, Incred, OkCredit and Razorpay. These five startups combined have made 32% of the total $1.8 Bn worth funding raised by fintech startup from January 2019 to the first week of November.

The fact that investor confidence is relatively higher towards lending tech startups compared to other fintech subsectors can be ascertained by observing the higher growth rate of both the funding deal count and the number of unique startups funded for lending tech startups.

Also, the share of lending tech startup deals to the total deal count in fintech has more than doubled from 20% in 2015 to 42% in 2018. The robust demand for formal credit in the non-urban regions and the vibrant MSME sector along with a push for digitised credit solutions from the government’s end are some of the factors pulling up the investor confidence in lending tech startups.

As Q4 2019 approaches the end, we don’t expect any drastic changes in the context of investor confidence shifting from the lending side to other sub-sectors. However, niche startups in overcrowded fintech sub-sectors such as payments tech or PoS startups are expected to attract substantial investor confidence. One example of this is Cred, the credit card-based rewards and payments platform, where differentiated product positioning has played a key role in increasing traction.

In the lending space, we expect the popularity of microcredit startups to increase, especially among those players offering short-term loans. The target audience for these startups would primarily be young workers living in urban areas. Examples include Simpl, CashE, EarlySalary and Lazypay.

Overall as per DataLabs by Inc42 estimates, the total deal count in the fintech sector for Q4 2019 is expected to reach 38, whereas the value of funding amount is projected to reach $530 Mn.

DOWNLOAD THE Q3 2019 FUNDING REPORT

Early Stage Investments Might Continue To Struggle

The volume of funding deals being poured into early-stage startups is decreasing on an annual basis. On the contrary, in the case of late stage investments, the deal count is on an upward trend. The CAGR (2015-2018) of funding deal count in seed-stage startups is -14% whereas in the case of late stage the growth rate is 15%.

If we compare the seed stage investment activity, a total of 207 funding deals were recorded at seed stage in Q3 2019, compared to 295 in 2018 during the same period. Similarly, in the case of the number of unique startups funded, the number was 194 (2019) compared to 275 (2018). In both cases, the count of funding deals and number of unique startups funded declined by 30% and 29%.

The fading investor confidence towards early stage ventures can be linked to multiple factors — fear of failures, overcrowding in sectors with robust demand (fintech, ecommerce, consumer services) and regulatory uncertainty for newer fintech and content models due to the imminent data protection law and intermediary guidelines. Finally, one could also attribute the slowdown to market correction after the high-frequency capital inflow between the interval of 2015 to 2017.

Overall, Datalabs by Inc42 has a bleak outlook as far as the odds of Q4 2019 ending with a record-breaking surge is concerned. Q4 2019 is estimated to record approximately $3.4 Bn across 196 deals, a nominal surge of 6% and 1% compared to Q3 2019 respectively.

It’s unlikely that startup investment patterns change over the course of these last few months of the year, based on the annual performance so far and the benchmarks set in the year.

DOWNLOAD THE Q3 2019 FUNDING REPORT

Author

Sandeep Singh

Inc42 Staff

Sandeep is a research analyst at Inc42 DataLabs. As a market researcher, he has a keen interest in blockchain and public policy.

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