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This quarter was rather eventful. We grew a lot more comfortable living and working in the midst of a pandemic. COVID provided us with a new lens to look at some sectors. We deep-dove into some of the major trends in the Indian startup ecosystem and consequently met some promising, relevant startups.
Quarter 3 dawned upon us with a fresh glimmer of hope - with lockdown restrictions easing up in several parts of the country, a tiny semblance of ‘normal’ life was visible again. In many ways, this was an incredibly important quarter for us- we learnt how to grow and thrive despite the pandemic. We mastered working remotely, adapted to the Zoom life, while finding unique ways to maintain our culture and even bring on-board new members to our team. This quarter we strengthened our investment thesis on a wide range of sectors, including, fitness, water management, and short-form video apps. From understanding the future of the COVID-impacted fitness industry as it arose from hibernation, to analyzing the butterfly effect of the ban of TikTok and a growing ‘Make in India’ sentiment on short-form video entrepreneurs - this quarter saw it all. To top it off, we also created a scorecard that helps assess how prepared your business is to thrive in a post-COVID world. It’s a tool that sparks some thoughts and ideas on how entrepreneurs and investors can make their businesses more future proof. You can check it out here.
Deal flow in Q3 saw a slight uptick. The increase in deal flow can be attributed to seasonality and possible early signs of returning to normalcy. Observing the trend, we expect the number to slowly increase over the next couple of months. In line with global trends, we saw a significant increase in deals from the HealthTech, EdTech, and E-Commerce spaces.
Global VC investment continued to be very strong in Q3, defying concerns of a potential drop-off in investment due to the challenges in getting deals completed during a pandemic. Globally, VC-backed companies raised $73.2BN across 4,861 deals, up 5% quarter-on-quarter. Three $1BN+ mega-deals helped propel the global investment total this quarter, including raises by WM Motor in China, SpaceX in the US, and Flipkart in India. Early-stage funding, meanwhile, was $19.3BN in Q3, down 18 % year-on-year and down 14 % quarter-on-quarter. COVID-19 is expected to remain a key driver of investor caution heading into Q4.
Despite challenging economic conditions due to COVID-19, VC investments In India grew to $3.6BN in Q3 from $1.5BN in Q2, propped up by $1.3BN raised by Flipkart. India's EdTech sector performed tremendously well this quarter marked by Byju’s ($500MM), Unacademy ($150MM), Eruditus Executive Education ($113MM), and Vedantu ($100MM). Apart from VCs, this quarter also saw Big Tech giants step up and be more active in the Indian ecosystem. In July, Google announced a $10BN fund to help accelerate India’s transition to a digital economy. Of that $10BN, Google made a $4.5BN investment in Jio Platforms, following on Facebook’s $5.7BN investment in the same company earlier this year. At this point, Reliance has become synonymous with massive fundraising. After raising $20BN for Jio Platforms in Q2, Reliance Retail has raised $5BN in Q3 at a valuation of $57BN. These investments come from a clutch of global investors like Silver Lake, KKR & Co, General Atlantic, Mubadala Investment Co, GIC, and ADIA.
As some countries come out of their first wave and others experience a second wave of COVID-19 cases, one thing became abundantly clear- in-person activities are bound to be very sporadic. We wanted to explore solutions aimed at addressing the needs of consumers using digital approaches. Fitness was one such industry. Like most industries in India, the fitness industry has largely provided fragmented, offline offerings. India has been no stranger to fitness. In fact, there are several examples of the existence and popularity of fitness in our culture, none more so than the existence of Akhadas, Yoga, and Ayurveda practices in the country. India’s modern fitness culture has been characterized by mom-and-pop gyms that have given way to the emergence of more specialized offerings - Zumba, Pilates, CrossFit, Mixed Martial Arts and other forms of exercise. The growing affluence of the middle class, greater exposure to global food trends, and health and fitness concerns are slowly bringing alive the magic of fitness programs in India. The revolution in the fitness industry seems to be driven by 2 major factors- the rise of social media and a change in consumer spending owing to the growing young, aspirational population. Consumers want solutions that offer them the flexibility to pay based on utilization and the flexibility to work out at different fitness centers based on their convenience and desire.
