2020 Predictions for India’s Startups
While we may be very right, or horribly wrong, we are committing by writing.
#1: Logistics Will Raise Most Capital
Logistics is a legacy industry and truckers and courier companies are not the first ones to be associated with tech.
But what is surprising, over $600MM flowed into logistics space this year, making it the second most funded tech-enabled sector. It was the only sector to see 2 players become unicorns in 2019, Delhivery in the third-party logistics provider (3PL) segment and Rivigo in the trucking space. Blackbuck is close to being a unicorn.
The 3PL segment has gone from strength to strength. While a smaller player like Shadowfax raised money from Flipkart, a larger player like Ecom Express turned profitable this year. Traditional players like Blue Dart are unsuccessfully grappling with change, attesting to the extent of disruption caused by the new-age players.
There are three drivers of why we think logistics will be the hottest space for investors next year.
First is the sheer size of the market opportunity. The market is $200Bn+, disorganized and catered to by small fragmented players.
Second is customer demand. One-day free deliveries have become a norm, creating a higher need to have fast and efficient logistics services.
The third is profitability pressure. E-commerce players are increasingly coming under pressure for their inability to reduce losses. Delivery costs are significant for such players and tend to rise with the demand that is sporadically distributed over non-metro cities. This translates into more and more delivery transactions outsourced by the likes of Amazon, Flipkart and D2C brands to 3PL players.
Startups in this segment are increasingly becoming ‘full-stack’ with the provision of services like warehousing, payments, cross-border shipping etc.
Within the trucking space, startups are attempting to solve for the sector’s core challenges around low asset utilisation, unpredictable demand, dependence on brokers for procuring freight, high-maintenance costs and poor financing options.
The importance of this segment is highlighted by the fact that India spends one of the highest amounts, as a percentage of GDP, on logistics and transportation costs. Thus, these startups that attempt to reduce the friction in the process and delivery cost savings have a clear value proposition for all interested parties.
Outside of companies that enable the fulfillment and delivery of goods, there is a long list of startups that offer software solutions for logistics and supply chain optimisation. Interesting ones that we would be watching are Locus, LocoNav and Freight Tiger.
We expect large investments to continue to flow to help organize this sector, while smaller tech enablers will continue to attract capital in 2020.
#2: B2B E-Commerce Will Go Full Stack
Certain sectors have risen in 2019 largely backed by the Jiofication and smartphone penetration beyond India1 and India 2.
B2B commerce is the largest of them.
But there are two seminal moments which mark the beginning of B2B 2.0. v2.0 will be the expansion of B2B commerce from just being a marketplace.
The first it the rapid scale for B2B commerce startups. Udaan, the fastest company to become a unicorn, grew breathtakingly fast. It is an indication that it has only captured a fraction of the market.
The second is the IPO of India’s oldest B2B online listing platform IndiaMart. With 60% of online B2B e-commerce market, it went public. The IPO was oversubscribed 36 times and receiving much investor love.
Both these indicate a maturity, along with the massive opportunity, of India’s B2B e-commerce startups.
Structural changes have led to formalization of economy. This has given a huge fillip to the B2B e-commerce market.
The receptivity of traders, shopkeepers, businessmen to transition online and change decade long practices of keeping ledger books, chit system has started. As they see the value and convenience of moving online it will act as a multiplier to encourage others to digitize.
Removing wholesalers, which are the most profitable players in the value chain, will improve margins for manufacturers and reduce prices for retailers. This will be complex, considering the bargaining power which wholesalers have.
The willingness of this segment to pay was the crucial question to be answered, which is showing promising change. IndiaMart saw its paying supplier base rise from 72k in FY16 to 130k in FY19.
Startups which can thus provide valuable full-stack services to create a closed loop ecosystem of retailers and wholesalers will thus reap the maximum value.
Offering convenience in the entire value chain from logistic support to credit will be key levers to attract, retain and monetize users. Transparency in pricing is one of the critical value-add as buyers are unsure of having paid the right price in an offline wholesale market.
In terms of monetization, 2020 could see another revenue stream unlock for the players as the target segment begins to pay for value added services such as advertising and analytics.
Data will be a crucial path to monetize and startups will have to be patient to build reliable data pools before making money. Till that time, they will have to focus on their existing streams which include commission on transactions, fulfilment service costs and offering credit and finance. Credit, especially working capital, is still a huge unfulfilled gap and more players will continue to emerge in this space.
Large, full stack, businesses will likely be built but it will require a lot of patience and specific strategies to win. IndiaMart took 23 years to an IPO and 10 years to find the right business model!
If you are sitting on top of money you will make money, especially if you’re full stack in 2020.
#3: Social Commerce Will Consolidate
The importance of social media in the lives of millennials is hardly a trend worth discussing.
However, what is interesting to note is the growing attention given to it by micro and small and medium enterprises in India.
