Climate Finance: The Global Shift Towards Sustainable Energy

The Paris Agreement was adopted by 193 countries and EU in 2015 to “pursue efforts” to limit global temperature rises to 1.5C, and to keep them “well below” 2C above those recorded in pre-industrial times with each country setting its own emission-reduction targets, reviewed every five years to raise ambitions.

A key goal of the agreement was also for richer countries to help poorer nations by providing funding, known as climate finance, to adapt to climate change and switch to renewable energy, evidencing the need for large-scale investments for a phased, orderly transition.

Global Energy Transition Investment

Since 2015, the world has invested more than $1T annually, in energy transition, reaching $1.75T in 2023. Our investment in renewable energy has doubled from c$330B in 2015 to $660B in 2023. A more interesting segment, however, which has 10Xed in 5 years, is electric vehicles, with investments growing from c$14B in 2018 to c$130B in 2023. 

While the 75% growth over 8 years is promising, it is not enough. Estimates suggest that we need 3X the current scale of annualized investments over the next decade to reach our climate goals, with 2X more investments required in renewable energy and 3X more in electrified transport.

The Indian Scenario

Since 2020, the Indian government has consistently claimed to be on track to achieve the goals it set out in fulfilment of its obligation per the Paris agreement which included 4 lofty targets:

  • India will increase its non-fossil-fuel energy capacity to 500 gigawatts (GW) by 2030.
  • India will meet 50 percent of its energy requirements from renewable energy by 2030. 
  • India will reduce its total projected carbon emissions by 1 billion tons by 2030.
  • By 2030, India will reduce the carbon intensity of its economy by 45 percent.

Estimates from IFC suggest that this will require investment upwards of $10T by 2070, for India to reach its “Net Zero” commitment.

With 75% of India’s emissions originating from energy use, investments in the production of renewable energy and consumption via electrification of transportation are two critical segments that need significant capital investments.

Financing Energy Production: Rooftop Solar

The Indian government has focused aggressively on rooftop solar, which generates 11 GW of electricity, with an ambitious target of 40 GW of electricity set for 2026.

Despite significant savings from a near-zero levelized cost of energy from solar and payback periods of under 5 years, the upfront installation cost remains prohibitively expensive for businesses and individuals alike. This has resulted in a slow uptake with the government having to push the initial 40 GW target to 4 years later.

A 3 kW set-up requiring 300 sq ft of rooftop space necessitates an expenditure of more than INR 1.2 lakhs. The payback period for a similar set-up at INR 6 per unit electricity cost is c4.5 yrs post which the the consumer only has to incur minimal maintenance charges for the setup.

Is financing not accessible for solar projects? Yes and no – while there is a strong push from the government, with low-cost finance made available by many banks and NBFCs through their schemes, access to such financing remains low.

The biggest barrier for MSME clients is a perceived lack of creditworthiness due to lack of credit information/ratings. This is further aggravated by the high transaction cost/time of MSME rooftop loans due to their small size, decreasing their attractiveness to lenders. Similar challenges combined with an inability to manage complex paperwork and understand structural requirements for rooftop solar compound the problem for retail consumers.

The principal argument against their poor creditworthiness for solar however is that electricity is a core raw material that MSMEs consume and have consistently paid for; a similar argument could be made for any retail consumer who would certainly undertake the installation of rooftop solar if the procurement and installation process could be simplified.

The opportunity for startups therefore lies in transforming this cash flow from an expense line item to a finance line item and in simplifying the complex process for both MSMEs and retail consumers.

The two models:

  1. Buy Now Pay Later (BNPL)

While the idea of BNPL traditionally brings to mind lifestyle purchases like apparel, accessories, electronics etc., BNPL for solar is a viable financial option that has been demonstrated with a reasonable degree of success. 

Unlike other purchases that may not have a cash flow component, BNPL for solar allows the borrowers to get easy approval for solar financing leading to quicker installation, and converts the fixed upfront cost into easy monthly payments.

Companies like BrightE in Australia have disbursed $1B+ of 0-interest loans for the installation of solar power set-ups. Their customer cohort is typically individuals in their later ages, with good credit scores with the asset delivering a significant sustained value.