With the onset of a pandemic, the global $100BN fitness industry was forced to go virtual almost overnight. With an already broken business model, COVID merely shed light on its gaping holes. Business models for brick and mortar gyms are archaic. Just like real estate businesses, the focus is primarily on location. Moreover, they have high fixed costs, require a significant amount of Capex (>$0.4MM), and suffer from an abysmally low retention rate (~25%). Overheads increase by 20% annually as ARPU decreases over the years. To counter this, gyms enroll 2-3x the total members they have the capacity to service. If everyone who had memberships went to their gyms, nobody would actually be able to work out. Going virtual is often talked about as a blanket solution for all the players in this ecosystem, but we found the solution to be a lot more nuanced.
During the last decade, like many consumer-facing businesses, fitness trends have bifurcated the industry into low-cost and premium offerings. This has left the largely undifferentiated mid-priced operators awkwardly stuck in the middle. We observed that these mid-tier operators are in a downward spiral, with memberships falling significantly, and increased margin pressure. They provide no redeeming factor- neither do they have a high barrier to entry, nor do they have any specialization. Already riddled with high debt, high churn, and with no solid digital offering, their only source of income is being threatened. Thus, middle tier gyms face the risk of being obsolete unless they pivot to the lower or upper ends of the funnel. We also observed that the presence of a digital channel is essential. This can be achieved through making digital your moat with an at-home fitness model or going the Omnichannel route. We noticed enough room for an unlikely disruptor to emerge - Zoom. If Zoom simply decides to add a payment layer on its platform, we see it becoming the Shopify of the fitness industry. Just like Shopify allows anyone to set up an online store and sell their products, Zoom will allow anyone to set up their own ‘fitness store’ and get paid for their services. You can read more about our findings on Fitness here.
We have spoken extensively about the two biggest risks to consumption in India being social issues and climate change. Climate change has many cascading effects, none scarier than humanity running out of water. It is estimated that by 2030, 21 Indian cities will run out of water if they continue to rely on current resources. This deadline will only accelerate with our current irresponsible consumption patterns. We’ve already had a glimpse of what this world might look like. In 2019 Chennai faced a water crisis that saw people lining up for water. The four reservoirs that supply water to households in Chennai dried up due to insufficient rainfall for three years. Chennai typically has a consumption of 830MM litres per day but during the crisis, the city could only accommodate 525MM litres per day. There were several instances of people jostling each other to get access to the tanker water. This led to forced shutdowns of schools, restaurants, hotels, and businesses asking people to work from home as the stress for water was high. Knowing this, we decided to take a look at the residential water management industry to look for opportunities. We found two key gaps in the industry – lack of sub water metering in India and low penetration of water purification systems in India.
Unlike most developed countries where each residential apartment receives a monthly bill of utilities that covers the usage of electricity and water, India only has the provision to receive electricity bills based on the resident’s usage due to the lack of sub metering for water in apartments. The lack of sub metering leaves residents unaware of their usage of water which leads to higher wastage. If you can’t measure it, you can’t improve it. With rising prices of water across cities and increasing conflicts among residents, there is an opportunity for sub water meters. Sub water meters would allow for fairness in water bills payments, where residents would only pay for what they consume and, hopefully, over time reduce the amount they consume.
Another challenge that consumers need to deal with is that of quality. Across the country studies conducted by various organizations have shown that the quality of water available to Indians is sub-standard. Both the WHO and Niti Aayog have claimed that over 600MM in India face extreme stress over water. India ranks #122 globally when it comes to the water quality index. The penetration of Electric water purifiers is a mere 8.7% despite incumbents. This is primarily due to a lack of affordability and accessibility. India’s average household income is $2,700 and a water purifier on average costs between $150-300, which is 10% of the annual income.
In conclusion, to imagine life without water is impossible and producing water is non-viable as of today, making conservation and preservation the only chance to avoid Day Zero for many cities. We have identified two opportunities in this market. Firstly, IOT enabled smart water sub meters can improve fairness in water bills among residents and also inflict a behavior change where residents become more conscious of the water usage once they start measuring it. Secondly, an upstart that solves the problem of water filtration by the use of technology to distribute water purifiers at affordable rates for the masses. You can read more about our deep dive into this space here.
