Avendus Capital

Digital & Technology

2020 Themes
 Overview CY2019 Digital and Technology transactions closed

• 27-member team

Online Retail
Secondary stake sale Private Equity

• Relationship-based, subject matter

Private Equity Private Equity

expertise led advisory USD 275 Mn Undisclosed Undisclosed Undisclosed USD 30 Mn

Advisor to: Lenskart Advisor to: Nykaa Advisor to: Pharmeasy April 2019 Advisor to: Licious

• >50% market share of the banked deals

Dec 2019 Dec 2019 Dec 2019 Dec 2019

• Closed 100 deals worth $6 bn in value in

Payments

InsurTech
Strategic Sale Private Equity
Secondary
6 years:
Private Equity
transaction for
investors Binny Bansal
USD 70 Mn
• Closed 36+ transactions in the last Undisclosed Undisclosed USD 16 mn / USD 65 mn
Advisor to: Wibmo Advisor to: Sellers Advisor to: Acko
Advisor to: Zeta
April 2019 December 2019 Nov 2019 / March 2019
24 months
Dec 2019

• 25+ tech closures of $75 mn+

Services

Logistics
Private Equity

Online
Strategic investment Secondary stake sale to Secondary stake sale

• Distribution capabilities to 200+ tech USD 40 Mn

investors globally
Undisclosed Undisclosed Undisclosed Advisor to: ElasticRun
Advisor to: Livspace Advisor to: Seller Advisor to shareholders Oct 2019
May 2019 Mar 2019 Nov 2019

• Introduced 30+ new investors to the

Digital Media
& Classifieds
Indian digital ecosystem Education
Edtech/
Private Equity Private Equity

SaaS
Private Equity Private Equity

• ~70% transaction closures; understand Undisclosed

USD 50 mn
the market pulse
USD 40 mn
Advisor to: Eruditus Undisclosed USD 45 Mn Advisor to Zenoti
Jan 2019 April 2019 Dec 2019 April, 2019

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Internet adoption will continue its rapid growth, despite increase in data
charges

• Large number of people are getting online and this pace will continue to accelerate
• 627 mn internet subscribers in 2019, addition of 67 mn y-o-y
• Internet data and content consumption to explode
• 350 mn users engaged in social media spending ~17 hours per week
• Digital payments are growing exponentially
• $500bn in 2019 ($265bn from UPI, 3x from 2018)
• Indian internet eco-system will continue to thrive on robust funding environment and stronger business models
• 1,894 start-ups incorporated in 2019 of which 726 got seed funding
• 35 unicorns, 25 companies between $500mn-$1bn valuation, another 10+ unicorns will be added in 2020
• Digital will increasingly touch and transform traditional industries
• Beyond E-tail – FMCG, Freight, SMEs, Kirana eco-system, lending, insurance, investing
• Given capital starved environment of traditional industries, digital eco-system with capital advantage will further
consolidate market share
• 25% of FDI has gone into the digital eco-system in 2019, a disproportionately large share

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1. Avendus estimates
Funding environment: Continue to see a robust funding environment for
high quality players – fewer mega rounds likely in 2020

• 2019 saw $14.5bn capital raised by D&T companies, up ~40% from 2018

• Only 40% of this funding went to unicorns (unlike SE Asia, where large part goes towards unicorns)

• Funding environment for companies valued between $150-$400mn will remain strongest

• For unicorns++, unicorns and soonicorns, path to profitability and operating leverage is a key discussion

• 13 unicorns are EBITDA positive, 18 are CM positive already – this pace will accelerate

• Unit economics will be back in fashion across all the rounds, especially series C onwards

• “Hope capital” raised from large syndicates will have to show credible business traction in 2020

• 15+ companies raised >30mn series A or B in 2019

• Digital ecosystem was isolated from broader macro environment thus far – that could change in 2020

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1. Avendus estimates
Exit environment: Private secondaries will take centre stage

• 2019 witnessed $4.6bn exits through private secondaries

• Journey to IPO will accelerate, but we will not see high profile IPOs in 2020

• Beyond profitability, IPO readiness process is an arduous journey

• Fewer portfolio secondaries, funds will focus on premium assets for liquidity

• Portfolio secondaries entail longer processes with higher uncertainties

• For larger and stronger players (with established unit economics), demand for secondary will be very high

• Sovereign funds, pension funds, strategic players and private equity funds will start playing an important role

• Consolidation will accelerate

• Investors may force consolidation in hyper competitive spaces (cash exits unlikely)

