Crystal gazing into India’s startup landscape in 2016: looking through the investor lens
So far the Indian economy has witnessed phenomenal growth in the Indian technology startup ecosystem, driven by factors such as enormously brewed capital, acquisitions and consolidations, increasing internet and smartphone penetration, and an ever growing domestic market. 2016, as the experts are predicting will be the year of corrections. A lot of capital has been pressed into the market in 2015 through early stage seed investments and the coming year will lead to a slowdown to allow investors to take stock and ensure their investment thesis is aligned with emerging possibilities. So, we ask experts to gaze into the crystal ball and predict the future of startup scenario in 2016.
2016 — a year of moderations and rationalization
“2016 will see a moderation in quantum funding”, says Karthik Chandrasekar (Partner, Sangam Ventures). According to him, 2015 was a great year for startups, which also saw a rise in angel investments. “I think this rise could be the possible reason that everyone out there wanted to be part of the drama and invest in at least one company. Due to this, there were a huge number of investments but there’s not a lot of capital to flow around and that may eventually lead to some big-scale consolidations. However, from an investor’s perspective, I believe, in 2016 investor maturity will improve. It will focus more on investors who learn the hard way, make corrections and come back to do better.”
For Shyam Menon (Co-founder and Investment Director, Infuse Ventures), the global startup scenario does not look pretty. So, are we moving towards a funding crunch? “I won’t call it a crunch, but in terms of funding, some rationalization needs to happen — in terms of the kind of deals and the numbers of deals get funded. I think it would become increasingly difficult for startups to raise money, as investors stung by the profligacy of the entrepreneurs who burnt cash in their eagerness to scale rapidly, become close-fisted, and focus more on unit economics.”
Although the market has suffered in recent times due to a considerable backlash against certain startups for layoffs, India will continue to grow as a startup incubator, especially in sectors such as food, agribusiness and healthcare, says Subhadeep Sanyal (VP, Omnivore Partners).
Market Opportunities untapped
While 2015 saw intrinsic use of new technologies in consumer tech space including digital payments, Internet of Things (IoT) and smart data storage, this is poised to pick up pace as other technologies in renewable energy, advanced robotics, and autonomous vehicles catch the fancy of clean-tech, ed-tech, fin-tech and healthcare companies. Amit Mookim (Country Head, IMS Consulting Group, IMS Health).
Amit Mookim (Country Head, IMS Consulting Group, IMS Health) says, “The healthcare sector is yet to be disrupted on the fundamental level. The problems such as accessibility of healthcare to Tier 2 and Ties 3, lack of information transparency, self-management and wellness and chronic disease management still needs to be addressed.”
Shyam too shared the similar views on “disruption”. He explains that if what digital technologies claim about disrupting the way everything works is true, then the opportunity to try and disrupt everything exists. Talking further about market opportunities in the clean-tech sector, he says, “We have yet not been able to find startups with relatively low CapEx requirement and potentially scalable solutions which could fit in the kind of capital constraints that we have. For example, not much disruption is happening in water because no matter what you do with fancy technology in getting drinking water, the reality is the price at which you can charge for water is limited — bottled water is a breakthrough in a way. In India, the price that we pay for drinking water is not representative of the technology that goes into it because there’s a lot of social good element to it. This could be the reason why not much of new technology has entered this space.”
Adding to his idea of “disruption” that is yet to happen, Karthik says, “One can consider ‘Uber’ to have really disrupted the market but I would call it a business model disruption but it does not bring in a market shift. Let’s consider the 1900s where it was talked about that humans would go extinct because there was not enough food to feed all. Then, fertilizers came around and it was the most talked-of ‘green revolution’ but now nobody think about it that the earth can’t support 2 billion people, you need disruptions that kind of create shifts like that. Right now the disruption is more on the lines of linkages, better access, better data and more such consumer tech business model disruptions. What we expect is the disruption in the field of science and technology that has an impact that lasts decades.”
He further says, “We need something that solves the problem globally like resilience to climate change, better utilization of natural resources, better efficiency, and lesser waste. There are different approaches to market and whoever ends up doing that creates the new reality.”
Buyer’s market or seller’s market?
Shyam believes that it is going to be a buyer’s market. He says, “In my books, 2016 will see big scale consolidations as the winners will get picked now — the rest have nowhere to go, so either they will die or get acquired. My perception is that 2016 will not see great exits. The biggest guy will buy everything and he will buy it at a price that he dictates.’
On the contrary, Karthik thinks it is going to be a sellers’ market. He says, “In India, the biggest issue with growth is getting good talent. When you look at a company that does something fundamentally disruptive or finding the guys who can actually build stuff is difficult. So, what ends up happening is that there are people who are solving tough problems and you will see them getting acquired by larger companies or corporates. The kind of companies that we invest in, solve problems that are fundamental and have the tendency to go global like lead-acid batteries which a problem faced globally, so when such player dominate the market with their disruption, it naturally becomes a seller’s market but such kind of market has its limits. In the consumer-tech space, there is a lot of competition. While the top two or three players with a lot of cash to burn may survive, the rest will have to either pack up or get acquired. There you may see a buyer’s market but otherwise, it’s the other way around.”
Role of incubators
While the Startup India Action Plan which was unveiled by PM Modi aims to set up 35 new incubators based on the public private partnership (PPP) model, our experts believe that this step will only prove to be beneficial if the focus of these incubators shifts from helping only consumer internet startups to other important sectors. “Product companies in sectors such as agribusiness, healthcare, cleantech have to compete against big boys already existing in the market, unlike in the consumer tech space — which has become more like me too, me too market. In such sectors, it becomes important that the startups receive specific domain and sector expert support. They need much more handholding than the usual three-six months of accelerator support, as the product building may also take up to two-three years. We need to have more hardware accelerators to provide such startups with intensive capital, regulatory support and handholding right from product development to business modelling. Incubators, now, need to readapt and figure out ways to infuse some early grants or soft capital to be able to help these companies develop disruptive prototypes and get technical validation,” says Shyam.
On the similar lines, Amit, says, “When it comes to the healthcare sector, incubation plays an important role but there are hardly any healthcare-focus incubators in India. Proof-of-concept model needs to be adopted by incubators to bring about the initial support required for early stage startups. More healthcare-focused accelerators need to happen in India within the MedTech space to sprout innovation similar to that of Boston and other US cities.”