Technology

How will the Cybersecurity Sector Rise in a Digitized World?

by Sandeep Kumar

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Every now and then we keep hearing about instances of cyber threats and attacks wiping out millions of dollars from various organizations. The cases have risen as several companies went completely digital, especially post-pandemic. 2021 saw a record rise in cybercrime with ransomware attacks rising by 151%. As businesses realize the importance of digital security, they are taking steps to keep their digital stack secured, making cyber resilience a top business priority. As per a survey by WEF, nearly two-thirds of businesses find it difficult to deal with cybersecurity incidents due to a lack of skills. Hence, they need to rely on partnerships with security firms to secure their business from such threats. Cybersecurity is a massive market with over $150 Bn in annual spending. It has led to a positive outlook toward cybersecurity startups. As a result, VCs are betting their money on security startups. 2021 is considered a record-breaking year for the sector as cybersecurity startups raised over $29 Bn in venture capital, outpacing the previous two years combined.

Source: 2022 Cybersecurity Almanac | Momentum Cyber

VC activity and trends

VC investments in cybersecurity have grown gradually over the years. In 2021, VC firms had a really big appetite for cybersecurity as the deal volume crossed $29 Bn, seeing a YoY growth of over 136%. With this, the size of the funding rounds has also increased for security startups, as 82 financing rounds grabbed a deal of more than $100 Mn.

As the startups in the sector are attracting VC money, there has been significant growth in the number of unicorns. About 30 cybersecurity startups achieved the unicorn status last year, with a few of them achieving the mark in just a few years of their inception. For instance, Orca Security, which was founded in 2019, raised $550 Mn in October at a valuation of $1.8 Bn. Wiz, a cloud security provider which was founded in 2020, is now valued at $6 Bn!

According to Momentum Cyber, cloud security has been the favourite segment to receive financing with a total of $4.3 Bn, followed by identity and access management receiving $3.4 Bn in funding, and endpoint security with $2.8 Bn. Geographically, the majority of the cybersecurity startups that received funding, securing over $17.4 Bn, belong to the U.S. followed by Israel (as per Crunchbase data).

Source: 2022 Cybersecurity Almanac | Momentum Cyber

Cybersecurity investment trend forecast

Based on the current momentum and growing threat landscape, the cybersecurity sector could see an even bigger year in 2022. This year, cybersecurity startups could see a market opportunity in the following areas, thereby drawing investors’ interest.

 Cryptocurrency

The crypto market is booming across the world. However, the area is also prone to growing amounts of cyberattacks. Most recently, Axie Infinity was a victim of one of the biggest crypto heists worth over $600 Mn. There are multiple cases like these, hence crypto security platforms (like Fireblocks) are expected to see investors’ focus. According to the Managing Director at Insight Partners, areas within crypto security, such as coin monitoring will see a critical focus. It is expected that large payment companies and even traditional market exchanges will carefully look at the space around security.

 Compliance and Auditing

2022 is likely to see a move towards “shifting left of compliance”, which intends to find errors early in software delivery for compliance and third-party audits. This also includes smart contract security audits. Some startups already working in this space include CertiK, Certora, and OpenZeppelin.

 Web3 and Metaverse

A large number of startups are exploring the web3 and metaverse space. This means startups involved in securing user identity and ownership could attract VC money. Identity management and authentication have already been popular in 2021, however, startups looking beyond and into the future of the internet could win big.

How to spot promising early-stage cybersecurity startups?

The number of cybersecurity unicorns and new startups in the sector is multiplying. As many startups are attracting VCs and raising funds at higher valuations, it is important to spot promising startups early-on to get higher returns.

YL Ventures, an America-Israeli VC firm specializing in early-stage cybersecurity investments, suggests some benchmarks that you can look out for. Some of the early-stage startups backed by YL Ventures include Orca Security, Enso Security, Grip Security, Piiano, Valence, and Eureka.

 Initial Revenue:

Series A companies with $500k in ARR attract strong investors. Best startups in the sector manage to reach the $500k benchmark in less than 18 months of operation. From this level, top-performing startups can reach $1 Mn in 18–24 months, which largely depends on the company’s ability to get relevant customers.

 Average Contract Value:

Contrary to founders’ concern, Average Contract Value (ACV) is rather a misleading point of comparison as cybersecurity goods and services, along with their business models, sales motions, and customer profiles, are far too divergent when compared across the industry. However, despite the divergence, it is expected that growth-oriented companies can improve their ACV over time as the company develops additional features and improves their ability to secure large enterprise customers.

 Initial Paying Customers:

On average, successful US-based cybersecurity startups will have closed their first payment within 12 months of their seed round. A company should aim to secure at least one paying customer one full year from initial funding. As per YL Ventures, at around the 18-month mark, a startup should aim for at least 10 paying customers. However, security startups in traditional and heavily regulated sectors may have a smaller number of contracts. They should instead focus on the size of the contract.

 Hiring:

On average, successful startups will have a go-to-market (GTM) executive within the first year of securing seed funding. Apart from this, successful startups tend to have about 25 full-time employees by the 18-month mark, and the number doubles at around two years.

Cybersecurity’s demand on rise

The number of cyber threats is growing in current times, and they are not expected to decline in the near future. It is expected that over the next five years, global cybercrime costs will be rising by 15% per annum, and is estimated to reach $10.5 Tn by 2025. As businesses have made a shift towards a digitized economy, they need to protect themselves from such malicious attacks. Security companies are building themselves continuously with the necessity to deal with the present and possible threats. Contrary to the horizontal approach which focuses on enterprise applications, cybersecurity has now been focusing on the vertical approach so that specific pain points of each industry can be addressed.

