The world as we see it : In a show of grit and resilience, India managed to maintain its standing
Global
Markets and asset prices continue to be persistent at current elevated levels despite a plethora of risks on the horizon. We can think of two critical factors supporting prices: continued liquidity support provided by global central bankers and swift, strong economic recovery in major economies.
Another major positive is that humankind is winning its war against the virus even though some dangerous variants lurking around are fully capable of opening up new fronts in this war. Vaccination and COVID-appropriate behaviour (masks, social distancing, essential travel only) are likely to help the situation from becoming dire and control the ensuing debilitating impact on lives and livelihoods.
Even as investors continue enjoying their sunny days, there are some critical factors that need monitoring. Firstly, inflation concerns and the uncertainty and volatility of inflation expectations have surfaced after simmering below the radar for the last few quarters. As can be seen below, we have gone from not talking about inflation to it being the most discussed economic concern globally.
Whether inflation prints are transitory or permanent and problematic will determine how asset prices behave in coming times.
Secondly, the ongoing banter between the USA and China continues to be a cause for concern as it can inflict severe economic damage in its least ugly avatar. Thirdly, in our part of the world, the technology ecosystem, government attempts to rein in monopolistic e-commerce and technology giants is gaining momentum with digital tax talks and stringent regulations being at the forefront.
India’s Open Network for Digital Commerce is one such initiative to control runaway digital monopolies. Lastly, an eye-popping statistic is the level of total global indebtedness which came in at US$281 trillion for 2020 (355% of global GDP) (Source: Institute of International Finance - IIF). The IIF estimates that government debt alone is likely to cross US$90 trillion in 2021.
We note that high levels of government debt should be safe as long as the debt remains inexpensive. In fact, in 2020, the cost of U.S. federal debt actually declined despite the total amount of outstanding debt being higher, thanks to ultra-low interest rates. These lower rates penalise savers and fixed income investors and encourage the chase for higher yields, resulting in investors seeking higher risk. Even if rates rise, they don’t pose a serious risk as long as they don’t rise faster than underlying economic growth.
Globally, the technology ecosystem has done very well for itself. In the six months ended June 2021, nearly 250 companies achieved the much coveted 'unicorn' status as their valuation crossed the US$1 billion threshold. Of these, India scored 16 unicorns. The listed universe is enjoying its own moment under the sun with 5 technology companies crossing the US$1 trillion market capitalisation level - Apple, Microsoft, Amazon, Alphabet and Facebook.
In the first six months of this year, globally, startups have already raised nearly US$300 billion, compared to the same amount raised throughout the entire calendar year 2020 (Source: CB Insights).
Local
Rumours of COVID’s demise have been greatly exaggerated, but India seems to have emerged from the second wave as on the ground situation gets back to (as close as possible to) normal. Localised lockdowns are the norm, rather than the national one India implemented in 2020, limiting their impact on the economy and livelihoods. Vaccination has become the number one priority and is being administered at a rapid clip (~4 million a day), with nearly 400 million doses administered and 73.3 million people fully vaccinated.
India seems to be in a good spot with GDP growth expected to be in the 10% range for the year, despite numerous challenges that the second wave presented. There seems to be a lot more stability at this time in terms of social, governance and economic parameters.
Government policy is on track to support growth and manage COVID related disruptions, RBI policy is ensuring controlled inflation and ample liquidity in areas that need it, and lastly, corporate earnings growth is likely to be robust if the overall current business environment is any indicator. This does not mean we can throw caution to the wind. There are clear areas that need monitoring, including any let up in policy momentum or its implementation, higher oil prices, inflation or inching up of interest rates.
Start-up Ecosystem
The current quarter, ended June 2021, saw relatively modest activity compared to the last quarter. We witnessed a 5.8% rise in the number of deals consummated (from 344 to 366), while the capital infusion decreased by 26.3% (from US$6.98 billion to US$5.14 billion), leading to a 30.37% decline in the average deal values (from US$20.3 million to US$14.1 million).
However, on a year-to-date basis, we have already surpassed the total amount invested in all of 2020 and are on track to have a record year of investments in this ecosystem.
Another major indicator of the tailwinds helping the sector includes the rise in the number of mega rounds (round sizes above US$100 million). A report by Inc42 (Indian Tech Startup Funding Report, H1 2021) predicts that by the end of 2021, the ecosystem will have received US$22.6 billion in funding across 1,212 deals.
Calendar year 2020 clocked 28 unique mega rounds, while we have already crossed 31 this year. Since our investor letter, we have 6 more unicorns - Chargebee, Urban Company, Moglix, Zeta, BrowserStack, and MindTickle bringing the tally to 16 for the year. In comparison, the ecosystem minted 11 unicorns in all of 2020 and 7 in 2019.
Indian Unicorns
July 2021 is going to mark a major milestone for the technology startup ecosystem as a whole. Zomato, the company that started out as a listing service for restaurants and eventually morphed into a food delivery platform, infrastructure provider, and procurement platform etc., launched its IPO and raised INR 93.75 billion (US$1.3 billion) at a valuation of INR 600 billion (US$8 billion). We see this as the dawn of a new age, where startups mature into scaled up, listed companies and make themselves available to retail investors for participating and reaping gains from this digital transformation that India is undergoing. Following Zomato’s success, we will see Paytm, PolicyBazaar, Nykaa, Flipkart, InMobi, Delhivery, CarTrade, Mobikwik and a few other successful startups listing themselves. Some have already filed their Draft Red Herring Prospectus (DRHPs) or announced their imminent IPO plans. Such liquidity events that provide exits to early backers are the essential sauce for a vibrant startup ecosystem as this capital typically gets re-invested, supporting newer entrepreneurs chasing more ambitious goals.
In a show of grit and resilience, India managed to maintain its standing (43 out of 64) in the Institute for Management Development’s (IMD) Global Competitiveness Index despite the lockdowns and the second wave wreaking havoc. The IMD report further noted that despite the lack of movement in the charts, India showcased improved government efficiency and investments in innovation, digitalisation, welfare benefits atop government subsidies acted as major catalysts to help the country survive a catastrophic event.