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Financial Quarter 3(Oct-Dec’2018): What worked and what didn’t?

LetsVenture analyzed more than 1200 early stage fundraising and 74 funded companies for the financial quarter to prepare this quarterly report. The average size of funding reported in this quarter was USD 631K, which is 5.91% lower than the previous financial quarter’s funding size USD 668K. And the number of funded startups in the period remained flat as compared to 73 deals in the previous quarter. Financial Quarter 3 (Oct – Dec) 2018 recorded an overall increase in the number of companies raising funds in the early stage.

  • Sector wise distribution of the funded startups
  • Demand-Supply analysis of funded and fundraising startups
  • Business type distribution of the funded and fundraising startups – B2B and B2C
  • Correlation between the geographical location and fundraising trends for startups

 

Sector wise distribution of funded startups

Exhibit 1: Sector wise distribution of funded startups
Exhibit 1: Sector wise distribution of funded startups

Exhibit 1 represents the percentage distribution of top 16 funded sectors. Five sectors which formed almost 50% of the total funded startups in this financial quarter include Consumer goods, Ed Tech, Fintech, Healthcare and Services. Ed Tech sector was consistent at 4% of the composition in Q1 and Q2, Q3 saw 175% growth to 11% of the composition of funded sectors. Similarly, there is 50% growth in the Healthcare sector from 6% to 9% in quarter 2 and 3 respectively. AI/Analytics sector, on the contrary, has seen 55% decline from 9% to 4% in this quarter.  However, Consumer Goods and Fintech sectors have been among the top five picks for investors consistently over past four quarters. Below are some insights on top five funded sectors:

  • Consumer Goods has been the sweet pick for investors consistently and this quarter witnessed multiple investments in startups offering personal hygiene products, nutritional snacks and food items, skin care products, clothing products, variety tea products, food products, baby products among many others. This points towards increasing investor interest in innovative consumer products as urban indian consumers are seen to be driven by healthier diet options over existing ones as the income level rises. The shift in trend is also seen on the supply side as some large MNCs are up with verticals catering to this growing segment. Many companies funded in this sector are offering food products such as whole wheat waffles, pudina makhana, dark chocolate ragi cookies, fruit medley, seed crunch, jackfruit bars, banana bites, lemon chaat, amla bites, ginger kashya, imlipop, coconut lemon green tea, hibiscus lush green tea, and lemon dew green tea etc. Another funded startup is manufacturing real-time air pollution sensors that help monitor air and ambience.  One startup is manufacturing washable and reusable cloth diapers. It claims, even with a penetration of just about 10%, disposable diapers will become an INR 5000 cr industry. This shows that baby care products and accessories still operate in a pivotal market which is gathering interest both among consumers and investors. Interestingly, one company offers waterless personal hygiene products shampoo that can be can be directly applied to hair and body, massaged and then can be dried off using a towel. The primary target market for this company includes hospitals, adventure enthusiasts, defense personals, homecare healthcare and space.
  • Education Technology emerged well this financial quarter to be the second most funded sector. Overall the startups offered products and services targeted to all age groups – kindergarten, high school, college, career oriented courses, models for competitive exams and skill oriented to enable growth in work space.  Most of the startups which got funded in this sector offer online learning tools and courses. They also offered centers for learning, regular courses, domestic tours, team packages, free workshops etc primarily for school students. The company which was able to secure the maximum amount of funding in this sector is a technology platform that creates video-driven online learning courses. It offers nanodegree programs in finance, marketing, human resource, information technology, project management, product marketing, artificial intelligence, the blockchain, machine learning, and data science etc. Another company offers an analytics platform to evaluate the performance of tutors and students. It assigns specific training modules for teachers to polish their delivery skills on specific concepts and offers an analytics platform to track the students’ performance, thereby enabling the tutors to identify the subjects where the students are strong or weak.
  • Finance Technology has been a consistent hot pick for investors since past four quarters. In terms of deal size, it is the highest funded sector. Investments were continuing to be seen in in P2P lending for salaried, non salaried and self employed individuals. There were startups offerings loans for education, medical, creative and innovative projects, online shopping – buy now, pay later products etc. One of the new age companies in this space has multiple offering to enhance customer stickiness and repeats. This includes a revolving credit limit which one can use and repay at any time per convenience; a reward scheme where one can earn points for timely repayment, rewards for referring friends or even for logging on to app; EMI adjustable points to help friends and family get access to a loan by referring them. The company which received the maximum funding provides easy finance options for buyers looking to lease a car for the long term, allowing them to sell and upgrade them in a hassle-free manner. Also, some companies offered blockchain based B2B payment platforms. They also offered services to banks, large corporate buyers, suppliers etc. Fintech expanded to the real estate sector. One such company provides rent management solutions. It offers services like loans for rent payment, security deposit, renters insurance, and landlords insurance. This target segment of this company is both B2C and B2B like paying guests, hostels, hotels, commercial real estate etc.
  • Healthcare was a promising sector which saw growth this financial quarter. Maximum number of funded startups operate in the B2C space. They are a mix of developing healthcare IOT, consumer products and offering consulting services & diagnosis. In the contrary, most of the fundraising companies in this sector are primarily a marketplace for doctors and users/patients and offer health consulting options both online and offline. One such company offers video consultations with doctors. Its users can instantly connect with doctors without needing an appointment. The application delivers electronic advices digitally. Alternatively, the AI driven platform offers e-advice inside the app just by mentioning the symptoms as an early assistance to the user. The B2B space witnessed funding in a startup developing portable device for vector-borne infection diagnosis that reduces the time and cost to detect infectious disease pathogens. Earlier, vaccines cured life-threatening diseases. On the contrary, this company offers biotechnology services and develops vaccines for as common as influenza (annual updating not required). 
  • Services boomed as a sector in this financial quarter. The demand-supply curve of startups in this sector seemed to coincide. The services sector – usually considered as an allied industry – was seen to gather interest among investors. These investors sensed the shift in consumer paradigm, turning from consumers into smart consumers. Consumers prefer tech-laced services that save time and get the work done without compromising quality. Funded companies offer services in automobile repairs, driving, laundry, logistics, task partner, pick up and delivery, vehicle cleaning and servicing, home cleaning and conditioning, beauty services and spa etc. These companies have Tier 1 cities as their primary target market and anticipate the penetration of customer behaviour adoption in Tier 2 and Tier 3 cities in the subsequent phases. Most of them are B2C operational and hence provide services to retail consumers. In the B2B, few companies that received funding offered assisted enterprise software services, consulting services, tech driven legal and financial services etc.