The global spending on cybersecurity products and services is estimated to reach $1.75 Tn between 2021 and 2025. This number suggests the huge TAM potential that the industry holds in ensuring cyber safety. As the security concern comes to the forefront in business discussions, the cybersecurity bubble is going to rise and is not expected to burst any time soon.

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Is the Chinese Stock Market a Safe Haven for Chinese Tech Companies?

by Sandeep Kumar

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Chinese Stocks Performance

Most Chinese tech companies listed in either the U.S. or Hong Kong experienced a disastrous wave of panic selling, pushing prices to a record low. The Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, underwent the biggest drop since November 2008. Analysts have termed this drop to be “scary” even in this extremely volatile market. The Index was down by 7.2% on 14th March 2022 and another 6.6% drop on 15th March 2022.

After a solid performance in 2020, most overseas-listed Chinese tech companies have been on a constant decline in the last year. The market cap changes from February 2021 to March 2022 have been immense for the 11 largest and best-known Chinese tech companies with Alibaba’s market cap slashed by 66%, Tencent by 50%, and PDD, the rising e-commerce platform, by 82%. Several notable names fell by double-digit percentages — JD.com by 7.14%, Hello Group by 5.74%, Baozun by 10.43%, iQIYI by 16.74% and Zhihu by 16.14%. The MSCI China Index has seen its valuation more than halve from a Feb. 2021 peak. The gauge is trading at about 9 times its 12-month forward earnings estimates, versus a five-year average of 12.6

Recently, JP Morgan Chase downgraded several Chinese tech stocks starting with JD.com, China’s largest direct retailer, from overweight to underweight and slashed its price target from $100 to $35. This was in harmony and came in as a response to valuations falling in the sector as well as due to a tougher macroeconomic environment.

Reasons for Plunge in Chinese Tech Stocks

The recent plunge in Chinese tech stocks has been such that investment banks like JP Morgan Chase and Goldman Sachs is now calling Alibaba, Tencent and Meituan “uninvestable” over the next 6 to 12 months. Russia-related risks, the domestic spread of Covid-19, and strong market regulations are apparently the biggest contributors that have caused this downfall in the market.

Firstly, among the geopolitical stress between Russia and Ukraine, the US and other European nations would impose sanctions on China, which would further squeeze the economy at a vulnerable time. Secondly, China has shut down the tech manufacturing hub of Shenzhen for more than a few weeks to combat the domestic spread of the Covid-19 virus. Even though this might not have a direct relationship with the performance of the stocks, it leads to supply chain and geopolitical concerns that drive manufacturing away from China and could pose itself as a weight on the Chinese economy. Lastly, a spate of recent regulatory developments is making traders wary of investing in Chinese stocks. Tencent Holdings Ltd., the owner of the super app WeChat and one of China’s biggest tech companies, has been facing a large fine for violations of China’s anti-money laundering rules, which has pushed the stock down by more than 10%.

A plunge in Chinese technology stocks slid after the US Securities regulator played down the prospect of an imminent deal to keep local firms listed on the American Exchange. The Securities and Exchange Commission identified several Chinese firms which face the risk of being delisted from the US, as a part of a crackdown on foreign firms that have refused to open their books for scrutiny to US regulators. The SEC added Baidu Inc. to their list recently for barring audit disclosure. Despite all these reasons, certain analysts view that Chinese tech stocks are no longer profitable. Investors are on a thirst for returns and it has become much harder for such companies to display green bottom lines as they are constantly being squeezed by regulations, domestic economic slowdowns and other political factors. Moreover, the macroeconomy has become weak, particularly domestic consumption and as these companies operate in Mainland China, the lack of consumer demand is hurting them constantly.

Measures to boost Chinese market and the rebound of Chinese tech

Stock prices in Hong Kong and China showed significant rebound in their performance after China’s State Council promised to drive the financial markets by easing certain regulations on technology companies, providing support for property developers and overall, boosting the entire economy. Following this announcement, China’s benchmark CSI 300 Index gained 4.3%, Hong Kong’s Hang Seng Index jumped 9.1% and the Hang Seng China Enterprises Index surged 12.5%, in March 2022. It also shot up the share prices of China’s two largest tech companies, Alibaba Group Holdings and Tencent Holdings, by more than 20%. We are seeing clear structural changes in China’s industrial policies and regulatory stance, especially within the tech sector. In the short run, it might have caused pains in the form of slower growth or increasing costs, but it has helped to create long-term benefits such as healthier competitive environment, higher ESG standards, and ultimately, more sustainable growth. Investors also got an optimistic signal when the Chinese Vice Premier held a meeting to stabilize the capital market and asked for more coordination and restraint from regulatory crackdowns, which instantly led to the rebound of these stocks. Big brother, “Beijing”, tried to calm the panicking stock market with this meeting and urged other government agencies to coordinate with the financial regulators before announcing measures that could disrupt the market.

Is Chinese market a safe place for Pre-IPO companies?

Beijing is currently stepping up its oversight on the flood of Chinese listings in the US, which are mostly tech companies. The State Council also announced that the overseas listing rules for domestic companies will be made even stricter and will tighten restrictions on cross-border data flows and security. The crackdown on tech is a common trend and market analysts view that it could not only threaten the IPOs in the pipeline but could also pressurize the popular Chinese ADR market. Chinese regulators are eyeing a rule change that would allow them to block a domestic company from listing in the U.S. even if the unit selling shares is incorporated outside China. The move could be a huge blow for Chinese companies which have clamoured to list in New York in recent years. There could be fewer and slower new listings in the U.S. due to the government crackdown.

