Venture capital (VC) investment in India reached a record high of $38.5 billion in 2021, propelled by a combination of tailwinds, including sound macroeconomic fundamentals of a country of about 1.4 billion.

According to Bain & Company’s India Venture Capital Report 2022, VC funding grew nearly four-fold in 2021 from a year prior, as the country’s startup ecosystem reached an inflection point.  The hectic dealmaking saw 44 startups in India growing into unicorns – enterprises with a valuation in excess of $ 1 billion. This compares with 42 unicorns that were minted in China in 2021, where VC funding growth slowed amid Beijing’s crackdown on the domestic tech economy.     

The investment boom that was seen in 2021 continues apace, as India has already minted 13 unicorns this year, and could very well overhaul last year’s record.

Why are venture capitalists sold on India?    

There are several factors working for India, insofar as VC enthusiasm for Asia’s third-largest economy goes. One of the biggest drivers of investing momentum has been India’s robust digital infrastructure that it has built over the years, the Bain & Company report said.

Unified Payments Interface system that routes funds and merchant payments seamlessly and quickly, cheap and ubiquitous data access, and Aadhaar-based electronic Know Your Customer have increased the start-up ecosystem depth. A maturing digital infrastructure, successful and significant public and secondary-market exits of long-held capital, as well as a positive macroeconomic outlook for India have combined to buoy investor confidence.

In addition, President Xi Jinping-led government’s assault on Chinese internet businesses in a bid to curtail their influence frightened investors, prompting them to redirect capital to India.

Mega rounds of $100 million quadrupled in 2021

The total deal value of $38.5 billion in 2021 was driven by the dual impact of a two-fold growth in the number of transactions (1,545 deals versus 809 in 2020), as well as the average deal size, which jumped from $12.4 million to $24.9 million.

More significantly, global VCs led more than 90 mega rounds of over $100 million, compared with about 20 such deals in 2020, typically as follow-on rounds in market leaders such as online food delivery platform Swiggy and gaming entity Dream11.

Similarly, early-stage deals saw a dramatic shift in pace and ticket size, with Series A rounds hitting the $10 million+ mark in average deal size. Further, India minted 44 unicorns in the year, becoming the third-largest home of unicorns, with 73 privately-held active unicorns, after the US, which has about 500 of them, and China nearly 170.

Fintech, consumer tech continued to hog limelight, capital

Consumer technology, fintech, and software as a service (SaaS) continued to account for more than three-fourths of all VC investments by value in 2021, same as they did a year earlier.

These sectors continued to see a significant expansion in deal size, indicative of a maturing landscape. SaaS specifically saw deal size expansion as marquee Indian unicorns became category-defining leaders globally, such as Postman in API management or BrowserStack in automated testing.

Funding outlook for 2022

Global headwinds in early 2022 are likely to affect the funding outlook for the rest of the year. The report expects investments in 2022 to remain in a similar range as 2021, the pace and quality of deals is likely to shift. Investors are expected to double down more significantly on quality assets with larger rounds, and a more measured pace of dealmaking. Compressed multiples in global public markets will probably see a trickle-down impact, leading to rationalisation in valuations and a focus on unit economics. Exits via public listings may also see some moderation, as IPOs in the pipeline may adopt a wait-and-watch stance given global headwinds in public markets. A few emergent sectors, however, will continue to see interest. These are web 3.0 or crypto-based investments (especially with the Indian government’s ruling on validity of digital assets), creator commerce, and core sectors, such as agritech and healthtech.