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1. Avendus estimates
E-tail: Digital first brands taking the lead, building efficient supply chain
and customer loyalty pivotal to emerging business models
Key sectoral trends / drivers
• Online retail volumes will continue to grow – omnichannel will be the key theme
• Jio’s foray in E-tail and power dynamics with Amazon, Flipkart
• Jio retail is at $26bn annualised revenue (Q3FY20) growing 10% sequential QoQ2
• Vertical players will focus on improving profitability
• Digital-first brands to take centre stage

Challenges to address
• Volatility in regulatory environment
• Digital-first brands will need to focus on clear brand proposition and innovative and efficient distribution channels
• Growth vs profitability

Key players to watch out for in 2020 Emerging early-stage companies

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1. Avendus estimates. 2. RIL investor presentation 17th Jan 2020
Local commerce: ‘Whatsapp commerce’ here to stay, interesting
business models would emerge
Key sectoral trends / drivers
• Indian WhatsApp users crossed 400mn1 in July 2019
• The next 400mn online transacting users aspire to experience and consume more
• Trust factor of buying from a known person and affordability driving sales
• New distribution channels with local language content to emerge – 66% of Indian purchasers are non-English
speaking
• Similar models in adjacencies, groceries, unbranded categories

Challenges to address
• Unit economics at lower ticket sizes
• Smarter consumers upgrade to buying from marketplaces directly
• Competition from incumbent horizontals who can add this service as an added feature

Key players to watch out for in 2020 Emerging early-stage companies

1. News reports 7
B2B marketplaces: Adoption of technology by SME/kiranas to explode:
All roads lead to lending!
Key sectoral trends / drivers
• MSME and traders are rapidly moving online
• 10mn+ seller base is already doing business online with organized players1
• Product margins will improve in industrial B2B marketplaces and FMCG tier II / III distribution in 2020
• 12mn mom-and-pop shops of which 80%+ are data dark for FMCG majors2
• Areas like export logistics, infrastructure, commodities, healthcare B2B to become mainstream

Challenges to address
• Huge upfront investments
• Competitive space in metros and tier I leading to thinner margins
• FMCG majors are keen, but are moving slowly
• Working capital financing is the key need – understanding of credit risk is important

Key players to watch out for in 2020 Other emerging companies

1. Avendus estimates
2. Press articles, Avendus estimates 8
Online Services: Journey towards profitability, newer verticals emerge
Key sectoral trends / drivers
• Food-tech, ticketing has become an integral part of living
• 100mn+ food orders per month, US$1bn plus tickets (p.a) booked online1
• Faster adaption of newer services (e.g home services, auto servicing)
• 150%+ growth in home services1
• Focus will be on penetrating tier 2 & 3 cities to drive further growth
• Shift to owned inventory (via cloud kitchens, private label brands) to expand profit margins
• Restaurants, local establishments are endorsing innovative digital channels for discovery
• US$1bn plus volume is driven through some platforms1

Challenges to address
• Hyper-competition in some verticals
• Low cost alternatives in traditional business models
• Challenges to continuous expansion of underlying market
Key players to watch out for in 2020 Emerging early-stage companies

1. Avendus estimates 9
Travel and mobility: Affordable hotel space to stabilize, experiences will
gain traction and micro-mobility will see rational growth
Key sectoral trends / drivers
• OTAs and budget hotels will stabilize the operations

• International experiences will see tremendous adaption

• Cab ride-hailing companies will play for robust but profitable growth

• Micro mobility players, bus aggregators (local and long distance) will see faster adaption

• EVs mainstream will still take some time

Challenges to address
• Customer and supply loyalty

• Physical infrastructure, asset quality and heavy execution

• Leasing and financing costs

Key players to watch out for in 2020 Emerging early-stage companies

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Ed-tech: Reach, awareness & affordability across the country will create
huge outcomes
Key sectoral trends / drivers
• 4mn paid users already paying $150 per user1: Best-in-class amongst all online models
• Content and learning delivery driven models will drive growth
• Rise of tier 2 and 3 cities and vernacular content expanding this market
• More than 33% users are already coming from tier 2/3 cities1
• Global content and India’s cost advantage to drive expansion in global markets
• Consumers will embrace newer concepts beyond standard K-12 materials

Challenges to address

• Building brand / trust takes capital and time

• Broadband infrastructure and speed
• High quality supply, its training and retention

