Although 2016 ended as a bonanza year for fintech startups due to demonetization, 2017 so far is looking rather mixed. While Proptiger and Housing have just recently declared a merger to create the biggest online real estate player in India, Mumbai-based home services startup Taskbob has announced its decision to close down. In 2017, readers can expect consolidation to be the underlying theme in India’s startup ecosystem, with the country’s capital operators continuing to realign their portfolios and search for exits.
Continuity in growth of SaaS
One of the areas which investors will continue to back is players operating in the software-as-a-service (SaaS) industry. As opposed to horizontal SaaS – software technology which could be used across different industry domains, vertical SaaS caters to a specific vertical, like hospitality or retail. To fulfill specific and critical business needs of a large retail player, a vertical player that specializes in retail solutions stands out as an obvious choice. This has led to the success of players like Capillary Technologies and Rategain that specialize in retail and travel sectors, respectively. According to data from Tracxn, over 60 startups operating in the vertical SaaS domain received funding in 2016, comprising 50% of the overall SaaS funding during the year.
Moonshot ideas will gain prominence
Over the past year, Team Indus (a spacecraft for lunar mission), Wrig Nano ( a smartphone-sized device developed to measure hemoglobin count within minutes), Pandorum Technologies ( 3D Printing of Human Tissues), GreyOrange( robotics systems for automation at warehouses) and Ather Energy ( An electric scooter) have successfully raised funds. Investors that have backed these firms include Tiger Global, Accel Partners, Blume Ventures, Ratan Tata, Nandan Nilekani, Sachin Bansal, Binny Bansal, Venu Srinivasan of TVS Group, and stock market investors Rakesh Jhunjhunwala, Ashish Kacholia, RK Damani among others. This year, there maybe more investors taking the lead from these prominent names, backing early-stage technology companies.
Consolidation in e-commerce and real estate sector
The real estate sector has been consolidating over the past few months. A couple of interesting deals say it all: PropTiger and Housing.com’s announcement to merge and online classifieds firm Quikr’s purchase of Tiger Global-backed Commonfloor.
In the e-commerce sector, there are huge obstacles when it comes to generating cash flows. The combined losses of Big three e-commerce players Flipkart, Amazon and Snapdeal surged from $60 billion (Rs 6,021 crore) in FY15 to $117 billion (Rs 11,754 crore) in FY16. Revenue doubled to $68 billion (Rs 6,802 crore). According to a report by Kotak Institutional Equities, the e-commerce sector is expected to see steady growth and is likely to register a 45% annual growth over the period of 2017-2020. What it’s likely to happen for common investors is to combine and consolidate their holdings rather than be pitted against one another.
Emergence of robust drug Industry
It is estimated that the pharmaceutical sector has the potential to grow to $55 billion in revenues by 2020 from $20 billion in 2015. The sector has attracted foreign investment (FDI) worth $14 billion since 2000 and it’s the sixth-largest recipient of FDI across all industry categories. In a major overhaul of the country’s drug policy, the Indian government is likely to soon disband the National Pharmaceutical Pricing Authority (NPPA) in its present form. It will assume the power to set prices of essential drugs, as it seeks to address concerns regarding excessive controls that were stifling innovation and competitiveness in the industry. The revamped policy will also delink price control from essential drugs. The NPPA was set up as an independent drug price regulator in 1997 and currently, it controls the price of over 450 medicines. The new system will be more flexible and prices will be regulated only when needed.
An apt time for investors to exit
Ajay Arora, Partner, Transaction Advisory Services, EY expects M&A activity in 2017 to stay positive owing to the ongoing interest from financial and strategic investors in the Indian economy. Sectors like technology, life sciences, and financial services are expected to attract significant investor attention in 2017.
According to data by startup analytics firm Tracxn, in 2016, the country’s startup ecosystem witnessed a total of 165 mergers and acquisitions (M&A). The major M&As include MakeMyTrip buying Ibibo Group and Flipkart’s Myntra taking over Jabong.
What’s more, to say the pressure is high on Venture Capitalists (VCs) is an understatement. Three venture capital firms, Sequoia, Accel and Nexus Venture Partners are each now managing over $1 billion committing to India. However, until now none of these firms have been able to take profits or even return the principle amounts to their investors, known as limited partners (LPs).
Meanwhile, the valuation markups of India’s largest internet companies are increasingly coming under pressure. Many VCs have not been able to cash in on the valuation boom in 2014 and 2015, during which global late stage investors rushed into the Indian market. Therefore, 2017 will prove to be a watershed year for investors, who will be tempted to exit.