Investor Focus Shifts As Late-Stage Startups Garner Attention: Report

Given the growing emphasis on profitability, growth and late-stage startups will receive more investor attention than earlier stage ones. A report titled ‘e-Economy India 2023’ by Google, Temasek and Bain & Company says.

The report points that Indian private equity (PE) and venture capital (VC) activity may have slowed from 2021 peaks in this challenging year, but deal values still surpassed USD 60 billion for a third consecutive year.

Structural Shifts In Consumption Potential Opening Up Vast Opportunity For Startups

The report highlights that SaaS, Fintech and B2C/B2B e-commerce are seen as the most appealing sectors over the medium term. 

The report also states that structural shifts in consumption potential are opening up a vast opportunity for startups, large businesses and MSMEs to power India’s internet economy towards a projected growth of 6x, reaching a trillion dollars by 2030. 

Sanjay Gupta, Country Head and Vice President, Google India says, “Three foundational forces - deepening consumer digital adoption, technology investments by businesses, and digital democratization with the India Stack  - has placed India at a turning point in its digital transformation. Structural shifts in consumption potential are opening up a vast opportunity for startups, large businesses and MSMEs to power India’s internet economy towards a projected growth of 6x, reaching a trillion dollars by 2030. 

Parijat Ghosh, Managing Partner, Bain and Company (India), says, “India's internet economy has remarkable potential and is expected to grow at 6x over the next decade, with B2C e-commerce driving 40% of the digital GMV, followed by B2B sectors and SaaS. The pace of digital disruption is expected to accelerate as traditional businesses and MSMEs increase investments in digitization, in addition to startups continuing to play a strong role in driving the internet economy. We expect to see players go beyond their core to cater to the consumer of the future and adopt new business models to capitalize on the growing opportunity.”

According to the report, SaaS is likely to hold the most appeal over the medium term, with about 77% of surveyed investors ranking it in the top three sectors for investment interest, due to the global reputation of India’s large talent pool and software products, and potential for growth in newer verticals with startups identifying profitable niches. 

Fintech followed in investors’ ranking at about 59%, and B2C e-commerce and B2B e-commerce at approximately 36% each, encouraged by a growing consumer base, rising number of micro-pay transactions, especially UPI, and expansion of opportunities for businesses to access credit, get organized and digitized. 

SaaS Startups Attract Investors with Talented Developers and Lucrative Investment Opportunities

Investors are flocking to SaaS-based startups due to their access to a vast talent pool of skilled developers renowned for producing high-quality software. These startups' ability to identify profitable niches and leverage the success of the ecosystem has led to increased sales efficiency. Furthermore, the global adoption of Indian products further enhances the sector's appeal as a highly lucrative investment opportunity. With the combination of talented developers, promising market niches, and the growing popularity of Indian software, SaaS startups have emerged as a compelling choice for investors seeking maximum returns.

Expanding ‘beyond the core’ to capture greater market share

The report states that making the most of India’s incredible digital consumption trajectory means businesses will need to invest in seeking out new audiences, cultivate new consumer habits and create the products and services that satisfy these needs. With the right enablers, talent and commercialisation model, businesses will be able to monetise their intangible and tangible assets and add to their topline.

The report advises considering addition of supplementary services that enhance the customer experience or expands the current offering for an even more seamless experience.

Emerging Enablers: Sustainability, Inclusivity, Trust and Security, and Responsible AI Shaping India's Internet Economy

A recent report highlights the growing prominence of four key enablers—Sustainability, Inclusivity, Trust and Security, and Responsible AI—that hold the potential to propel India towards a more sustainable internet economy. However, the report emphasizes that the realization of these enablers requires active participation from all stakeholders. 

Surprisingly, nearly 60% of surveyed investors expressed that Environmental, Social, and Governance (ESG) compliance will significantly influence their investment decisions in the next few years. The focus on sustainability stems from the increasing importance of preserving our planet, with consumers and businesses alike prioritizing environmental responsibility. As businesses and regulators adopt carbon reduction measures, concerted efforts from all parties are necessary to embed sustainability at the core of business strategies and operations.

The report further points out that discount brokerages and robo-advisories are gaining traction among India’s increasingly savvy investors. 

The focus is now on unit economics as growth tapers and market volatility impacts the near term. 

Digital Investment and Educational Content Drive User Acquisition in Online Brokerage Platforms

According to the report by Google, Temasek, and Bain & Company, digital investment has emerged as the way forward, with educational content playing a crucial role in user acquisition. Discount brokers like Zerodha and Groww have successfully attracted new investors by offering low-brokerage services and fostering community engagement through forums and educational resources. The report reveals that over 90% of new digital investment users are brought on board through online platforms, resulting in a remarkable 129% year-on-year growth in the number of discount broker clients over the past four years, reaching 17 million in 2022.

Interestingly, digital stockbroking platforms have witnessed a shift in their customer base, expanding beyond metro and Tier 1 cities to include users from Tier 2 and Tier 3 cities. Upstox, an online investment platform, reports that over 80% of its customers now hail from these smaller cities. To further drive investor participation in mutual funds from Tier 2 and Tier 3 cities, text message-based services offered by fund houses have proven to be instrumental.

Retail investors are increasingly drawn to standardized model portfolios due to their affordable fees and the acceptance of small-ticket investments. Leading platform Smallcase has integrated with most prominent brokerages, granting access to 95% of existing demat accounts. As a result, its user base has grown sevenfold, surging from less than 1 million in 2020 to 4.5 million investors in 2022.

The "e-Economy India 2023" report by Google, Temasek, and Bain & Company highlights the evolving landscape of India's internet economy. The focus on profitability and growth has led investors to show greater interest in late-stage startups. The report identifies SaaS, Fintech, and B2C/B2B e-commerce as the most appealing sectors for investment in the medium term. 

Additionally, the report emphasizes the importance of sustainability, inclusivity, trust and security, and responsible AI in shaping the internet economy. It also highlights the significant role of digital investment platforms and educational content in acquiring new users. 

As businesses expand beyond their core offerings and adopt new business models, the report emphasizes the need for participation from all stakeholders to drive India's digital transformation and tap into the vast potential of its internet economy.