Key players to watch out for in 2020 Other emerging companies

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1. Avendus estimates
Payments: UPI is a disrupter, focus shifts towards value added services,
super apps & finally lending
Key sectoral trends / drivers
• Hyper-growth in UPI transactions – 2.3x YoY growth
• UPI volumes were US$28.9bn in Dec19, more than total Credit and Debit card volume of $16.8bn1
• Multiple payment options need integrated open-loop solutions
• Monetisation to come from
• VAS, credit (EMI, working capital), data insights, marketing campaigns
• Many payments / wallet apps to focus on becoming super apps given their consumer base

Challenges to address

• Rules of the game are changing every day

• Customer retention in absence of cashbacks and discounts
• High cost of merchant acquisition
• Lending and insurance seems to be the key for monetization

Key players to watch out for in 2020 Emerging early-stage companies

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1. RBI, UPI websites
Fintech intermediaries: Established leaders with brand to further
consolidate market share, B2B2C will evolve
Key sectoral trends / drivers
• Leaders continue to benefit from the migration of consumers towards online
• Leaders becoming systemically important for banks, NBFCs, insurance companies
• Wallets, Horizontals, emerging “Neo-bank aspirants” and other “super-apps” to compete for same market
• Tech enabled B2B2C channel will see good traction, given the need for assistance

Challenges to address

• Assisted delivery to stay, impeding true non-linear margin evolution in short term
• Consumer retention in credit products as customer grows
• Brand establishment is important for lowering CAC

Key players to watch out for in 2020

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Lending Tech (SME lending): Tech to be enabler in processes, offline
can’t be wished away
Key sectoral trends / drivers
• SMEs are credit hungry, NBFCs with access to funds have huge opportunity
• Total SME lending grew by 10%, whereas NBFC’s SME portfolio grew at 26%1
• 500,000 SMEs are already vendors on ecommerce companies2
• Phygital: Tech improves processes, TAT and underwriting, but physical interface is must
• Differentiated acquisition channels (trade marketplaces, dealer networks, POS) will be winners
• Focus on NPAs and collections

Challenges to address
• There always will be high quality traditional NBFCs to compare with
• CAC of SMEs – DSAs vs new channels
• Distribution channels becoming lenders themselves (e.g. payment companies)

Key players to watch out for in 2020 Other emerging companies

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1,2. CRISL report, Avendus estimates
Lending Tech (Consumer lending): Consumer lending growing, bank
partnerships playing an increasingly important role
Key sectoral trends / drivers
• Shift towards unsecured from mainstay housing and vehicle finance
• Unsecured lending growing at 30% vs 10% growth in secured lending1
• Fin-tech lenders will focus on long tenor debt in 2020
• Building loan book vis-à-vis short-term transactions
• Banks partnerships important especially in capital constrained era
• Players will focus on building strong collection engines for larger ticket sizes

Challenges to address

• There always will be Bajaj Fin to compare with

• Balance between High CAC and Customer ownership
• Customer data and privacy

Key players to watch out for in 2020

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1. Combination of research reports of CRISIL, DRHPs, broker report and Avendus estimates
Insure-Tech (manufacturing): Seamless digital experience and data-
based underwriting to be differentiators
Key sectoral trends / drivers

• Digital adoption: Rapid increase in digital penetration

• 7% of Auto today from ~2% 2 years ago
• Internet ecosystem to acquire consumers and data is increasingly gaining importance
• Customer-centric products – both bit-sized and customized – will evolve
• Seamless experience will weigh over small price difference

Challenges to address

• Will be compared against established insurances irrespective of size

• Capital hungry sector, easing of FDI norms is key
• Brand: Time required to build affinity for high involvement products

Key players to watch out for in 2020

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1. IRDA
Wealth-tech: In addition to growing AuM, focus will shift to customer
engagement and monetization
Key sectoral trends / drivers
• Digital players are likely to gain market share
• Discount brokerage market share has risen to 9% today from 2% in FY161
• Retail investors will continue shifting towards direct plans
• Players need to put greater emphasis on designing intuitive UI/UX and customized offerings to retain customers
• Payments apps will differentiate their product offering to build a sustainable MFs distribution business

Challenges to watch for

• Lowering CAC: distributor led acquisition vs direct acquisition
• Getting high LTV customers will be the key
• Moving revenue mix from fee-based (one-time transaction based) to commission-based (recurring)
• Monetization in direct plans, overall market size of brokerages, fees on AMC businesses

