Early-stage investment companies feel the next bunch of Unicorns in India will come from the “Deep Tech” space.
Deep Tech, which is an industry terminology for using technologies such as AI, Machine Learning and analytics to unearth newer business models, is increasingly finding flavour amongst Silicon Valley gurus and is now worming its way in India.
Funding houses like YourNest are seeing the proverbial golden pot in the business potential of B2B ventures when compared to heightened investor interest in e-commerce, food tech and fintech. However, B2B, which is often not glamorous and works in the background, is now drawing investor attention.
Interestingly, India’s IT success story was built by software exporters such as TCS, Infosys, which are B2B companies. Now, the interest in such ventures is re-emerging. “A niche group of ‘Deep Tech’ entrepreneurs is creating solutions based on disruptive technologies and this could throw up 3-5 Unicorns,” Vivek Mansingh, General Partner, YourNest VC Fund, told BusinessLine.
Changing business models
So, what has changed in the past few years for investors to sit up and take notice? Firstly, macroeconomic tailwinds are driving ‘Deep Tech’ as corporations in the developed world are under severe pressure from a varied set of competitors, which is forcing them to change their business models.
Take the case of Nanobi, which provides analytics on the cloud. According to Abhishek Purohit, Co-founder, V-P Product Strategy and Partner Enablement, Nanobi, which works with some of the leading US healthcare providers, as the US healthcare insurance market is deeply digitised, over the years, errors have crept into the system and this needs fixing.
A lot of corporations need changes to be made in their IT systems and their technology providers tend to react slowly. “There are pain points and if a start-up caters to that, they are in business,” said Padmaja Ruparel, co-founder, Indian Angel Network (IAN).
While the case is strong for start-ups in this space, it is a different ball game when compared to a Flipkart, whose customer base is in India. “The benchmarks are global and that is an area where these ventures need improvement,” said Sunil Goyal, managing director and fund manager, YourNest, which has backed Uniphore, Rubique, KaHa amongst others. In 2018, Indian B2B start-ups have raised $1.31 billion, with PineLabs raising $125 million from Temasek and PayPal, according to Tracxn Data. For most part, the funding is used for building a product or a solution, something which was not part of an Indian entrepreneur’s DNA. “It does involve a longer gestation period and entrepreneurs need handholding in understanding the issues faced by multinational corporations who are its customers,” said Ruparel.
The promise of ‘Deep Tech’ start-ups can be seen from the fact that 5 per cent of the total funded companies in 2017 came from these ventures which have grown at a 5-year compound annual growth rate (CAGR) of 30 per cent, higher than 13 per cent rate of B2C ventures, according to industry data.
Cash burn in these kinds of ventures is much lower when compared with a cab aggregator or an e-commerce retailer which often need upwards of $40 million every month, resulting in founders seeking to raising funds at regular intervals. Tech ventures have the ability to scale up faster at the back of less money, said Bhaskar Majumdar, Managing Partner, Unicorn India Ventures.
A back of the envelope calculation pegs that a ‘Deep Tech’ start-up requires around $30 million in funding, from Angel to Series B round. “By that time the company will have a steady cash flow,” pointed out Goyal.
There are challenges in these businesses too.
“Typically, the sales cycle tends to be longer, there is a need to understand who the business is selling to (CTO, procurement head or CEO) and competition is global, which means the benchmarks are higher,” said Ruparel.