While there is no true 0-interest product, with the cost of financing baked into the product, and cash purchases producing upfront discounts, BrightE’s true value proposition lies in its ability to quickly disburse the required capital for solar installation through its partner vendors which solves your installation, financing and maintenance needs together.

  1. Offtake Agreements

These agreements have a very interesting characteristic: they do not alter the typical MSME behaviour of paying for electricity costs, but simply reduce your power bills.

In these models, the financier charges the consumer a pre-fixed rate of electricity per unit which is typically lower than their existing tariff, so the customer sees upfront benefits. The rate per unit is used to pay the negligible variable cost of solar energy production, then the interest on the loan, and lastly the principal on the loan.

Unlike the BNPL model, with a fixed monthly payment – the variable nature of the payments in offtake agreements which are contingent on electricity generated result in a wide range of IRRs which could range which could make management of cash flows a bit tricky for the financier but this model has the added benefit of negligible change in customer behaviour and easier customer education.

While startups may adopt either mode to deliver the financing required, a core requirement of both models, more than the interest charged, is the convenience they offer to both retail and MSME customers, making their decision to transition to solar energy easier and accelerating our transition to production of renewable energy.

Financing Energy Consumption: Electric Transportation

Road transport accounts for 12% of India’s energy-related CO2 emissions and is a key contributor to urban air pollution. To bring the emissions from this sector on track with the 2070 goal, the share of EV sales needs to reach 50% by 2030.

Green shoots of this transition are already visible with TCO for 2-wheeler, 3-wheeler and LCV categories for both personal and fleet use-cases being lower than ICE vehicles.

While the understanding of these benefits of owning 2-wheeler EVs has resulted in significant growth, with EVs already reaching 5% market share of sales in FY23…

… the EV ecosystem is still fraught with challenges.

The principal challenge for EV ownership remains an inability to underwrite the asset, emanating from a limited understanding of battery chemistry, and a non-existent/inactive secondary market for these assets.

For comparison, while on an ICE 2-wheeler, the loan-to-value ratio (LTV) can go as high as 95%, the comparable number for EVs is 80%. The tenor of the loan also ends up being lower, with the average tenor of 3 vs 4 years of EVs and ICE vehicles respectively. The interest rates on these loans also tend to be 1-4% higher.

While many Indian startups are attacking the problem from the problem statement of easier access to finance, and in some cases dealer-level financing to unlock benefits of portfolio diversification, in our view, true value for the segment will be unlocked with investments in the development of a secondary market for 2-wheeler EVs, which will provide assured returns for the assets, improving its residual value, reducing its risk profile for lenders and making it comparable to an ICE vehicle. Asset buyback programs and battery-repurposing schemes are other options that could help catalyze the creation of a secondary market for EVs.

An interesting development in the field is Piaggio’s 3-wheeler battery subscription model which de-links the battery purchase from the chassis, reducing the upfront purchase cost. While these models by themselves may be insufficient given the distribution and the massive scale of financing required, they could help catalyse the development of a financing ecosystem, much like the installation of the first charging stations were needed by OEMs to drive sales of EVs.

Closing Remarks

While we have only looked at two more prominent use cases, i.e. solar energy and EVs to illustrate our case for the requirement of easy financing across consumption and production of energy, our broader view is that in both cases and other climate finance opportunities, it is critical to look at ways and means of meaningfully improving the risk profile of the asset through creation or modification of cash flows to ensure that ample private capital can be mobilized to help us accelerate our transition to a more sustainable future.

If you are building in Climate Finance and wish to speak, please feel free to reach out to us at akul@venturehighway.vc

Beaker to Billions: The Rising Opportunity in India’s Specialty Chemicals

In the grand laboratory that is the global market, India’s specialty chemicals sector stands out as a beaker bubbling with immense potential. Like a seasoned alchemist turning base metals into gold, India’s specialty chemicals sector is transforming raw materials into essential ingredients that power a plethora of industries worldwide. 