Investors might have to reconsider before placing their bets on Chinese tech start-ups as certain new regulations have been imposed on mainland companies looking to go public in the US. Most analysts were of the view that Chinese companies looking to raise capital might face greater uncertainty about their path to getting listed on public markets which could result in lower valuations. Apart from these technical complexities, the new regulations could mean that similar IPOs in the future will likely need to go to Hong Kong. Faced with the potential of lower returns — or the inability to exit investments within a predictable timeframe — many investors in China are holding off on new bets. Chinese IPOs in the U.S. were headed for a record year in 2021 until Chinese ride-hailing company Didi’s listing in late June on the New York Stock Exchange drew Beijing’s attention. Within days, China’s cybersecurity regulator ordered Didi to suspend new user registrations and remove its app from app stores.

The move revealed the enormity of Chinese companies’ compliance risk within the country and marked the beginning of an overhaul of the overseas IPO process.

What does it mean for IPOs in China?

The path to an IPO in the Chinese market looks uncertain. For Chinese companies applying to the US, they must expect stricter regulations from both sides and a higher degree of scrutiny in the market. Moreover, it could also lead to a potential downfall in the company’s valuation and dampen investor sentiment, thereby making it more difficult for such companies to raise funds in the US. According to the Hong Kong Exchange website, more than 140 companies have filings for Hong Kong IPOs. This just makes us conclude that the Hong Kong market might be an alternative for Chinese companies to go public and might best suit the sentiment of investors. Even though the markets have been brought under control, it might not be the perfect platform for companies to go public at this time in the economy.

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This article has been co-authored by Ishaan Poddar, who is in the Research and Insights team of Torre Capital.

Will GoTo IPO be an encore of Grab & Bukalapak?

by Sandeep Kumar

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GoTo, the largest technology group in Indonesia which was formed in 2021 as a result of a merger between ride-hailing giant Go-Jek and the e-commerce firm Tokopedia, is all set to go public on the Indonesia Stock Exchange (IDX). The company aims to raise over $1.1 Bn. The price range for the IPO is set between IDR 316–346 per share, which could give an estimated market capitalisation of about $29 Bn. It is anticipated that the IPO will be one of the biggest milestones in the region for an internet company. However, this is considered to be a bold move, especially in times when most stock markets are facing turbulence.

Looking at the fate of one of the highly anticipated tech stocks of 2021, Grab, which is facing a continuous downfall, we try to see whether GoTo will follow a similar path?

GoTo Snapshots

GoTo’s Financials — Is the valuation justified?

GoTo Group provides a unique ecosystem that combines the need for on-demand, e-commerce, and financial services under a single umbrella through its Gojek, Tokopedia, GoTo Financial platforms. Given the broad range of services offered, GoTo’s ecosystem contributed to more than 2% of Indonesia’s GDP by addressing the needs of about two-thirds of the country’s household consumption.

Source: GoTo

With Pro-forma orders of approximately 2 billion in the 12-months ended 30 September 2021, the company has earned GTV 28.8 Bn during the period. As per the company’s reports, its total addressable market (TAM) in Indonesia is expected to grow significantly by 2025. Despite having a gross revenue of about $1 Bn on the year ending September 2021, GoTo is yet to achieve profitability. With the reported data, GoTo’s EV/Revenue multiple is estimated to be around 28. While its valuation is less than its competitor Grab’s valuation at the time of its IPO, there is no denying fact that GoTo is still highly overvalued. GoTo Group must learn from the tragic post-IPO performance of other tech companies so as to ensure stable results.

How are other Southeast Asian tech companies performing post-IPO?

GoTo’s IPO is sought to be one of the biggest IPO in Indonesia this year. The decision to go public at this time is surely a bold move as most of the financial markets across the globe suffer due to the Ukrainian crisis, along with sharp sell-offs in tech stocks and expectations of rising interest rates. Moreover, the performance of GoTo’s peers in Southeast Asia like Grab, Bukalapak, post-IPO have been disappointing. As a result, some investors are now contemplating GoTo’s prospects.

GoTo’s Singapore-based rival, Grab’s debut on the NASDAQ witnessed an immediate slump after a record SPAC which valued the company close to $40 Bn. Despite its huge market presence, the company still struggles to make profits. Grab’s shares have hit a low this month as the company reported an annual loss of about $3.6 Bn. As we mentioned in our previous article, Grab had highly overestimated its valuation and hence the decline was meant to be.

Another Indonesian e-commerce startup, Bukalapak had a great start on the IDX, soaring 25% on its debut. While the company was a big hit in the Indonesian stock market raising $1.5 Bn, these moments were short-lived as it started to dip a few days after the IPO. The company has now lost more than 74% of its value since its public listing. Singapore-based Sea Ltd, on the contrary, soared after its IPO in 2017 but has seen a decline in recent months. From an all-time high of USD 372.70 per share to its share price recorded at 93.70 (as of 15th March 2022), it has seen a decline of 74.85%.

Will GoTo shares see a similar fate?

The favourable Indonesian stock market is making the stakeholders hopeful of GoTo’s decision to go public in such turbulent times. With some of the existing shareholders agreeing on an 8-month lockup period, the IPO won’t see any sale of shares from existing owners. According to the prospectus, the company also plans on offering about a 10% stake sale outside of the domestic market. However, the dual listing will take time and will happen only after analysing the market dynamics once it becomes public.

It is very bold of GoTo to opt for public listing in times like these when tech stocks are facing sharp sell-offs. Additionally, high valuations with lacking profits may not turn out in favour of the company in the long run, as seen in the case of Grab. While GoTo stock may see a fine start on the IDX, the company’s valuation might be disturbed, as it goes public. Although the extent of variation is difficult to determine right now, it is still a risky bet.