Social commerce, the buying and selling of goods through social media platforms such as Facebook, Whatsapp, Pinterest, Instagram has been a widely-discussed topic in 2019.
Social commerce startups target the 50+ mid-tier cities and towns where sellers sell non-branded items through Facebook posts or Whatsapp messages.
Different types of business models have sprung up but all rest on the main premise of people recommending or selling goods to others. In particular, two kinds of business models rose to prominence, the Reseller model and Video Commerce.
The Reseller model allows individuals to sell customised catalogues to their friends and families on social media and earn a commission in the process. Major players include Meesho, Shop101 and GlowRoad. The segment has gained a lot of traction due to its empowering effect on women, especially housewives, who have taken to these startups to earn extra income.
Video commerce startups present a glorified, tech-savvy version of television shopping where sellers encourage customers to buy goods through live videos. Major startups in this segment such as BulBul, SimSim, Wmall and Mall91.
Others such as Dealshare popularise deals on social media platforms and allow users to avail great offers and discounts on daily household items.
Social commerce startups raised $157MM in 2019. Meesho is currently leading, having raised $215MM to date and witnessed a 14x rise in revenue in FY19. Most others are still in the early stages of their journeys and there are good reasons to believe that they will interest investors in the coming years as well.
About 40% of the world’s population counts as users of social media, spending on average ~2 hours each day on social networking sites. Time spent has doubled over the past few years and this is only going to increase, with the tremendous effort put in by some of the largest tech companies to get every internet user hooked on their sites.
Social commerce startups are riding this wave, and have leveraged the right tools at the right time.
From Facebook live stream and Insta shoppable posts to vernacular languages in Whatsapp, social media platforms have gone beyond entertainment to become an essential part of our lives. Their use cases extend to product discovery, price comparisons and even payments.
By eliminating the friction of getting redirected to a third-party platform, startups in the sector have not just made commerce more efficient and convenient, but also reduced the risk of abandonment and improved purchase rates. What more than the fact that platforms such as Facebook, Snapchat, Pinterest are constantly upgrading their shopping hubs in an attempt to grab a share of the social commerce pie.
Another reason behind the sector’s promising future is the diverse make-up of India. The near-ubiquitous access of internet has pushed e-commerce into tier 2 / 3 / 4 cities, allowing hundreds of local brands to sell outside their regions and exposing thousands of value-sensitive customers to unlimited variety at great prices.
The result is not just an amplification of transaction volumes but the entry of a different kind of supplier and customer segment into the internet market. A segment, the majority of which is still unaccustomed to the ways of an Amazon or even a Flipkart.
However, this segment is very comfortable using Whatsapp or watching videos on Youtube. Social commerce startups have addressed this gap in the market and by being the first player-created entry barriers for the traditional e-commerce players.
The network effects of social commerce will enable one player to become a unicorn. But the network effects will also consolidate users with few players.
With social media groups like Facebook looking at the space with interest, we expect a spate of acquisitions in 2020, resulting in consolidation.
#4: Gaming Startups Will Go Mainstream
Gaming has been a breakout year in India.
The confluence of lower data prices, increased leisure time and a young millennial base has led to interesting models emerge in gaming.
2019 has seen fantasy gaming platforms thrive especially after Dream11 became the first gaming unicorn in India. ‘Maine bola tha na Sehwag century marega’ (I told you Sehwag will hit a century) might have been an often-heard phrase from the neighborhood uncle while growing up.
Dream11 capitalized on this ‘skill-based’ prediction to allow the Uncle to make teams online while getting a shot to earn attractive prizes. Rise of different sports leagues such as kabaddi, badminton, football has also meant that these startups get users throughout the year and not just during the 2-month IPL phase.
2020 will see social interactive gaming and eSports become mainstream. India ranks fifth among the world’s top mobile gaming markets and will likely move to top 3 in the next 3 years.
Mobile gaming is likely to be a $105Bn opportunity by 2023 and outpace China which is estimated to be at $73B. From 2MM gamers in 2016 to 100MM gamers by end of 2019 the momentum will likely continue.
The average gamer spends 60 mins on mobile games with OTT platforms seeing 45 mins spent. Add to the fanatic user engagement is the repetitive behavior where 40% men and 35% women play mobile games at least five days a week in India.
Action games such as Fortnite, PUBG will continue to engage, incentivizing game developers. Real-money gaming will also hold steady backed by a loyal base of professional gamers playing poker, rummy and live trivia.
Gaming is also being seen as a viable and lucrative career option now and giving rise to professional gaming tournaments happening in many cities and towns in India. Interesting roles such as esports commentator, gaming coaches, gaming news editors will likely emerge in 2020.