Specialty chemicals, by definition, are chemical products that provide a wide variety of effects on which many industries depend. From the vivid dyes that colour our fabrics/food to the advanced polymers that fortify our automobiles, these chemicals are the unsung heroes of our modern existence. 

Table: Key Segments of Specialty chemicals in India and their end-use industry

With the overall increasing consumption across the nation and expansive industrial base (with more talent), India is becoming a large demand and supply hub, respectively. Additionally, with the technical know-how developed in the last decade, India is poised to become a global hub for new and pivotal compounds.

A large and compounding market awaits for entrepreneurs to tap

Globally, the chemical industry is a colossal market valued at approximately USD 4.7 trillion, within which India emerges as the fifth-largest chemical producer, marking its significance on the world stage. Despite its impressive position, India’s share in this vast global market is around 4.3%, in contrast to China’s 32%. The global chemical industry is predominantly made up of commodity chemicals, accounting for about 80% of the market, leaving specialty chemicals to fill the remaining 20%.

Zooming into India, the domestic chemical industry is worth a robust USD 200 billion, with specialty chemicals constituting about 18% of this and valued at approximately USD 36 billion. This segment of the industry highlights its potential for deeper penetration into global markets. Over the last five years, India’s chemical sector has experienced a strong compound annual growth rate (CAGR) of about 11.7%, indicating an expanding industry. The emergence of the Indian specialty chemicals market has been driven by the country’s strong process engineering capabilities, low-cost manufacturing capabilities, and abundant manpower.

Image: Country-wise Chemical market size; India Chemicals split

This segment is forecasted to continue its upward trajectory with an expected 12.4% CAGR, reaching an estimated USD 64 billion by the calendar year 2025. This anticipated growth underscores India’s increasing importance and evolving role within the global specialty chemicals market, setting the stage for increased contribution to the global chemical industry

The specialty chemicals sector, in particular, is poised for remarkable growth, driven by a combination of factors including increased demand in domestic and international markets, advancements in chemical technology, and a strategic shift towards high-value chemicals. Let’s explore these further!

Strong macro tailwinds catalyzing India’s specialty chemicals sector

  1. Focus Shifting away from China : Amidst rising geopolitical tensions and stringent safety regulations imposed by the Chinese government, the global supply chain for raw materials in the chemical sector has faced disruptions. This has led to an increase in the prices of certain specialty chemicals, compelling the industry to look beyond China for sourcing these crucial inputs
  2. Growth in R&D and Process Engineering capability in India : Historically, India has had a big gap in technical expertise necessary for the complex production processes of specialty chemicals. In recent years, there has been a significant improvement in R&D capabilities and process engineering know-how. This evolution places India at the forefront of innovation in the specialty chemicals sector. Given the complexity of Specialty chemicals’ elements, technical know-how is critical. 
  3. Government catalyzers : Measures such as anti-dumping duties on Chinese imports, public procurement policies favoring domestic producers, tax subsidies, simplified regulations, and export promotion schemes have all acted as accelerators for the industry’s growth.
  4. Rise in global demand driven by rise in rise in end-user categories : Growth in the end-user industries, such as pharmaceuticals, food, construction, electronics, and dyes/pigments, has led to stronger sustainable demand & growth for specialty chemicals.
  5. Low per capita consumption across product categories : Current per capita consumption of chemical products in India is about one-tenth the world average, indicating huge headroom for growth.

While there is clear room for more specialty chemical manufacturers, we believe specialty chemicals also present a unique opportunity for a managed B2B marketplace due to certain gaps in the supply chain. Some of the gaps include : 

