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Five startup themes to look forward to in 2021

by Dec 14, 2020Personal

Five startup themes to look forward to in 2021

by Dec 14, 2020Personal

As we all come close to the end of this unforgettable year, 2021 promises to be equally eventful.

2020 has undoubtedly been a year full of surprises, and shocks for most of us, personally as well as professionally.

These are a few things to watch out for that are likely to make 2021 a breakthrough year!

1. Large tech firms sincerely planning for IPOs

Background

Almost every conversation with fund managers from 2019 onwards, had a common takeaway – India needs more public offerings from the technology ecosystem. To be honest, that sentiment did not resonate with founders or executives at large tech firms with the same amount of sincerity.

And why would it? Founders of privately held companies tend to follow strategies that are rewarded by follow-on deep-pocketed investors – and until the pandemic hit – that metric was growth and scale.

What changed in 2020?

In 2020, almost all large tech companies including Flipkart, Zomato, Delhivery, Pine Labs, Policybazaar, and Byju’s expressed keenness in going public sooner than later, and the process of choosing bankers, getting financial discipline is in the works.

To be clear most of these IPOs are likely to be outside India.

Why now, you’d ask:

1. Indian companies preferred to be private because deep-pocket investors rewarded disproportionate investments in growth at the cost of economics.

While this gradually started changing post WeWork’s debacle, it put pressure on scaled technology leaders to chalk out a path to profitable growth.

What’s interesting is that the financials now seem to support the claim. Zomato, for instance, had cut its burn down to $1million a month from a peak of $25 million last year.

2. In March, the cabinet had approved a proposal to allow these companies to be listed overseas without simultaneous listing in India. But to make this a reality would require easing of provisions of taxation and foreign exchange management act (FEMA) among others.

While these regulatory changes are awaited to make the process smoother, there is a clear possibility that happens soon.

3. Globally, public investors are comfortable to bid the value of technology companies up in anticipation of future growth, especially post-pandemic because the virus has accelerated the adoption of technology. Take for instance, Snowflake, JFrog debut, DoorDash, and Lemonade’s IPO. The indicators in the US market are clear.

At the same time, most of these Indian tech companies are more than 10 years old, and that alone increases pressure from investors to get out of the private sandbox.

What next in 2021:

Next year would make it clearer if these businesses can sustainably scale. For example, on the business front alone – will Flipkart be able to maintain its market leadership amid Reliance scaling its ecommerce business?

And more importantly, will it be able to do so while being financially prudent? Will it be able to scale its new avenues of growth like grocery, B2B ecommerce and payments? How well will the firm’s omnichannel retail strategy pan out?

Similarly for Byju’s, while the company has raised sufficient capital to stay private for years, it has spoken about its ambitions to go public.

But once listed, a company is under far greater public scrutiny. It means getting comfortable with the rhythm of quarterly and annual reporting requirements, their content and costs.

Will Byju’s find itself ready to be compliant?

That said, IPO is not the end of the story—it is only the beginning!

 

2. A healthier start-up ecosystem

Background

Even before the pandemic hit, a lot of start-up boards were already planning to cut costs after looking at what happened to WeWork. Investors were asking companies to make meaningful improvements to their P&Ls.

Starting Sep-Oct’19, companies got on a path to cut down expenses like subsidies to vendors, consumer offers/discounts, operating costs and wage bills.

As a result, businesses including Ola, Curefit, Udaan, Swiggy, Zomato, Uber, among others started downsizing teams, cab rides became expensive, and large companies like Oyo too shut down at some unprofitable international markets.

Then came the pandemic:

With the pandemic suddenly hitting the world, the companies had to make even deeper cuts as the projections for the next 1-2 year got affected. Businesses were looking at planning on a monthly basis instead of a quarterly/half-yearly/annual planning.

Founders have asked tough questions and prepared themselves for a long tough winter. While a part of this was influenced by the pandemic, some of it I’d argue was necessary to begin with. Some indicators:

In a way, the pandemic forced companies to make tough decisions in a very short span of time and changes which would have otherwise happened over the course of 1-2 years happened in a span of just 2-3 months.

E-commerce has exceeded pre-pandemic growth levels, food delivery is getting there as I write this post, and some sectors like education and payments have scaled up rapidly.

At the same time, we’ve had a record breaking eight unicorns emerging this year.

Looking ahead:

Things are now looking much better as we plunge into the new year. As lockdowns have ended and markets have started to open up, businesses are recovering and look in a much better shape.

In 2021, I do expect businesses to continue to stay lean as they adopt more sustainable growth strategies and seek alternate revenue models and consumer acquisition channels.

For Flipkart, that would mean scaling its new B2B business, and categories like grocery and fashion, while at Ola this could be building its electric mobility business as the new pillar of growth.

For others like Oyo, Bookmyshow, and mobility startups like Bounce and Vogo, 2021 will be about starting at Day 1. These businesses will be smaller in size but healthier.

That said, would these companies go back to their pre-COVID growth trajectories or will the growth rates slow down from 50-100% growth in a year to 20-30% a year or lower, remains to be seen. I’d look for how these businesses have been able to grow post these cuts.

I am betting markets to reward the sector leaders disproportionately, next year.

 

3. Big business houses explore deeper technology partnerships

Background:

90% of Indian family offices have been set up in the last 10-15 years by families that had benefited from the economic boom of the 1990s and 2000s.

Somewhere in mid 2012, many of these families saw early signs of the disruption caused by 18 to 25-year-old founders with relatively no background in entrepreneurship, building unicorns that would dwarf their empires.

Take OYO for instance, in January 2020, OYO was valued more than the market capitalization of all of India’s listed hotels and restaurants – combined! Some of the companies in this space were over 100 years old!