Startups of particular interest will be women-focused gaming platforms (Bakbuck), live trivia and quizzing platforms (Loco, Brain Bazzi, Quizizz), creating next gen-gamers (Statespace), and social gaming platforms for casual gamers (Super Gaming)
Freemium models, in-app purchases with a higher discretion to spend to advance to new levels/ purchase costumes will be the dominant monetization models. Improved distribution and reach due to Google Play will continue to strengthen the ecosystem and encourage more game developers, advertisers and gamers.
Cloud gaming, which allows gamers to play without installing on their devices, will augment this big trend and give rise to Games as a Service. Growth will also be driven from Bharat where people from Tier 2,3 cities move from influencer platforms such as TikTok to gaming platforms such as Dream11.
Overall it will be an interesting time for gaming startups in 2020 and we will be keeping a close watch out for the most interesting startups.
#5: Everyone in Fintech Will Lend
Indian Fintech has innovated, driven by a forward-looking regulator.
Indian Fintech companies could become exporters of their technology, skills and market prowess by utilising FinTech Bridges that are being established by governments all over the world.
India Stack has been one of the biggest enablers of innovation in the FinTech space in India and many countries around the globe have followed in its footsteps. For instance, the EU implemented PSD2, along with the progress with NPCI, UPI, BHIM, e-KYC in India.
Based on these stacks, several payments startups have expanded vertically and are now offering, or have plans of offering, consumer loans, credit/debit cards or credit score/profiles.
With the low cost of distribution and development, sector-specific incumbents will come up with their digital first financial services solutions. Auto OEMs such as Hero MotoCorp to Hyundai are setting up captive finance divisions to disburse auto loans, Flipkart has applied for an NBFC license, and Google recently announced its foray into checking account services.
In 2016, RBI released guidelines for NBFCs that intend to functions as account aggregators, effectively aggregating customer data from different financial providers. Companies like Zeta are building SaaS tools that promise to help Fintech set up shop and start selling in 6-8 weeks.
All this will incentivize companies to set up mechanisms to collect lucrative financial data and provide financial services, like new age banks.
However, since RBI does not allow/give licenses for neobanks in India, there are limited opportunities for creating one right now. The RBI is, however, working in a joint-group with HKMA to develop the guidelines for the future.
At present, there are several avenues of partnering with legacy banks and offering products such as crossover cards (Paytm & Citi) and/or building an aggregator platform for specific financial products (LendingKart, PolicyBazaar).
Fintech is a highly regulated sector and it presents an opportunity for ‘local’ players to build their presence without worrying about global players. As most fintech companies collect deeper data on their customers, they will build the ability to launch a very lucrative “feature” in 2020.
That feature is lending, of course.
#6: Online First Brands Will Proliferate
“Why can’t you buy a plant online?” will likely be a question you ask in 2020.
A lot of entrepreneurs who cut their teeth managing operations when e-commerce startups like Shopclues and Flipkart broke on the scene are finding a resurgence in online retail.
Online payments, increasing efficiency of 3PLs, and influencer marketing are likely to push D2C brands to carve out a bigger share of the Indian e-commerce market.
There are approximately over 400 active D2C brands in the country right now and players in the fast moving consumer categories. The ones that have broken out are in Fashion (Zivame), F&B (Bira, Paperboat, RAW Pressery), Personal Care (The Man Company, Ustraa, Mama Earth,), Electronics (OnePlus, boAt).
Taking a page out of the US market and following the classic trickle down approach, D2C brands have followed a premium first strategy where they’ve targeted the most ‘profitable’ and niche customer segments — India 1. This started with power centres in urban areas and is now seeing increased activity in Tier 2/3 cities as online brands are establishing offline stores, thus going the omni-channel route.
There is high likelihood that a large number of brands can scale to a revenue of $100MM (Rs 700 crore) in the next decade. However, unlike our relatively pure tech counterparts, D2C brands have little scope for building a winner-take-all product/offering.
The markets are massive and the operating models allow enough room for multiple ‘big’ players to co-exist. Their growth is a function of capital as they have huge appetite for marketing and branding but unlike the ‘tech’ counterparts, we don’t expect them to be guzzlers of capital.
This, however, would also mean that more traditional legacy brands will have to protect their turf not only against their contemporaries but also against these savvy, online and relatively low operating cost brands.
Consumers can expect the discount train to continue albeit more in terms of bundles and cashbacks rather than upfront discounting. The retailers (online & offline) will aim to move more of their inventory even if the margins are lower.
D2C brands have also been witnessing increasing customer loyalty and personalisation options, coupled with higher profit margins. By disintermediating middlemen across segments, these companies save significant costs and build direct to consumer relationships.
The convenience of having a trusted brand delivering right to your doorstep will be the reason attracting new age consumers. Brands will find markets to innovate across all categories.
We expect you to be purchasing a lot more from direct to consumer brands in 2020.
The Indian startup ecosystem continues to be ever more exciting. After a transformational decade, where India went from 0 to 24 unicorns, we expect the ecosystem to cement its place as a leading ecosystem.
We look forward to 2020.