Note from the Manager

Believe it or not, we made it - we have reached the end of this year. 2020 has been unpredictable, to say the least. A lot has been written about how it drastically changed consumers’ habits, maybe forever. But the arrow of time keeps marching forward and as we welcome 2021 with cautious optimism, we want to take a few moments to look back on what 2020 meant for us, here at Lightbox, and in the larger startup ecosystem. The 2 biggest risks to consumption in India are climate change and social issues. This quarter we decided to dive deeper into how social inequality manifests into our everyday life- from unemployment to commerce. The former manifests majorly in the Blue and Grey collar market. The traditional staffing experience is time consuming, expensive, and inefficient. The latter creates a pressing need for a more inclusive shopping experience, leading to the rise of Social Commerce. Here is our detailed thesis on Social Commerce and the Jobs industry.
 

One of the highlights of our year has always been our Annual Investor Day. This Investor Day was definitely one for the books. Not only did we host it online, but it was repeated 3 times a day over 3 days to accommodate time zones. This ensured phenomenal reach and ample time for interaction with our portfolio companies. We hosted 5x the usual number of participants. Collectively, they spent 1,096 hours on the platform and made 2,041 connections. We hope you enjoyed the event as much as we did and we’re grateful for your overwhelmingly positive response towards it. In case you missed the event, or would like to watch it again, you can find it here.
 

Deal flow in Q4 saw a return to pre-COVID levels, which was encouraging to see. In line with global trends, we saw a significant increase in deals from the HealthTech, FinTech, and E-Commerce spaces. Despite the pandemic and the lockdown, the growth of Indian startups remained unfettered in 2020. The ecosystem grew up to be the third-largest startup ecosystem in the world, with a new startup entering the unicorn club practically every month. According to an estimate, there are currently 38,815 active startups in India, of which 1,050 were launched this year. In terms of unicorn creation, 2020 was the best year for startups with 11 new startups joining the $1BN+ valuation club, with the total now standing at 42.
 

Venture Capital and Private Equity investments in India for the year came in at $47.5BN, holding steady from $47.2BN in CY2019. Reliance Group alone took home 36% of this, raising $17.2BN across Jio and Reliance Retail. The lockdowns imposed during the early part of the year impacted business activity across sectors. Deal activity was slow in April ($461MM raised) and May ($318.5MM raised) but picked up in December ($1.5BN raised) ending the year with strong momentum. Exits took a backseat, touching a 5 year low in 2020, coming in at $6BN across 146 deals.

A growing, powerful trend we observed in 2020 was the rise of Social. Not necessarily as a category by itself, but a powerful enablement tool in all the sectors. Just as every industry makes the crucial transition from analog to digital, nearly every category of company will eventually make the transition from single-player to multiplayer, from company-driven to community-driven, from individual to social. This integration of a social experience in a product’s fundamental offering was especially prominent in Commerce. Interestingly, this trend was not just on a rise in India, it was visible globally and covered extensively. Thus, we decided to understand the ‘social’ uprising better, starting with Social Commerce.
 

E-commerce—powered by cheap data, supply-side innovations, and digitally savvy customers—has become a $60BN gross merchandise value industry in India in FY20. Just over 100MM of the estimated 572MM Indians connected to the Internet purchase products online today. Think about that last line for a second, it is quite absurd. Despite having access to the internet, why are only 17% of Indians shopping online? To put it quite simply, because the traditional commerce experience wasn’t built for them. The new generation of internet users’ introduction to the internet has been mobile-first and majorly through videos and image-based platforms (Facebook, YouTube, TikTok, ShareChat etc) and not text-based. These traditional platforms are intent-based, English first, text-based, unassisted, and lack community.

New emerging platforms need to build for this new generation of Internet users. They are averse to English (but are aspirational) and prefer a more visual experience than textual. Platforms need to solve for three emotions- lack of awareness, confidence, and trust. Enter Social Commerce: it can be understood as a philosophy toward online shopping that humanizes the robotic online shopping experience, applying insights and design approaches that have been more traditionally associated with gaming, social media, or entertainment platforms. This new frontier of commerce in India will help democratize access to online commerce for everyone. We believe this makes the transition to Social Commerce not just inevitable but also necessary.

