Niche businesses take centre stage with $20 bn in unicorn funding this year

Startup sectors like specialty e-commerce, enterprise subscription software and standalone business models are attracting funds and higher valuations

Most of the 31 firms that became unicorns in 2021 on the back of some $20 billion poured across start-up deals, are specialised plays, signaling a maturing of the Indian internet sector.

Niche startup sectors like specialty e-commerce, enterprise subscription software and standalone business models like Urban Company are attracting funds and higher valuations, according to the latest investment data.

PE-VC Investments in India (2017-2021 YTD)

Year	Amount ($bn)
2017	23.96
2018	36.46
2019	36.46
2020	39.50
2021	48.75

Excludes private equity investments in real estate; Source: Venture Intelligence

At least four companies from the pack–Infra.Market, OfBusiness, Zetworks and Moglix–are large e-commerce platforms targeted at business customers, mainly in manufacturing. On the other hand, firms like Licious, a meat e-tailer, and Facebook-backed Meesho are solving specific consumer categories.

“Vertical e-commerce expanded in India after 2019, thanks in large part to US capital. India was always set for further growth in e-commerce, digital payments, Edu-tech and Saas (software-as-a-service) which was accelerated during the pandemic,” said Arun Natarajan, founder of Venture Intelligence.

In the nine months till September 2021, some $49 billion has been invested in India across private equity and venture capital deals (barring in real-estate), 59 per cent higher than all of 2020, according to Venture Intelligence data. This includes a $3.6 billion investment by Softbank in Flipkart and Blackstone’s $1 billion acquisition of ASK Group.

“If Flipkart is raising at $25 billion, Meesho comes and says it is digitising untapped tier-II and tier-III customers, people are buying into that story,” said Natarajan.

During the past five years, the majority of the startup venture capital was guzzled up by Flipkart, Ola, Oyo, Paytm, Swiggy and BigBasket–which essentially solved the first layer of e-commerce, payments and mobility.

After Flipkart and Amazon, the initial vertical e-commerce players that emerged were fashion appeal (Myntra, Jabong, Voonik), pharmacy (1MG, Netmeds, PharmEasy) and grocery services (BigBasket, Grofers). Most of these companies have gone for late-stage rounds or have consolidated amongst themselves.

Investors and experts are of the view that the world’s third largest startup ecosystem is finally coming of age and looking at finding unique solutions for problems that are unique to India. The first phase of startups copied the models successful in the developed markets and customized it to India.

Add to this a thriving digital payments ecosystem, larger smartphone user base and digital-first business models-- have come together to attract investors, which in turn has opened up new sector. For instance, meat delivery, which is touted to be Rs 1,000 crore market opportunity. Licious is the first to get into the unicorn list.

Similarly, in ed-tech, though Byju’s and Unacademy solved for K-12 learning and exam preparation, categories which newer start-ups have avoided, players like Eruditius and UpGrad, two of the latest unicorns, are solving the vocational training needs aimed at job seekers and those looking to upskill.

In software, a battery of SaaS (software-as-a-services) firms targeting the US enterprise market have attracted funds, thanks to the success of Zoho and Freshworks and a burgeoning Saas ecosystem in Chennai. Freshworks became the first Indian SaaS company to get listed on the Nasdaq. Already there are over 1,000 Saas firms set up in India, of which over 150 have annual revenue of over $1 million, according to Nasscom.

For fin tech, after P2P digital payments, the biggest area for growth has been payment gateways. Razorpay, which is challenging legacy providers like Bill Desk, has raised over $366 million in funding. It has given way to businesses in the mutual funds space, like Groww and Paytm Money, which is going after first-time financial market participants.

Foreign capital has had an outsized role to play. “Foreign investors like Tiger and Softbank, which have seen these cycles in the US and China, are responsible for the unicorn boom in India,” said Natarajan of Venture Intelligence. Softbank, Tiger, Sequoia, are investors in 19, 24, and 23 Indian unicorns respectively.