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This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

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How will the Cybersecurity Sector Rise in a Digitized World?

by Sandeep Kumar

Keep up to date with the latest research

Every now and then we keep hearing about instances of cyber threats and attacks wiping out millions of dollars from various organizations. The cases have risen as several companies went completely digital, especially post-pandemic. 2021 saw a record rise in cybercrime with ransomware attacks rising by 151%. As businesses realize the importance of digital security, they are taking steps to keep their digital stack secured, making cyber resilience a top business priority. As per a survey by WEF, nearly two-thirds of businesses find it difficult to deal with cybersecurity incidents due to a lack of skills. Hence, they need to rely on partnerships with security firms to secure their business from such threats. Cybersecurity is a massive market with over $150 Bn in annual spending. It has led to a positive outlook toward cybersecurity startups. As a result, VCs are betting their money on security startups. 2021 is considered a record-breaking year for the sector as cybersecurity startups raised over $29 Bn in venture capital, outpacing the previous two years combined.

Source: 2022 Cybersecurity Almanac | Momentum Cyber

VC activity and trends

VC investments in cybersecurity have grown gradually over the years. In 2021, VC firms had a really big appetite for cybersecurity as the deal volume crossed $29 Bn, seeing a YoY growth of over 136%. With this, the size of the funding rounds has also increased for security startups, as 82 financing rounds grabbed a deal of more than $100 Mn.

As the startups in the sector are attracting VC money, there has been significant growth in the number of unicorns. About 30 cybersecurity startups achieved the unicorn status last year, with a few of them achieving the mark in just a few years of their inception. For instance, Orca Security, which was founded in 2019, raised $550 Mn in October at a valuation of $1.8 Bn. Wiz, a cloud security provider which was founded in 2020, is now valued at $6 Bn!

According to Momentum Cyber, cloud security has been the favourite segment to receive financing with a total of $4.3 Bn, followed by identity and access management receiving $3.4 Bn in funding, and endpoint security with $2.8 Bn. Geographically, the majority of the cybersecurity startups that received funding, securing over $17.4 Bn, belong to the U.S. followed by Israel (as per Crunchbase data).

Source: 2022 Cybersecurity Almanac | Momentum Cyber

Cybersecurity investment trend forecast

Based on the current momentum and growing threat landscape, the cybersecurity sector could see an even bigger year in 2022. This year, cybersecurity startups could see a market opportunity in the following areas, thereby drawing investors’ interest.

 Cryptocurrency

The crypto market is booming across the world. However, the area is also prone to growing amounts of cyberattacks. Most recently, Axie Infinity was a victim of one of the biggest crypto heists worth over $600 Mn. There are multiple cases like these, hence crypto security platforms (like Fireblocks) are expected to see investors’ focus. According to the Managing Director at Insight Partners, areas within crypto security, such as coin monitoring will see a critical focus. It is expected that large payment companies and even traditional market exchanges will carefully look at the space around security.

 Compliance and Auditing

2022 is likely to see a move towards “shifting left of compliance”, which intends to find errors early in software delivery for compliance and third-party audits. This also includes smart contract security audits. Some startups already working in this space include CertiK, Certora, and OpenZeppelin.

 Web3 and Metaverse

A large number of startups are exploring the web3 and metaverse space. This means startups involved in securing user identity and ownership could attract VC money. Identity management and authentication have already been popular in 2021, however, startups looking beyond and into the future of the internet could win big.

How to spot promising early-stage cybersecurity startups?

The number of cybersecurity unicorns and new startups in the sector is multiplying. As many startups are attracting VCs and raising funds at higher valuations, it is important to spot promising startups early-on to get higher returns.

YL Ventures, an America-Israeli VC firm specializing in early-stage cybersecurity investments, suggests some benchmarks that you can look out for. Some of the early-stage startups backed by YL Ventures include Orca Security, Enso Security, Grip Security, Piiano, Valence, and Eureka.

 Initial Revenue:

Series A companies with $500k in ARR attract strong investors. Best startups in the sector manage to reach the $500k benchmark in less than 18 months of operation. From this level, top-performing startups can reach $1 Mn in 18–24 months, which largely depends on the company’s ability to get relevant customers.

 Average Contract Value:

Contrary to founders’ concern, Average Contract Value (ACV) is rather a misleading point of comparison as cybersecurity goods and services, along with their business models, sales motions, and customer profiles, are far too divergent when compared across the industry. However, despite the divergence, it is expected that growth-oriented companies can improve their ACV over time as the company develops additional features and improves their ability to secure large enterprise customers.

 Initial Paying Customers:

On average, successful US-based cybersecurity startups will have closed their first payment within 12 months of their seed round. A company should aim to secure at least one paying customer one full year from initial funding. As per YL Ventures, at around the 18-month mark, a startup should aim for at least 10 paying customers. However, security startups in traditional and heavily regulated sectors may have a smaller number of contracts. They should instead focus on the size of the contract.

 Hiring:

On average, successful startups will have a go-to-market (GTM) executive within the first year of securing seed funding. Apart from this, successful startups tend to have about 25 full-time employees by the 18-month mark, and the number doubles at around two years.

Cybersecurity’s demand on rise

The number of cyber threats is growing in current times, and they are not expected to decline in the near future. It is expected that over the next five years, global cybercrime costs will be rising by 15% per annum, and is estimated to reach $10.5 Tn by 2025. As businesses have made a shift towards a digitized economy, they need to protect themselves from such malicious attacks. Security companies are building themselves continuously with the necessity to deal with the present and possible threats. Contrary to the horizontal approach which focuses on enterprise applications, cybersecurity has now been focusing on the vertical approach so that specific pain points of each industry can be addressed.