  • Fragmented Supply, Making the Discovery Challenge : Specialty chemicals are complex and proprietary formulations and functional agents responsible for critical features of the end products. Specialty chemical manufacturers specialize in specific ingredients and processes, leading to a highly fragmented supply. There are a total of 100K+ SKUs across various manufacturers in India. 
  • Fragmented Distributors, each having limited SKUs : The range of SKUs with distributors is limited given their limited know-how/expertise in a few chemicals/categories. Hence, the distributors in the space are also fragmented. For example, Europe has 20K+ small distributors, with the top 5 distributors accounting for less than 15% of the market. India is even more unorganized. 
  • Lack of innovation-first distributors : End product manufacturers like to work with distributors to take specialty chemicals from multiple suppliers and create formulations specific to the need of the new products that they may be launching. This could provide innovation-led moat.
  • Fragmented Supply Chain leading to longer lead times : End product manufacturers often procure Specialty chemicals in small quantities as they are typically <20% of end product composition. Hence, it is hard for them to identify & procure directly from small & fragmented manufacturers and hence, a product moves across 3 – 5 stakeholders, leading to longer lead times and potential for losses in transit. 
  • Sub-Par Warehousing and Fulfilment of Specialty chemicals : Specific packaging and vehicles are needed to ensure quality retention and low oxidation losses. Currently, there is limited.
  • Lack of QA, Order Tracking and Poor Documentation : QA is very critical given the criticality of specialty chemicals in the end product. However, QA is time-consuming and hence, many distributors skip this. Additionally, there is no order tracking, visibility and trail in terms of fulfilment & documentation.

Global precedents and insights: Azelis and IMCD model a winning playbook for specialty chemicals B2B marketplaces

There are two large global companies – Azelis & IMCD, both European and are currently at GMV of c.$5B each. The growth has been a combination of organic growth & bolt-on acquisitions (much like ofBusiness in India, which has made 50+ small acquisitions). Both companies operate across all categories & have built both private labels as well as in-house formulation labs to drive value add over & above aggregation. This is a core playbook in this sector, and we believe it will play out similarly in India.

These companies also exhibit impressive financial performance with high operational efficiencies, highlighted by:

  • 25% gross margins
  • 11-12% EBITDA margins
  • 8+ inventory turns => high RoCE of 40%+ 
  • Net working capital of 40-50 days

Such metrics underscore their robust business models in the B2B marketplace for specialty chemicals.

Identifying this opportunity, we have seen a few companies in India who are building a managed B2B marketplace for specialty chemicals in the last few years. 

Table: Illustrative list of B2B Specialty Chemicals companies in India

As India’s specialty chemicals sector expands, driven by robust demand, technical prowess, and strategic global shifts, the future radiates with potential. This landscape presents a strong opportunity for managed B2B marketplaces, poised to streamline the fragmented supply chains and catalyze innovation. By embracing models pioneered by global leaders like Azelis and IMCD, and fostering a dynamic ecosystem of collaboration and innovation, India can significantly elevate its role in the global chemicals industry, turning challenges into scalable opportunities.

Rocketing Ahead: Unveiling India’s Cosmic Quest in the Space Tech Arena

Do you ever find yourself marveling at the uncanny resemblance between reality and the fantastical scenarios portrayed in science fiction? If so, prepare to be captivated, for the domain of space technology is currently witnessing a convergence of visionary concepts and tangible advancements that rival even the most imaginative cinematic portrayals!

Consider this: at present, our planet is encircled by over 4500 satellites, with an estimated projection of approximately 2800 additional satellites slated for launch each year in the foreseeable future. This equates to an average of about 8 satellites launched daily—an impressive testament to humanity’s surging presence in the vast expanse of space.

While stalwart pioneers such as the United States, Russia, and China have long held dominion over the realm of space exploration, India, under the astute guidance of the Indian Space Research Organization (ISRO), has emerged as a formidable contender. ISRO’s resounding success in launching missions to celestial bodies such as the Moon and Mars has firmly established India’s position as a significant player on the global stage.

In a strategic initiative aimed at fostering private sector participation in space endeavors, the Indian government has introduced the Indian National Space Promotion and Authorization Center (IN-SPACe). Serving as a facilitator and regulatory body, IN-SPACe endeavors to empower private entities through technology transfers, financial assistance, and access to testing infrastructure—an attempt to catalyze a vibrant ecosystem of space-related enterprises.

While missions like Chandrayaan and Mangalyaan have undoubtedly captured global attention with their lunar and Martian exploits, the ascent of private enterprises within the space technology landscape heralds a new era of innovation and opportunity.