 

Demand-Supply analysis of funded and fundraising startups

Exhibit 2: Demand-Supply analysis of funded and fundraising startups
Exhibit 2: Demand-Supply analysis of funded and fundraising startups

Exhibit 2 depicts the demand-supply correlation amount sectors of funded startups in comparison with fundraising startups from an investment perspective. This show the the sectors as a percentage of the total companies on the fundraising and funded side. Blue columns represents the sectors raising funds while the green line area represents the funded sectors. Below are the highlights:

  • HR Tech, Fintech, Agri Tech and Transportation & Logistics sectors have been quite balanced in terms of the demand and supply of startups. We can also infer that these sectors may see higher supply in future as the startup ecosystem is supply heavy. In terms of comparison startup supply between Q2 and Q2, the top mover was Transportation & Logistics sector which increased from 2% in Q2 to 6% in Q3. Fintech remained almost similar to Q2 at 8%.
  • Consumer Goods, Ed Tech, Enterprise Software, AI/Analytics and Media & Entertainment sectors saw more supply of startups than demand for investments in this financial quarter. This quarter depicts significant increment in percentage composition of fundraising companies.
    • Consumer goods sector from 9% to 15%
    • Enterprise software from 7% to 13%
    • AI/Analytics remained flat at ~8% in both the quarters
    • Media & Entertainment sector saw decline from 9% to 4% in Q2 and Q3 respectively.
  • Automotive, IOT, Healthcare, Gaming & Sports, Events  and services sectors were hot picks for investors in this quarter. The gap in demand supply curve in these sectors may result in higher supply of startups in the upcoming quarters.
  • Most investors in the early stage are sector-agnostic. But, sectors that have been consistently receiving good interest and performing well are getting investor attention. It may not be surprising to see companies operating in other sectors expand their services to investment-attracting sectors. This would enhance their probability to grow and scale. In addition, they would receive goods interest from investors in subsequent rounds of fundraising.

 

Business type distribution of the funded and fundraising startups

Exhibit 3: Business type distribution of the funded and fundraising startups
Exhibit 3: Business type distribution of the funded and fundraising startups

Around 61 percent of this quarter’s funded companies were operating B2C domain, which is ~6 percent lower than previous quarter. The correlation between fundraising and funded companies varied drastically in the consumer goods segment. Now, more companies are focusing towards B2B market in similar sectors. The quarter’s ~6 percent increase in the number of companies operating in the B2B space validates this point. There is close balance in the distribution of funded and fundraising companies in both B2B and B2C segments.

The increase in proportion of funded B2B companies as compared to the last quarter is not very significant. However, increase in number of B2B companies in Healthcare and Fintech sectors dominate this financial quarter.

 

Demographic distribution of the funded and fundraising startups

Exhibit 4: Demographic distribution of the funded and fundraising startups
Exhibit 4: Demographic distribution of the funded and fundraising startups

Exhibit 4 depicts 66.22 percent of the startups which raised funds were in T1 cities. This figure is almost flat as compared to the previous quarter. However there is a high variance in the distribution of fundraising companies. Nearly a 20% variance between funded and fundraising startups originating from T1 cities and it correlated a shift to T2 & T3 cities. This shows the paradigm shift and penetration of entrepreneurship to T3 cities. The penetration of offering of new age technologies and consumer benefits and services can now be availed by consumers in T2 & T3 cities. This implies lesser capital expenditure of startups operating in T1 cities trying to expand and scale into T2 & T3 cities.

From a different school of thought, one may also infer higher competition among companies operating in relatively similar industries. This calls for higher marketing spends to acquire a customer. Hence the cost of acquisition among companies operating in the similar landscape may increase. Another interesting thought is that first mover advantage in locally operated business might have a play against bigger funded players.

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