The global spending on cybersecurity products and services is estimated to reach $1.75 Tn between 2021 and 2025. This number suggests the huge TAM potential that the industry holds in ensuring cyber safety. As the security concern comes to the forefront in business discussions, the cybersecurity bubble is going to rise and is not expected to burst any time soon.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Upcoming Indian Unicorns: Logistics Startups Driving Towards Growth

by Sandeep Kumar

In India, over 72 startups have gained unicorn status as of November 2021. The count of these billion-dollar companies is expected to reach a total of 76, by the end of the year 2021. Unicorns in the country are currently valued at $168 Bn approximately. The pace with which these companies are gaining valuations is truly remarkable. India’s pace of unicorn growth has surpassed that of China. The Indian economy is capitalizing on a host of international and national factors that are expected to create many more such companies.

We aim to identify and bring out such companies at an early stage so that the secondary’s investors can churn out greater returns. In this edition of Indian Soonicorns, we bring out some companies in the logistics space that have complete potential to reach the billion-dollar mark in the future.

A Hope for Growth in a Highly Fragmented Logistics Market

The size of the Indian logistics industry is estimated to be about $215 Bn, growing at a CAGR of 10.5%. Even though the market is highly fragmented with a large number of organized players, companies are working to make a mark in the industry through the adoption of technology such as Artificial Intelligence, Internet of Things, automation, cloud computing, blockchain, etc. In 2020, the Indian logistics tech market secured over $460 Mn investments, despite the pandemic. Delhivery is one of the successful logistics startups that is looking forward to go public through an IPO this year.

Let us have a look at potential soonicorns that are likely to give high returns to their investors in the longer run.

1. FarEye

Rationale: FarEye, an Indian SaaS start-up that helps firms globally optimize their supply chain and logistics operations and process over 100 Mn transactions each month. The start-up works with over 150 e-commerce and delivery companies globally, including popular names such as Walmart, UPS, DHL, Domino’s, and Amway. The company clocked 280% growth for the FY21 compared to the previous year and 78% of the revenue comes from the market outside India. FarEye has raised a new financing round, it’s third since the pandemic broke last year. The new capital will be used to expand its software platform capabilities, drive expansion in Europe and North America, and explore inorganic growth opportunities.

2. Locus.sh

Rationale: Locus is an intelligent decision-making and automation platform for logistics. It uses deep ML and proprietary algorithms to offer supply-chain solutions. The start-up operates in North America, South Asia, Europe, and the Indian subcontinent, says it has helped its customers save over $150 Mn in logistics costs. The platform is popular among GMGC, retail, and e-commerce firms as well as distribution partners. The company is aiming for a revenue potential of $3–5 Bn between 2023 to 2025 and will be focusing to improve its geographic reach and build its R&D team to expand its product line.

3. Xpressbees

Rationale: They are the fastest-growing express logistics service provider in India catering to end-to-end supply chain solutions. Their logistic solutions across B2B, BTC, Cross-border, and the third party comes with an edge of speed, accuracy, and scalability. It has grown 4X in the last three financial years, from FY18 to FY21. Xpressbees presently has over 100 hubs across India, a storage capacity of 10 lakh sqft, and 52 cargo airports. Fully automated, technology-driven workflows and material movement procedures are used in 75% of Xpressbees’ operations. The team is now working on AI/ML technologies to develop the next generation of smart and intelligent systems.

4. ElasticRun

Rationale: The Pune-based ElasticRun develops an online system that improves the reception of orders from customers and the dispatch of delivery drivers. According to The Economic Times, its current revenue rate is around $350 Mn and is expected to cross $1 Bn over the next 6 months. The company’s focus on using deep technology to address the need for commerce marketplaces has helped them scale rapidly, delivery much broader distribution for consumer product brands, while also creating a level playing field for Kirana stores, given them parity with competing e-commerce players in terms of reach and product selection.

5. Porter

Rationale: Porter offers an end-to-end logistics platform that helps businesses with last mile and first mile deliveries. It helps its customers save on logistics costs and provides support services such as on-demand transportation, real-time visibility, supply chain management. It is said to be one of the only logistics models that is 100% asset-light. The intra-city logistics company that saw a 5x valuation growth in its last funding round, is looking forward to expand its operation to enter the top 35 cities of India by 2023.

6. LEAP India

Rationale: LEAP India provides integrated, end-to-end customized pooling solutions to its customers. The company’s consolidated revenue in FY20 was marked at about $23 Mn and has been estimated to be grown at a CAGR of 47% during FY17 — FY20. According to India Ratings and Research, the company has a fairly stable investment outlook with a rating of ‘IND BBB+’. With only a few players in the palletisation sector, LEAP India is already a leader in the country, having a market share of over 70%.

Logistics Gaining Investors Interest to Seek Higher Valuation

The initial months of the pandemic did slow down the sector, however, it has started to gain momentum. The large but fragmented logistics sector is emerging as a trustable opportunity for investors. The digital transformation that has come up recently is reviving the $200 Bn logistics industry in India, and more so as these startups are keen on using technology to bring down the logistics costs in the country. With greater government support on infrastructure and an expected rise in the B2C and B2B trade in the coming years, logistics companies are set to grow. The third-party logistics segment alone is expected to experience growth by $10.74 Bn during 2021–2024. With investors’ money, the logistics space will become more robust in the near future. We try to spot some startups in this space that are soon expected to join the likes of Delhivery, Rivigo, and Blackbuck.