Furthermore, with the Indian space industry poised to catapult from $8.4 billion to a staggering $44 billion by 2033, the trajectory of growth appears nothing short of astronomical. This exponential surge underscores the transformative potential inherent in space-related ventures.

Space Tech Industry – Addressing every link in the chain: 

The industry is delineated by IN-SPACe into key segments of: access to space, space for Earth, and space for space, as outlined below:

  • Access to Space:
    • This segment encompasses the development and deployment of systems necessary for reaching and operating in orbits beyond Earth.
    • It includes the construction of launch infrastructure, the design and manufacture of launch vehicles, as well as the production of associated hardware and software.
    • The overarching objective is to facilitate the transportation of payloads, satellites, and astronauts into space.
  • Space for Earth:
    • Within this segment, space assets and resources deployed in orbit are harnessed to enable a variety of applications and use cases on Earth.
    • Examples include earth observation, navigation systems (such as GPS), communication systems (satellite communication), and weather forecasting.
    • The focus is on leveraging space-based technologies to address terrestrial needs and challenges, thereby enhancing communication, navigation, and monitoring capabilities.
  • Space for Space:
    • This segment involves the development of systems and solutions aimed at enabling and sustaining operations in space itself.
    • It encompasses space exploration missions for research and development purposes, the provision of in-orbit services for satellites (such as maintenance and refueling), as well as activities related to space traffic management and debris mitigation.
    • The primary objective is to support ongoing exploration and utilization efforts in space, while also ensuring the safety and sustainability of activities conducted in orbit.

All these 3 segments have new age players emerging in the Indian ecosystem as mapped below (non-exhaustive):

As per the Decadal Vision unveiled by IN-SPACe in Jan ‘23, following is a view of the key growth segments within space technology:

The most prominent sectors within the space technology industry today in India are navigation and communication, both of which have become integral parts of our daily lives. Globally, companies like Starlink (a division of SpaceX), have already deployed over 6000 satellites in low Earth orbit, with projections indicating that this number could skyrocket to as many as 42000. These satellites provide internet connectivity from space to any location on Earth, a development that has profoundly transformed global communication dynamics.

Amongst the various new and emerging areas in the value chain, we foresee biggest value unlocks by private players in India happening in key areas of: 

  1. Earth Observation:

Earth Observation is projected to become an $8 billion market by 2033, offering significant opportunities for both domestic and international markets. Despite the Indian Space Research Organization (ISRO) launching its first remote sensing satellite in 1988 and currently operating a constellation of around 44 such satellites, their commercial applications have been limited due to constraints in coverage, data capture frequency, and use cases.

However, there is a burgeoning demand for satellite data across various sectors such as maritime surveillance, forestry, border security, insurance, oil and gas, agriculture, and mining. To address this demand, numerous startups have emerged in the Indian space ecosystem, providing customized data solutions tailored to specific industries.

While optical imagery has traditionally been the primary technology for Earth observation, it is limited to capturing images only in daylight and under clear weather conditions. To overcome these limitations, new technologies like Synthetic Aperture Radar (SAR) and Hyperspectral imagery are being developed. Indian startups like Pixxel (specializing in hyperspectral imagery), Piersight (focused on SAR), and Galaxeye (offering multispectral imagery) are at the forefront of developing prototypes and solutions using these advanced technologies.

Although the scientific principles behind these innovations are well-established, the key challenge lies in demonstrating the effectiveness of hardware and software in real-world scenarios. Currently, most players in the Indian space industry are in the process of showcasing their technology through test satellites and data processing. Over the next 3-4 years, these startups are expected to launch multiple satellites, forming constellations that cover key regions of interest for their clients.

The rapid advancement of these startups and their potential to revolutionize Earth observation through space technology applications is generating excitement within the industry. The ecosystem is waiting to witness the young entrepreneurs actually showcasing their technical prowess and unlocking real commercial opportunities.

