The post-pandemic funding frenzy
Private capital is focusing on sectors — especially fintech — which it believes will weather the pandemic and grow
Two days after closing a $ 215 million funding round at a post-money valuation of $ 2.2 billion, Kunal Shah, founder of Cred, took to Twitter to sound a cautionary note. “Unicorn tag, high valuations are all vanity metrics till the company delivers profits...” he tweeted.
Cred, a credit card payments-based rewards marketplace founded barely three years ago, was one of the six privately owned, India-born technology startups that recently saw their valuations vault past the $1-billion mark, earning them the status of unicorns. Between them, the six startups drew over $1.5 billion from investors in a record week for private equity investments in India that saw more than $3 billion deployed, as per data collated by VCCEdge.
Unicorn valuations, most private investors and the recipients of such valuations openly concede, aren’t an exact science. The same, in fact, usually holds true for valuations accorded to most startups, whether at the early stages or later. Valuations are, more often than not, driven by demand-and-supply dynamics in specific markets. And, right now, in India, the dynamics are skewed in favour of technology startups from sectors that have benefitted from the tailwinds created by the pandemic.
For most of last year, the universe of India-focused private investors — private equity firms, sovereign wealth funds, national pensions, hedge funds and strategic investors — reserved big-ticket bets as startup businesses navigated the pandemic and the longdrawn-out lockdown in the country. By September- October, when it started to become clear which businesses would better weather the pandemic, the private capital floodgates swung open.
At the close of financial year 2020-2021, while the number of private equity deals declined to a five-year low at 1,462, the overall capital deployed hit a five-year high at $46 billion, taking the mean deal value to more than $43 million, against $26 million the previous year.
Given that the pandemic is far from over and there is limited visibility on its long-term impact on the economy, capital is getting concentrated in sectors and businesses, especially technology-enabled businesses, that investors believe will weather the environment better in the near- and medium-term. The fear of missing out (Fomo) is driving many of these investors to close deals at valuations that will buy them prime stakes in what they perceive as potential winners in specific market segments.
Nowhere has this been more apparent than in financial services, rather in fintech. A March 2021 Credit Suisse research report noted that the fintech sector in India was the second largest recipient of private capital over the past decade with payments companies raising $4.2 billion, followed by digital lenders at $2.5 billion. “Covid-19 has accelerated the pace of digitisation globally across communication, shopping and payments… as we come out of the pandemic, there is widespread consensus that it has brought a structural change in categories such as shopping and payments,” Ashish Gupta, head of Asia Financials Securities Research at Credit Suisse, said in the report.
Out of the 10 startups that have already achieved unicorn valuations since January this year, three are fintech startups — investing platform Groww, cloud-based general insurer Digit Insurance and Kunal Shah’s Cred. That’s already at par with the number of fintech unicorns born in all of last year.
By most accounts, the post-pandemic funding frenzy has just started. With digital adoption as the underlying theme, a factor that has been accelerated by the pandemic, capital will continue to be heavily concentrated in sectors such as education, health care, logistics and food delivery, gaming, e-commerce, softwareas-a-service (SaaS) and, of course, fintech. The second big factor driving outsized funding rounds and euphoric valuations is the dry powder waiting to be put to work. In a separate report in March, Credit Suisse said that at the close of calendar year 2020, the dry powder globally stood at approximately $2.1 trillion “as a result of record second half fundraising and slower deal volume.”
And there’s more piling up. Early this month, New York-based alternative assets investor Tiger Global Management closed its 13th venture fund at $6.65 billion, almost twice the size of its 12th fund raised just last year. Tiger Global participated in the latest funding round of three of the startups that racked up unicorn valuations last week — Cred, Groww and social media platform ShareChat. Also in line is SoftBank Group Corp’s Vision Fund 2, currently on the road to raise a $108 billion warchest. SoftBank Vision Fund 2 led a $300 million round in social commerce platform Meesho last week at a valuation of $2.1 billion.
Funding frenzies and soaring valuations aren’t new, occurring in sixseven years cycles in most markets, including India. But, this time it’s a bit different. According to an Orios Venture Partners report, the 12 startups that achieved unicorn valuations in 2020 took an average of eight years to get to that milestone. The entrants this year have taken less than five years.
It’s probably a good thing then that Kunal Shah has profits on his mind over “vanity metrics”. After all, it has been barely four years since SoftBankbacked e-commerce marketplace Snapdeal, once valued at $6.5 billion, imploded in spectacular fashion.