If you are an investor interested in getting access to these and similar opportunities, please reach out to us for understanding the investment process better. If you are a shareholder or an ESOP holder of any such company and are looking for liquidity solutions, feel free to connect with us as well. Our platform will provide you with seamless financing and investment journey. Follow us for more such updates.

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This article has been co-authored Tamanna Kapur and Vivek Kumar who is in the Research and Insights team of Torre Capital.

Reinvention of Sharing Economy Companies — Changing Perspective to Thrive through Covid Crisis

by Sandeep Kumar

How has Covid impacted various sectors

Due to the COVID-19 pandemic, activities in the sharing economy (SE) were in jeopardy. Even though SE is regarded as a disruptive phenomenon, particularly in the lodging and transportation industries, the pandemic raised concerns about its long-term sustainability. Before the outbreak, SE was estimated at a faster rate. SE was expected to be worth $335 Bn by 2025, according to estimates.

Source: Sharing or paring? Growth of the sharing economy, PwC

Because many sectors, such as healthcare, tourism, and restaurants, were closely linked to the SE, the importance of sharing grew in the pandemic era. Activities such as lodging, eating out, hosting in-person conferences, and cruising, as well as the role of travel agencies and tour operators in organizing such activities, ground to a standstill.

However, because various nations were put under lockdown as a result of the COVID-19, the use of online shopping and food delivery services soared. The need for freelance work soared as workplaces closed. As a result of the closing of movie theatres, video streaming services have become the primary source of entertainment. Preventive measures have impacted all sectors of SE, increasing the need for some services while slashing demand for others.

Sharing Economy Model

By the second half of the 2000s, consumer behavior had shifted dramatically, and an increasing number of individuals were beginning to see that their current purchasing patterns would not be sustainable in the future. Companies arose in this atmosphere to provide a new type of answer to the evolving customer needs. A sharing economy is a form of the new economic model that focuses on the peer-to-peer exchange of goods and services to increase the efficiency of underutilized resources. The phrase “sharing economy” began to be used to refer exclusively to enterprises of this sort. Couchsurfing, Airbnb, Uber, and its peers, which are developing as a result of significant shifts in consumer habits, have overturned whole industries with their so-called “creative disruption” in the span of only a few years.

There is an opportunity for the sharing economy to thrive in the post-pandemic period. The sharing economy has revolutionized the way people travel, dress, and stay as a result of technological evolution. It has posed a challenge to traditional marketing strategies, but it has also given the business model a new direction and a brighter future, with many organizations taking use of technology advancements. According to industry estimates, sharing will increase from $13.75 billion to $19.25 billion over the next five years, with half of the contribution coming from people under the age of 30.

People were more interested in taking advantage of free and reduced services before the pandemic. However, they are now more cautious about the implementation of safety and preventative measures. In post-pandemic circumstances, we’re witnessing the positive side of the sharing economy and how it’s affecting service providers and platforms.

Traditional businesses must examine which of their service sectors are vulnerable to the advent of a sharing economy player; then, once these areas have been identified, businesses must determine how they will be able to stay up with the trend.

Companies following sharing economy model to reinvent themselves

The pandemic had imposed several forms of restrictions on the way people interact with each other. As a result, a lot of sharing companies had to reinvent their business models to suit the current scenario in order to sustain themselves. This has been the need of the time as most of these companies were on the verge of scaling their businesses and a crisis like this would have sabotaged their growth. Spending huge amounts of money and giving great discounts to keep hold of the market would be unlikely for these growing startups as they take a hard look at unit economics in these challenging times. We look at how different companies across various industries have reinvented themselves to overcome the economic drop due to the pandemic.

· Mobility — Shared commuting was growing popular before the pandemic. However, the market was bound to witness a decline due to the safe commute preferences of consumers. Cab services like Uber and Ola focussed on selling their self-driving car services, instead of shared rides. Some have even expanded their operations to the delivery of essentials, packaging, and moving services.

· Co-Working — Co-working spaces had just started to gain the attention of firms when suddenly people were forced to work from home. In response, startups in the space took the support of AI to access controls like contactless cards and facial recognition. Smartworks even increased the area per employee to 120–140 square feet from 70–80 sq feet per employee, keeping in mind the social distancing norms.

· Accommodation — Accommodation companies, like Airbnb, were at great risk of facing the brunt of the pandemic. Airbnb in particular shifted its focus by introducing short-term rentals and opening up its spaces for frontline warriors. The platform largely encouraged domestic travels over global travel, owing to the travel restrictions due to Covid. Co-living rents were cut down and annual hikes were deferred. Globe — a platform that offers hourly rentals, on the other hand, had performed substantially well as it identified the new market among those who need to work-from-home or need a change of atmosphere.

· Others — While some sharing companies have suffered due to the pandemic, there has been minimal impact on companies, such as those engaged in furniture and appliance rentals. Furlenco, Rentomojo, etc. have not suffered much as these affordable products never go out of demand. Unlike other sharing economy companies, their products are used by customers over longer time durations.

Future Outlook — Will the sharing economy lead to a boom?

Due to its several advantages to consumers as well as businesses, sharing economy companies are on a rise. The trend is visible not only in B2C companies where the concept has already garnered reliability, but it is also on the rise in the B2B sector. Some companies that have served individual customers in the past, now look forward to grabbing onto the institutional customers as the demand from the former declines.

Technology has played an essential role in preparing innovative business models which have helped growing startups to reduce their expenses without compromising on the scale during such turbulent times, thus leading to the reinvention of the sharing economy companies. With the conscious efforts among customers as well as businesses to achieve sustainability, we see the continued rise of sharing economy companies.