Key players to watch out for in 2020

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1. NSE, MCA data, Avendus estimate
Enablers: Fin-tech players using different use cases to acquire SMEs/
consumers
Key sectoral trends / drivers
• Strong value proposition
• Services like accounting software, tax filing, business reports, collection reminders
• 8mn+ merchants are already using apps / technology to manage finances
• Entry point for:
• Employee benefits, forex cards, meal cards and eventual acquisition of consumers for lending
• Value proposition of “neo-banks” will evolve

Challenges to address
• Hard to monetize on core SME services offering
• Lending is the ultimate monetization
• Quality of customers acquired, their ability to borrow
• Access to debt and cost of borrowing

Key players to watch out for in 2020 Emerging early-stage companies

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Logistics tech: Tech to bring efficiencies, execution will separate the men
from boys
Key sectoral trends / drivers
• First-mile and last mile pure-play will play an increasingly important role
• Warehouses and fulfilment centers move closer to consumer or SME
• Trucking marketplaces will focus on profitability in 2020
• Newer areas will see dominant players e.g. international freight, air cargo
• Players with ability to provide IT integration with OEMs for billing, tracking, inventory management will shine

Challenges to address

• High working capital and asset maintenance cost

• Solving for supply fragmentation and ability to “take out” the middleman to create margin
• Pricing pressure

Key players to watch out for in 2020 Other emerging companies

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Health tech: Digital technologies are working overtime to solve for
availability, accessibility and affordability of healthcare
Key sectoral trends / drivers
• Still in its 1st generation w.r.t. digitization of data
• Govt. regulations could help ease the friction in consumer experience
• E-pharmacies will become mainstream for consumers; health, wellness and sports are next frontiers
• Practitioners are embracing technology to give their patients seamless service

Challenges to address
• Regulation and implementation needs to catch up with innovation across sub-sectors
• Slow adoption of technology by pharma, hospitals and medical experts
• Data protection framework to be established to remove grey zones
• Execution heavy business – unit economics depends on expansion in traditional margin structure

Key players to watch out for in 2020 Emerging early-stage companies

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Online classifieds: Moving from pure-play classifieds to a combination of
classifieds and transactions
Key sectoral trends / drivers
• Internet will be mainstream for discovery, but not enough
• Transaction services along with discovery across all sub sectors
• 2020 will see heightened competition for the market share in cars
• Transaction led business models will have lower margins

Challenges to address
• Execution heavy business
• Underlying market challenges (auto, real estate)
• Lending and insurance would need physical execution for seamless delivery

Key players to watch out for in 2020 Emerging early-stage companies

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Content & Gaming: Content hungry “next 500mn” users are driving
engagement and will drive monetization in 2020
Key sectoral trends / drivers
• Vernacular the growth engine – Focus on next 500mn users
• Advertising dollars growth exponential towards digital
• $3.5bn digital ad market for 2019, growth of 35%+, expected to grow at same pace1
• Local digital ad market is growing by 55% YoY2
• Land grab for eyeballs in OTT players will continue
• Real money gaming gaining traction – low ticket size high frequency games
• Casual gaming still dominated by international studios

Challenges to address
• Data tariff increases
• Regulatory overhang, content moderation, especially in UGC
• Low customer stickiness and high CAC
• High development costs for gaming

Key players to watch out for in 2020 Emerging early-stage companies

1. Approx $1bn of direct spend through credit cards on digital marketplaces goes unreported for digital market sizing data by advertising agencies 22
SaaS: India will see more SaaS companies breaking the US$10mn ARR
barrier much faster
Key sectoral trends / drivers
• Vertical SaaS continues to grow globally with enterprises and SMEs embracing it with vigor
• Larger players have shown the way for Indian SaaS start ups to break into developed market
• 4+ companies crossed $100mn ARR mark, 43 companies have crossed $5mn ARR mark1
• Migration of Indian founders to the US after proof of concept is proven will accelerate
• India and APAC SaaS plays will emerge in 2020 as enterprises would adapt and start paying market rates

Challenges to address
• Longer implementation cycles
• India-first companies have lower ARPU
• Early entry into the US market has mixed results of execution
• Balanced mix of inside sales and feet on street in the US: Hiring “right” US salespersons has always been a
challenge

Key players to watch out for in 2020 Emerging early-stage companies

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1. News article
Thanks

Karan Sharma Pankaj Naik

Executive Director Executive Director
Co-Head - Digital & Tech Investment Banking Co-Head - Digital & Tech Investment Banking
Email: karan.sharma@avendus.com Email: pankaj.naik@avendus.com
Landline: +91 22 6648 0967 Landline: +91 22 6648 0020

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