An array of business models have risen to meet these broader human needs. By leveraging a variety of formats, ranging from conversational commerce on chat platforms, to video-led commerce, to a vibrant social reseller community, startups are finding innovative ways to integrate a social experience into traditional commerce. There are 4 major business models that exist in this space, all trying to solve different problems (emotions) of the users. You can find our detailed findings on the 4 models and the overall thesis on Social Commerce here.

Social inequality is a major risk to consumption in India. Out of the many social issues in India – unemployment is a rising issue and could be a hindrance to India’s goal of becoming a $5TN economy. To understand how startups are leveraging technology to tackle this pressing issue, we looked deeper into the jobs market in India with a particular focus on the Blue and Grey collar jobs. There are 4 key issues in the labor market that are unique to India: low labor participation, a mismatch between the share of labor participation and economic output across sectors, a smaller share of formal jobs, and an increasing number of unskilled laborers being added to the workforce.

Given India’s demography, China is often used as a benchmark to highlight the potential of the Indian economy but the differences between the two countries are quite stark. In China, the services sector accounts for 47% of the workforce while in India that number is 24%. On the agriculture side the story is the opposite, In India, 46% of our workforce is engaged in agriculture compared to 25% in China. As we looked to understand the opportunities in the job market, we broke down the labor force into three buckets – White, Grey, and Blue Collar. White-collar workers typically work in front offices at corporates / organized SMEs. When it comes to filling these job vacancies, a company typically uses job portals to acquire talents and then takes care of development, operations, and engagement internally via an HR team. The Grey and Blue-collar workers typically perform repetitive jobs at corporates or hard manual work. But to fill a Grey or Blue-collar job vacancy, a company prefers to use a staffing agency. The staffing agency takes care of all the client’s project needs from acquiring talent to development, operations and engagement. The key issues for Blue and Grey collar employers are: quality, timely sourcing of candidates, and employee retention. Staffing businesses have low margins whereas job portals have high margins. However, job portals work well for White-collar recruitment and staffing businesses work well for blue and grey collar recruitment.

Staffing companies in India are run in an old school manner with little to no usage of technology. While margins are improving they continue to remain extremely low driven by three key factors: Low differentiation and high sourcing costing, low retention on the supply side, and the transactional nature of the employee / employer relationship. A staffing agency that is vertically focused (Security and Intelligence Services) stands out both in terms of service as well as margins. You can find our detailed view on the Indian Jobs industry here.

Over the past few quarters, we have discussed another growing problem in India – the taboo around mental health. The pandemic brought increased levels of anxiety and isolation, heightening the need to address mental health. The enormous gap between those who need mental health care and those that receive care (ie. “the treatment gap”) is probably one of the biggest problems. We’re excited to announce that we have completed our final due-diligence on InnerHour. InnerHour not only reduces the treatment gap, but also helps treat mental illness at scale. It takes a collaborative, omnichannel approach designed to cater to every patient’s need- from discovery to on-going care and monitoring. We’re delighted to be a part of their journey.

The close of InnerHour in January 2021, will mark the addition of 3 new companies to our family of portfolio companies, along with WayCool and CityFlo, in the past 12 months. In the coming quarter, we will present our analysis on the Consumer Durables space in India. It has been a largely ignored space by Venture funds, however we believe it holds a lot of potential and value waiting to be unlocked. We’re also deep-diving into India Stack – the Public Digital Infrastructure that has set the foundation for Financial inclusion in the country.

2020 wasn’t an easy year. The world threw some unexpected challenges our way, but we persevered. Through adjusting to working from home, countless Zoom calls, and learning how to evaluate companies remotely. We have made countless memories and picked up skills which we’ll carry in the new year. Needless to say, all of this wouldn’t have been possible without your unwavering support and trust. In 2021, we look forward to identifying new opportunities that align with our values and continuing to support our existing portfolio. Goodbye 2020, onwards and upwards. Happy New Year!