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This article has been co-authored Vivek Kumar and Tamanna Kapur who is in the Research and Insights team of Torre Capital.

Upcoming Indian Unicorns: Healthcare Startups that are Showing Potential to Achieve Greater Valuation

by Sandeep Kumar

Keep up to date with the latest research

India has been emerging as the startup hub all across the world. From a time when India produced one unicorn per year during the period 2011–2014, the country has produced 34 unicorns in 2021 alone! The count is highest ever for the country and shows no sign of stopping. The growing trend of unicorns is indicative of growing interest and faith of global VCs and investors in the Indian startups. The most recent startup to gain the unicorn status is the insurtech company, Acko, which witnessed its valuation increasing from $400 Mn to $1.1 Bn in its recent funding round.

Early identification of such unicorns can increase the investors’ returns manifold. Through this article we fetch out the potential soonicorns in the healthcare sector that are expected to soon enter the unicorn club and provide great returns as their valuations would soar high in the future.

Growth of Healthcare Sector Post Pandemic

The Covid-19 pandemic has caused a havoc across the world. In times like these people have realised the importance of health. As a result of the pandemic, the healthcare sector in India has witnessed a boost, especially in its digital transformation. Indian healthcare startups have attracted more funding than ever, over the last year. Compared to total of $316 Mn raised by the sector in the year 2020, this year healthcare startups have raised $1.3 Bn over 69 deals as of 6 August 2021. It is estimated that the HealthTech market in India will reach $5 Bn by 2023, growing at a CAGR of 39%. Digital shift, use of better technology, and favourable government policies are facilitating the growth of the market.

Earlier this year, Pharmeasy became a unicorn, bagging a valuation close to$1.5 Bn. Now the online pharmacy is planning to go public soon, eyeing a valuation of about $7 Bn through its IPO. We analyse more such healthcare startups that have the potential to achieve unicorn status in the future, and can earn high valuations in the long run.

1. Pristyn Care

Rationale: Pristyn differentiates itself from hospital chains by offering end-to-end services including diagnostic assistance, health insurance claim processing, hospital paperwork, cab pick-up and drop-off for surgery, prescription delivery at home, and a free post-surgery consultation. After the pandemic and subsequent lockdowns wreaked havoc on the healthcare industry, Pristyn turned to telemedicine and online consultations to restore its surgery division. The startup is in talks to raise $90-$110 million from investors such as Sequoia Capital US and others, valuing the company at $1.2-$1.4 Bn. They wanted to make an ecosystem that can organise the world of daycare procedures by utilising technology and a set of basic yet powerful processes and activities.

2. Cure.fit

Rationale: Cure.fit is a health and fitness company offering digital and offline experiences across fitness, nutrition, and mental well-being. The start-up which has made 6 acquisitions so far, has spun off its health food vertical — Eat.fit, as an independent entity to cater to growing consumer demand from the cloud kitchen delivery sector. Cure.fit is targeting to have 10 lakhs subscribers on its platform by Dec 2021. Partnership with Tata Digital will significantly accelerate CureFit’s growth as a fitness & wellness leader and will open up access to a large set of new consumers.

3. HealthifyMe

Rationale: HealthifyMe was developed and launched by a team of doctors, nutritionists, and fitness trainers in 2012. HealthifyMe uses a combination of software, wearable devices, and fitness trainer to help people reach their fitness goals. It claims to be used by over 25 Mn users and has 1,500 coaches across India and Southeast Asia. They are slated to cross $50 Mn in their annualized run rate revenue by this coming January and are on track to touch the $400 Mn revenue run rate by the end of 2025. The COVID-19 pandemic has helped people realise the importance of staying fit and maintaining a healthy lifestyle.

4. La Renon

Rationale: Ahmedabad-based La Renon is a global healthcare company. It is founded and managed by a group of professionals of varied domains of the healthcare industry itself who have got vast experience with unmatched expertise. The new-age pharma company has been attracting private equity interest. La Renon become one of the top 40 pharmaceutical companies in India. It has been ranked 34th in the market with a promising growth rate with a CAGR of 70%. The company is planning to expand the business into other chronic segments and in the manufacturing of critical Active Pharmaceutical Ingredients. Despite the presence of global peers, the opportunity in the segment is huge.

5. Practo

Rationale: Practo has evolved from a SaaS website to one that charts a patient’s whole path, from scheduling an appointment to locating a lab, having a second opinion, prescription reminders, and finally bringing medicine to the patient’s door. It is now available in 20 countries. Every year, 18 Cr patients use the app, which has over one lakh doctors on board and 70 K clinics and hospitals as partners. Practo plans to introduce surgery support to diversify its revenue and create new moats. Though telemedicine usage has been small thus far, India has seen some recent development due to the pandemic, Practo being a lead in the field.

6. Stelis Biopharma

Rationale: Stelis Biopharma is a fully integrated biopharmaceutical contract development and manufacturing company. Given the health crisis around the world due to the pandemic, the company is experiencing strong customer traction and is working to ramp up its CDMO business and enhance its process development and other capabilities. Stelis Biopharma is looking forward to produce upto 800 million doses of vaccines annually, including Covid-19 vaccines. With some really important contract, like the one for Sputnik V, Stelis Biopharma has entered into its growth stage.