  1. Satellite and components manufacturing:

Satellite and components manufacturing is poised to become a USD 4.6 billion market in India by 2033. With the escalating demand for satellites for earth observation, navigation, and communication, it is crucial to enhance the upstream value chain of components and manufacturing processes. Reflecting the broader trend of indigenization across industries, particularly in space technology where defense applications hold sway, the government is steadfast in retaining intellectual property, profit pools, and as much of the value chain as possible within the country.

Key subsystems in satellite manufacturing encompass antennas, power electronics, propulsion systems, thermal control systems, sensors, and data handling units. The challenge lies in seamlessly integrating these components to cater to specific use cases while fortifying the supply chain for each. Strategic decisions regarding whether to procure or build each component significantly impact the speed of satellite deployment downstream.

The commercial viability of satellite applications hinges on hardware optimization, driving global efforts towards miniaturization. Innovative approaches include optimized mechanical structures, such as origami-based satellites pioneered by NASA. These satellites are launched in a folded state to minimize volume, subsequently unfolding in space to reduce the size of the satellite bus and lower power and fuel requirements. Additionally, there is a surge in the development of innovative materials for components, capable of withstanding the rigors of launch and space while being lightweight.

In this thriving landscape, startups like Bellatrix and Dhruva Space are emerging as key players in supplying cutting-edge components. Dhruva Space’s announcement of a sprawling 2,80,000 sq.ft. full-stack manufacturing facility in Hyderabad in October 2023 underscores the sector’s growth trajectory. Moreover, a robust network of small and medium-sized manufacturing facilities, long-standing suppliers to ISRO and aerospace clients, is witnessing blossoming partnerships with new-age funded satellite startups. These collaborations underscore the industry’s potential for innovation and growth, positioning India as a key player in the global satellite manufacturing ecosystem.

  1. Launch segment:

The launch segment is anticipated to grow into a USD 3.5 billion market by 2033, comprising satellite launchers and the essential infrastructure for satellite deployment into space. Across the globe, nations, including India, are intensifying efforts to fortify their launch infrastructure in response to the escalating demand for satellite launches.

Presently, there exists a substantial waiting period for satellite launches, with bookings often necessitating advanced arrangements of 6-12 months. This delay stems from the practice of launch vehicles accommodating multiple satellites or payloads, mandating meticulous capacity utilization optimization for economic viability.

Key players in this sphere include prominent entities such as Agnikul and Skyroot, actively contributing to the advancement of launch capabilities. Moreover, there is a prevailing expectation that launch vehicles will undergo miniaturization over time, facilitating streamlined and more frequent launches. This anticipated trajectory is poised to enhance space accessibility and stimulate innovation within the satellite industry.

As these segments expand, we stand on the brink of witnessing a surge in proprietary technology developed by India, benefiting both domestic needs and the global community, thus creating genuine value for all stakeholders.

It’s an opportune moment for entrepreneurs to showcase boundless innovation and cultivate groundbreaking businesses that truly transcend the limits of our world.

The Anatomy of Seed Deals in India: Insights and Evolution

The Indian startup ecosystem has come of age in the last two decades. What started as an adaptation of US consumer internet businesses for India in late 2000s, soon grew into a lifeforce of its own with rapid rise in India focused playbooks, consolidation of India’s leadership in software, public-private partnership in scaling financial rails & products, a rally towards make-in-India, and most recently, a race to the space. India has certainly benefited from a multitude of factors, both geo-political and social, but at the core of its success lies the Cambrian explosion of talent and capital chasing innovation. It has been particularly pivotal for the 0 to 1 journey of an entrepreneur which has historically been the most perilous. 

In this article, we discuss the anatomy of seed deals in India in the last two years, compare it with the state of the union a decade ago and provide insights into the startup ecosystem.

[For the purpose of this article, we define seed deals as investment rounds in which start-ups raised a total capital of $0.5-5M. Such deals accounted for c40% of total fundraises of less than $5M in 2023.]

The gold rush has subsided, but the shovels remain aplenty

As expected, we saw significant correction in early stage investments in 2023, with seed deals reducing from a high of 288 investments in 2022 to 193 investments in 2023. The total value of investments declined from $488M in 2022 to $347M in 2023. This 33% decline in volume and 29% decline in investment value was largely driven by a raging interest rate cycle and the change of sentiment post the peak of liquidity in 2021.

