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Indian startups raised a record $10 billion in venture capital in 2019, driven by new sectors and emerging winners, despite a sentiment shift towards caution during the last quarter of the year.

Startups, or firms less than 10 years, raised $10 billion in equity, higher than the $9.6 billion and $9.1 billion in 2018 and 2017, respectively, though these were also record amounts, according to data from Venture Intelligence, a data tracker.

Graphic by  Paras Jain/Mint
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Graphic by Paras Jain/Mint

Investors deployed capital across sectors, from e-commerce and lending to emerging sectors such as social commerce and enterprise software for select industries.

“In 2020, we expect the dollar value of investments to continue rising, though the number of deals may remain unchanged. As with the maturity of the ecosystem, market leading firms that have a larger service and geographical footprint will continue to attract a disproportionate amount of capital to be at their disposal," said Ankur Pahwa, partner and consumer internet leader, EY India.

Out of the top six largest deals of the year, five closed in the first half. After September, when WeWork’s valuation was slashed from $47 billion to $8 billion and its IPO was shelved, and other tech listings such as Uber and Lyft also did not perform well, investors turned cautious on high-growth, loss-making tech startups.

“The investing model of burn-to-scale, or growth at all costs, has lost its sheen and the overall ecosystem is starting to mature, and with maturity comes a cautionary approach. There is also an increased focus on real sustainable businesses and capital-efficient business models are taking centre stage. Investment velocity will certainly be impacted by a sense of guarded optimism," Pahwa said.

The change in investor preference is also evident in the large deals, such as SoftBank’s investment in eyewear retailer Lenskart, e-commerce logistics firm Delhivery and online babycare retailer FirstCry, all of which burn less cash for growth and don’t have compounding losses, unlike some other consumer internet firms.

So, while investors turned cautious, they are still taking a long-term view and deploying capital, given the large market and better quality of entrepreneurs.

With China’s population at 1.4 billion, India at 1.38 billion and the US a distant third at 350 million, according to an Economist report, “India’s target addressable market is too big to ignore," said Sanjay Nath, managing partner, Blume Ventures, an early-stage investor. “So, investors are coming in with a long-term view despite macro concerns such as the recent growth stats and geopolitical developments."

The rise of business-to-business (B2B) startups, across sectors from e-commerce to fintech and software, was also a large investing theme. Out of the $10 billion, B2B firms raised $4 billion, the highest ever percentage (40%) and a jump from the 25% share from last year, when B2B firms had raised $2.3 billion out of a total $9.6 billion.

Large investors, such as pension funds and hedge funds, are also investing earlier in startups, showing increased interest.

“Large foreign funds which were mainly visitors are making discovery trips and tracking deals earlier, which is a good sign. The percentage of deals that close may be lower, but their presence and share of capital allocated to India is rising," said Nath.

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