Previously, we had spoken about the government mandated purge of 59 Chinese apps in late June which included all Bytedance entities. At 200MM MAUs, India was the single biggest market for TikTok globally, in terms of number of users. The exit of TikTok, access to cheap mobile data powered by Jio, and the availability of budget smartphones have created an ever-expanding whitespace of the ‘Bharat’ users. Coupled with a growing ‘Make in India’ sentiment, we are witnessing a fascinating battle of video content being fought between upstarts and new offerings by incumbent Indian media / digital content companies. To understand the upstarts in India better, we took a step back and analyzed Bytedance’s rise to prominence through Toutiao, Douyin, and TikTok. We noticed a careful pattern in the way Bytedance approached its products - identify the pain point, build a great product with strong user retention, strong data mining and analysis, innovative growth strategy and finally, a well-defined monetisation strategy.
Taking off from ByteDance’s approach, we have observed that you need 3 pillars to build a company in the short-form video space. We call these the 3 rights to win and it’s our yardstick of measurement while analysing a company in this space. The 3 rights are- 1) A solid product, technology stack, and the use of data science: This can be achieved by offering outstanding creation and editing tools within the camera, building your platform on top of an interest graph, having the tools to collect the data and analyze it, and finally using this data to create a hyper-personalized news feed of videos, 2) A growth strategy: Once the current hype subsides the apps need to have a sustainable strategy to grow. Usually, this has been done through sky-high spend on marketing to remain omnipresent, subtle growth hacks within the product to promote virality, and strong engagement with the community. 3) A monetisation strategy: Traditionally, monetisation has been achieved through relevant in-feed ads. India being a lower ARPU market, monetisation has been tough to achieve through ads. To overcome this, video content platforms are now planning to monetize through hashtag challenges, brand takeovers, and most importantly video commerce.
While comparing the Indian startups against these rights, we have struggled to find product differentiation among the players. Their UI is identical and reminiscent of TikTok. As a user, the experience across the apps remains similar. While this works really well in the short-term for user onboarding, they will need to evolve over time. Having a TikTok-esque UI also leads people to expect a similar quality experience and product. It is unfair to compare the upstarts’ technology to that of TikTok, who took almost a decade to perfect it. We are not expecting them to immediately match up to TikTok’s reinforcement algorithms, but we do need to see an evolved product reflective of a new unique consumer insight and an engaged community in the short term. Users ultimately reward you for building the best product, irrespective of whether you are the first or last to build it. It seems like most businesses in this space are simply riding the ‘Make in India’ hype. We have not yet seen a clear consumer insight or deep product differentiation, so we remain in a wait and watch mode. You can read our comprehensive take on this topic here.
To wrap up, this quarter was rather eventful. We grew a lot more comfortable living and working in the midst of a pandemic. COVID provided us with a new lens to look at some sectors. We deep-dove into some of the major trends in the Indian startup ecosystem and consequently met some promising, relevant startups. As we step into the final quarter of a rather unconventional year, we’re looking forward to understanding the growing jobs industry and the rise of social commerce companies in India. Look forward to our blogs on the same!
Those that make it through are not unscathed – they have battle wounds. The challenges of the first year take their toll… emotionally, organizationally, culturally. While the first year has likely felt like a sprint, it is important to remember that this is a marathon and it is impossible to continue to run a marathon at a sprint pace.
At Lightbox we’ve always tried to use tech to build interesting businesses. Companies that understand what Indian consumers want as well as they understand their household budgets. We ran our annual day at a modern art gallery in Colaba, with our CEOs as well as a few founders from our network to lead the discussion.
When we first met to discuss starting a fund, one of the things that we all had in common was that we were entrepreneurs. We had launched our own companies, gotten rejected by investor after investor, produced good and bad products and experienced failure after failure. We were start up warriors and had the battle scars to prove it.
Everybody pivots. If you ask anyone who’s run a business in the past, they’ll tell you they pivot a lot. They pivot based on everything from customer feedback, to external advice, to market conditions. And its a good thing….
Sandeep Murthy, Partner at Lightbox, on the difference between fintech and financial services. The difference is in how the data is used.
Franchising revolves around duplicating the franchisor’s business blueprint across different locations. This means that as a franchisor, you need far less capital with which to expand and your risk is largely limited to the capital you invest in developing your franchise. This investment is often less than the cost of opening one additional company-owned location. As industries are forced to take a step back and contemplate their business models, what will the future of franchising look like?
Our summer '19 intern, Aryaan Dubash, investigates plant based alternatives in the Indian context