However, even amidst the sharpest rate hikes in the last two decades, and a prolonged monetary tightening, coupled with geopolitical tensions across the globe, the deal activity remained strong when compared to the investment activity a decade ago. Compared to 146 seed investments raising a total of $187M in 2013, the early stage seed investments in 2023 stood at almost 2x in terms of capital deployed.

This underlines the fact that the Indian startup ecosystem has significantly expanded in the last decade across all the vectors of talent, breadth of innovation, and capital. A quick look at investors in seed deals show that when compared to 2013, the total number of lead investors have grown by c2.7x to 339 and the total number of participating investors have grown by c2.2x to 1230. A higher growth in investors that lead rounds vs. those that participate underscores significant expansion in smart capital chasing conviction across a broad range of end markets, thus deepening innovation in the country. 

Figure 1: Total seed investments in 2022-23 vs. 2013 

We also note that while the overall seed deal activity remained low in 2023 when compared to the year before, the market seems to have bottomed in the first quarter (JFM) of 2023 with a total of 37 deals during that period. The seed deal activity since then has recovered to over 50 seed deals/quarter; however it remains low compared to 90+ deals/quarter during the heydays of 2021 and early 2022. 

Figure 2: Seed investment volume bottomed in Q1 2023

As table stakes mature, the blinds increase

While investors may have re-calibrated their bar for pulling the trigger in the aftermath of the 2021 bubble, the ecosystem continues to have a lot of dry powder that was raised amidst the flood of liquidity in 2020-21. As a result, many seasoned investors as well as first time fund managers, particularly at the early stage, are sitting on a lot of cash eager to find promising investments. This, coupled with increasing confidence in India’s capability to create large outcomes,  has led to a significant increase in the size of seed investments over the last decade. 

Compared to c44 startups that raised more than $1.5M in their first early stage round in 2013, c92 startups raised rounds larger than $1.5M in 2023. The contribution of larger rounds in overall deal activity continued to increase over last year as well with c47% of total seed investments in 2023 being larger than $1.5M vs. c40% in 2022. 

In our view, the increase in round size in 2023 over 2022, in spite of a weakening investment environment, can largely be attributed to large pools of capital chasing fewer high quality startups. It also highlights risk aversion in some sense as it can be argued that a lesser number of smaller rounds imply a lesser number of high-risk experimental and/or optionality checks.

While round size continued to inch higher, the entry valuations corrected to a more sober level with more than 70% of startups in 2022-23 raising their seed rounds at less than $10M post money valuation. However, when compared to a decade ago, the seed stage valuations have clearly ballooned – in 2013, almost 85% of the startups raised capital at less than $10M post and almost 70% raised at less than $5M post money valuation. 

Figure 3: Seed valuations and round sizes in 2022-23 vs. 2013

Startups now come in all shapes and sizes

What was predominantly a consumption story a decade back, has now become a holistic narrative. Innovation has become a household phenomenon, and founders with all kinds of experience are now embracing this path. 

Compared to 2013, when more than 70% of the funded founders had more than 10 years of experience, both 2022 & 2023 cohorts were a lot more evenly distributed amongst founders of varying experience, with experienced founders (>10 years exp) contributing just under 40% to overall seed deals. On the other hand, the representation of young founders (<5 years exp) amongst early stage investments increased to c36% in 2023 vs. c31% in 2022. 

Figure 4: Change in founder mix in 2022-23 vs. 2013

As the number of entrepreneurs have almost exploded in the last decade, the canvas for innovation has also expanded significantly. We are not just a consumer internet phenomenon anymore and our startups are no longer a derivative of US business models. This has reflected in the diversity of the sectors which raised capital in 2022-23. While SaaS/AI and Consumer remained the largest sectors in terms of total deals, the contribution of other emergent sectors or frontier sectors also remained high. A significant number of deals happened in emerging markets like Space tech, Defence tech, Climate etc [bucketed under Others in the image below].  