Ride hailing caused similar disruptions in the mobility space, while ecommerce dented sales of large offline retailers, especially the ones selling electronics.

As a result, public company promoters realized that they might not have the ability to operate as a startup and cannot stop the disruption coming to them but instead – they could join in this disruption!

Therefore, most of the family offices we work with have allocated capital for investing in Indian startups. They set up family offices, invested in venture funds, and in some instances backed businesses in their personal capacity.

From their own treasury perspective, I’d still argue that they were on the fence.

Hit the pandemic:

Somewhere in the middle of the pandemic induced lockdown, a realization hit some of India’s largest conglomerates… They understood that technology adoption is not a ‘good to have feature’ anymore, it is a ‘must have’. Why?

– A large part of this was led by India’s largest multinational conglomerate Reliance Industries raising billions of dollars for its tech foray, followed by investments into the Indian startup ecosystem. It was a signal to traditional conglomerates to start taking more aggressive positions in the technology sector.

– At the same time, across industries, businesses also started to bear the brunt of the cost attached to not adopting technology. Take for instance – retail. In the middle of the lockdown when retailers saw their offline sales plummet, the likes of HUL, P&G, Tata, ITC, Godrej, Dabur, Marico, Cipla, Vishal Mega Mart, etc all listed their stores on Swiggy and Dunzo. This was a stop-gap arrangement, but it’s changed the way these FMCG giants view the tech ecosystem.

E-commerce players in the B2B space tell me that now these brands are far more serious about their commitment to tap online channels as a distribution network.

– Technology firms were equally keen to strike a partnership. In the last few months alone Flipkart, BigBasket, Urban Ladder and Amazon among the larger ones have realised the need for partnerships with brick and mortar players being a crucial leg to scale operations if they want to get a bigger piece of the overall market.

For instance, Flipkart invested in Aditya Birla Fashion and Retail, and Arvind Fashion to get a slice of their brand portfolio and offline footprint instead of building capabilities themselves.

Come 2021 –

In the next year, I expect conglomerates like the Tata Group, Aditya Birla, Hero, HDFC, and Reliance to make even bolder investments in technology businesses.

Reliance is already leading the way. The Hero family office has also been very active with startup investing in the last nine months, and is only likely to double up.

What would be interesting to see is how these companies finally manage to pull off the cultural transition and build successful businesses. For starters, Tata and BigBasket will be a deal to watch out for!

 

4. Reliance makes India’s presence felt among international investors

2020 from RIL eyes:

This year has not only been unprecedented from the lens of the pandemic, but also from what Reliance Industries has brought to the table. RIL has changed the narrative for technology startups in India singlehandedly this year.

The group which has cumulatively raised Rs 1.75 lakh crore from global technology giants and investors, has also signalled to the rest of the world that India is gearing up for the next phase of disruption across industries.

This has led to several dormant investors across USA, Japan, South East Asia and the UAE to view the Indian technology ecosystem with a sense of seriousness.

Here is a comprehensive list by Venture Intelligence: New Tech Investors 

Come 2021:

There is nothing holding India’s technology startups back next year. I believe in the next few months more of newer as well as older investors will double down on the country.
India is home to 38 unicorns, about half of which emerged in the last couple of years.

The trend is accelerating on the back of a rapidly digitalising Indian consumer. Why? We had 5 unicorns emerge in just the pandemic months- Postman, Nykaa, Zerodha, Unacademy, Razorpay, and Pharmeasy.

Infact, looking beyond the large investors, I also do see a lot of newer daily offices and individuals in the USA, UK, Japan as well as Singapore using 2021 as their maiden year of Indian tech investments.

Three broad reasons:

1. Most late stage companies or companies valued at above $1 billion, are chalking out clear strategies to grow profitably. This itself will be a milestone for investors who have till now thought of India as a cash guzzling market. Businesses like Ola, Byju’s, Urban Company, Innovaccer among others have also demonstrated India’s ability to scale businesses overseas.

2. India being truly the last large emerging market left to tap, and with Covid-19 accelerating the adoption of technology across income levels, the potential to build new businesses is immense. In the six months to June 2020, developing countries in Asia accounted for more than half of global FDI.

Add to that India’s newly minted status as the world’s second largest digital nation, the results are very predictable- money is pouring into Indian tech startups.

3. Early but promising progressive regulatory changes in education (National Education Policy), health (National Digital Health Mission) and agriculture (Farm Bill), core sectors with huge and direct population impact.

 

5. A new normal way of working

2020 Stay home, stay safe

Remote work is here to stay and it is a massive change in the way we work. Today, most young tech talent has gone back to their hometowns and continue to work from there, or are moving away from the IT hubs into a more spacious home away from work.

At the same time, organisations now realise that the impact of Covid-19 have some effects that are going to be more permanent in nature, and the way we work is at the top of the list.

According to a report from FT, even if vaccines arrive early in 2021, organisations may find that productivity will be hampered if they do not reset their work practices.

2021 and the way forward:

I believe that technology companies will take a longer-term view into working from home. They are already testing hybrid working models, while holding managers at a high bar to decide the need for an employee to be physically in the office.

As a result, most executives will no longer be bound to work in the city of headquarters. This would mean real estate costs tanking even further, hopefully less congestion on the road, and the search for a longer term scalable solution to keep motivational levels up!

Taking about real estate costs, here are some data points from NoBroker on the fall in rent in metros:

From the employee perspective, the shift is massive and very consequential: people will make new choices about where they want to live, and will create new expectations about flexibility, working conditions and life balance.

In practice, these have opened up a wide array of options, for both companies and employees. It would be interesting to see how a prolonged period of hybrid working – from home and office in different proportions – works out.

NoBroker's Real Estate Report 2020