The year 2020 was truly extraordinary for India, with Covid-19’s significant impact on the country’s economy and healthcare systems. GDP is expected to contract by 8% in 2020, as more than 65% of the Indian economy was at a halt during the full lockdown, which ended only in June 2020. However, latest forecasts by the International Monetary Fund (IMF) expect strong rebound in 2021, with growth returning to the long-term trend of 7% to 8% over 2022 to 2025. Within the year itself, Covid-19 played an important role in dramatically accelerating digital trends across sectors. This was reflected in venture capital (VC) money flows and the emergence of new, digitally founded business models across sectors.

Despite Covid-19, a few investment themes continued from prior years:

• Strong deal flow, with close to $10 billion in VC investments—higher than in all previous years except 2019.
• Continued momentum in consumer tech and software as a service (SaaS).
• Significant fund-raising activity, with $3 billion raised by India-focused funds in 2020—40% higher than in 2019. Marquee funds including Sequoia, Elevation Partners, Falcon Edge, and Lightspeed all closed new funds for India investments in 2020 despite the pandemic.
• Growing number of start-ups (about 7,000 new start-ups founded in 2020, with more than 10% growth in seed stage deals) and unicorns (12 added in 2020 vs. 8 in 2019, to take India’s total to 37 now).

At the same time, there were a few themes that were different—driven or accelerated by Covid-19:

• Decline in average deal size by 15% vs. 2019.
• Surge in investment activity in a select set of sectors within consumer tech, including edtech, foodtech, gaming, and media and entertainment, with an average 4x increase in investment value over 2019.
• Slowdown in exits (70% lower exit value in 2020 vs. 2019), likely led by depressed valuations and disruption to business models.

In terms of key sectors receiving investments, consumer tech, SaaS, and fintech continued to lead the way, accounting for 75% of VC investments in 2020 vs. 65% in 2019. Fourteen of 22 VC deals were more than $100 million in size. Key subsectors receiving investments included edtech, foodtech, gaming, and media and entertainment in consumer tech; verticalised solutions within SaaS; and payments within fintech.

SaaS in particular saw clear signs of maturity, with average deal size increasing dramatically—from $14 million in 2019 to $25 million in 2020. We expect deal momentum in India to continue into 2021. Deal activity in the second half of 2020 recovered to pre-Covid levels: VC investments totalled $3 billion in January to March, declined to $1.1 billion in April to June, and then recovered to $3 billion each in the next two quarters. Further, the number of active VC funds grew to 520 in 2020 from 480 in 2019, with multiple new funds investing such as Inflection Point, Avataar, Coatue, D1 Capital, amongst others.

Overall exit value declined by 70% from $4.4 billion in 2019 to $1.3 billion in 2020. We expect recovery over the next one to two years as portfolios of top VC investors mature. (Most portfolios did not reach maturity in 2020, in addition to Covid-19 impacting exit valuations and disrupting business models across sectors.)

Overall, the strength of India’s VC ecosystem has driven real economic value for the country. VC investments have played a pivotal role in bolstering the start-up ecosystem in India—behind only the US and China, globally—and have created more than 3 million jobs directly or indirectly over the past eight years.