As the first generation of technology startups have matured and as public private partnership has evolved into a symbiotic relationship, we now see experienced operators, with shorter learning curves & deep business insights, increasingly starting new companies. The depth of talent pool in SaaS and FinTech has improved significantly over the last decade as operators from both incumbents & India’s big-techs are increasingly starting new companies. B2B commerce is also gaining traction with the consolidation of manufacturing, formalisation of 25%+ MSMEs and digitally-native next generation of traditional business owners taking charge.

On the other hand, we have seen a declining interest and deal activity in more saturated or turbulent sectors like Consumer Internet, Edtech and Health. We expect some of these categories will likely be re-imagined with the use of AI where we are seeing early applications in areas like radiology, customised learning modules and webtoons, amongst others.

Figure 5: Break up of seed investments across sectors in 2022-23 vs. 2013

The roots of innovation starting to run deep and wide

In the previous decade, large tech companies in India produced the highest number of funded startups in the country. More than 100 funded startups came out of Flipkart alone. However, the concentration of talent pools have started to reduce and in 2022-23, no single company produced more than 2% of funded startups. The top 8 companies (mostly tech behemoths like Flipkart, Amazon, Microsoft, Google, Oyo, Uber, etc) contributed only 10% of seed funded startups, as the last employer of the founders before starting up.

However, when we look at lifetime experience of founders, the top 15 companies contributed over 35% of the total seed funded startups in 2022-23. Interestingly, these companies not only include new economy tech giants but also old economy incumbents like Reliance, ICICI, TCS, Amex, HSBC, etc. This implies that the innovation is no longer just driven by the outsiders with disruptive perspectives but also industry insiders with deep domain expertise. The right to win is shifting from ‘sheer force of will’ to ‘unique insights’.

Figure 6: Genesis of startups in 2022-23 as per last job experience vs lifetime experience 

Not just VCs, but Angels, Sharks & Dragons also seeding Unicorns

The make-up of risk capital has drastically changed in the last 5 years. What used to be a small friends & family round of a few ten thousand dollars to bootstrap product journey of a startup has now transformed into a professional seed / pre-seed round of several hundred thousand dollars. These new sets of investors, who typically invest much before VCs do, have many names – angels, sharks and dragons; but they have a similar characteristics: most of them provide what we call paying-it-forward capital – i.e. they are investing back into the ecosystem from which they earned their riches. 

The flush of global liquidity & maturing of the tech ecosystem in India in the last 5 years has led to many IPOs, share buybacks, secondary exits and M&A – all leading to wealth in the hands of individuals who want to give back to the ecosystem. This has led to a sharp increase in super angels as well as micro VC funds who not only provide high risk capital but also help founders with advice & expertise, thus improving initial chances of success. This has been particularly pivotal to the growth of the startup ecosystem in the last 5 years and the spread of innovation across all kinds of products & services.    

While there are more than 100 micro VCs in India today, top 20 micro VCs invested in more than 30% of all the seed investments that happened in 2022-23, making them one of the largest groups of investors. Similarly top 16 angels (out of 1,000s) invested in more than 20% of all the seed investments that happened in 2022-23. 15 out of these 16 angels are founders of successful startups who actively invest to pay it forward to the ecosystem. 

Figure 7: Top 20 micro VCs participated in 141 or c30% of seed investments in 2022-23 

Figure 8: Top 16 Angels participated in 103 or c20% of seed investments in 2022-23

It’s Day 1!

In traditional finance, people talk in terms of P&L, cashflow and balance sheet. A decade ago, while popular tech jargons like GMV, contribution margin, unit economics, retention, right to win, were common amongst a handful of VCs and tech entrepreneurs, they were not really mainstream in India by any stretch of imagination. 

10 years later, thanks to Shark Tank, these jargons have become household knowledge. Entrepreneurship has become mainstream in India. CNBC could never do what Shark Tank has done – it has captured the imagination of the working class, and brought business & economics into every Indian households’ dinner table conversations, weaving the DNA of entrepreneurship into the social fabric of our country.

India’s startup story might be two decades old, but it’s still Day 1 for the entrepreneurs of this country, and this day is brighter than ever!