7. MFine

Rationale: MFine provides an AI-powered healthtech platform for on-demand, virtual consultations with doctor. It also offers services such as booking routine lab tests, medicine delivery, and comprehensive wealth packages. The company has served over 3 million users since its inception, and monthly transactions crossing over 300,000. Apart from individual users, MFine also partners with over 500 corporates. Despite significant growth in revenue in the recent years, the company’s expenses have increased which shall be used to enhance its technology and services. With its plan to introduce insurance service, MFine is working to all health related needs under one platform.

Growing Market and High Future Returns

Since the pandemic and series of lockdown, a large number of people have been dependent on some of these healthcare platforms. Its growing market very well explains the growing valuations of such healthcare startups. An early identification, can help investors to reap great returns as these companies reach the later stage of its operations.

The growth of the unicorns in India has just started, and it is heartening to see such growth as it creates an environment for others to innovate and perform better. We will continue to bring forward such potential startups to your notice. If you are a shareholder or an ESOP holder of any such company, looking for liquidity solutions, feel free to connect with Torre Capital. Our platform will provide you with seamless financing and investment journey. Follow us for more such updates.

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This article has been co-authored Tamanna Kapur and Vivek Kumar who is in the Research and Insights team of Torre Capital.

Why are High-Growth Companies Staying Private for Longer?

by Sandeep Kumar

 

 Pre-IPO And Secondary Market Trading

In the recent times, the pre-IPO market has emerged as an attractive alternative class for investors as they allow them to reap out the maximum benefits before the company goes public. While the pre-IPO market is considered to be a good opportunity for providing early access to huge potential gains, it may have some liquidity constraint. However, the pre-IPO secondary market allows the founders, early employees, and investors to receive liquidity much sooner in a company’s life cycle. The secondary market balances the need for liquidity and allows founders to stay motivated and focussed on building the company, while staying private for longer durations.

Secondaries trading platform like Torre Capital are committed to democratizing the Pre-IPO market, by making it secure and accessible to all. With a large number of companies achieving the unicorn status and having a great IPO exit, the pre-IPO space is booming more than ever. We shall look upon the various factors that have motivated the companies to stay private for longer and delayed their exit.

Pre-IPO Secondaries Volume Growth

Secondary market trading are stock transactions in which an existing stockholder sells their stock for cash to third parties or back to the company itself before the company undergoes a merger, acquisition, or initial public offering. While the secondaries market was impacted in the early 2020, due to the pandemic, it has rebounded and witnessed continued growth since then. With over $50 Bn secondary deals completed in the first half of 2021, the transaction is projected to reach $100 Bn by the end of the year. It is estimated that over the next five years, the annual secondary volume could reach $250 Bn as limited partners manage their portfolios more actively.

Growth of Secondaries (in $Bn)

The high amounts of funding rounds in the recent time period, along with optimistic valuations in the future, will continue to give a positive indication about the growth in secondaries activity.

Why are more companies opting to remain private?

Companies that go public gain an instant infusion of money by selling all or part of their firm in a public offering. While this may appeal to certain businesses, others recognise that public ownership has a cost. They avoid having to report to a big group of shareholders and can keep their company strategies and finances confidential by opting to remain private.

Source: McKinsey&Co

It can be seen that from the late 1990s to 2016, the number of publicly traded firms decreased by 52%. Despite this steep decrease, the entrepreneurial spirit has never been greater everywhere on the planet. The United States is ranked first in the world in the Global Entrepreneurship Index.

People are eager to establish their businesses. They just don’t want to share them with the rest of the world. The additional restrictions needed of publicly listed firms are one of the reasons companies don’t want to cope with the inconveniences of becoming public. The Securities and Exchange Commission is enacting increasingly harsh restrictions, which most firms would want to avoid.

This is especially true in situations when a large number of employees are also stockholders. Employees are free to focus on their tasks rather than the statistics since they don’t have to worry about what the stock is doing and what that could entail for their money.

Another reason a business could prefer to remain private is to have more control over its operations. A firm can remain in the hands of a few select people or families by remaining private. In addition, private firms are not subject to the whims of stockholders.

Private equity firms alone spent $130.9 Bn in biotech and tech start-ups in 2018. IPOs, on the other hand, took in $50.3 Bn. It should come as no surprise that, with so much money at risk and considerably fewer headaches, more private firms are opting for private equity.

There are several motivating factors for a company to go public. However, such access comes at a hefty cost in the form of SEC and shareholder scrutiny. As a result, many private firms opt to remain private and seek funding from other sources. Traditional lending institutions offer secured loans and shares that may be used as personal money or sold to employees to raise funds. This implies that while investing in private firms is feasible, it generally necessitates intimate links to the company.

How Has The Decision Benefited Tech Companies

The decision about whether to go public or stay private varies from company to company. Having a successful IPO may be important for a company, however it comes with several hassles, in terms of regulation level and the time involved. The dynamic of software firms within the IPO space is such that they do not wish to take the hassle and risk involved in secondary market trading or pre-IPO placements. With IPOs definitely a lot of risk is involved in not being able to match up to the investment that has been made and generating enough profits. Going public does help raise capital but it is an expensive endeavour for the company itself.

Software firms are approaching private equity firms instead for capital as that opportunity comes with less risk involved and fewer drawbacks. This is due to the sheer amount of capital in private equity that gives a strong standing to the firm. Technology corporations have raised successful funds in the private rounds that have made them achieve the decacorn status while staying private. On the other hand, entering into a public market through IPO may also possess the risk of downside. Astudy by Battery Ventures estimated that over 40% of the unicorns that have gone public since 2011 have underperformed their final private-market valuations. From company’s average age of 4 years to go public, in 1999, to the 2014 average age of 11 years, we see a change in preference of the companies in the decision to stay private.

Late Stage Investors Enjoy Higher Returns

As mentioned before the growing scale of fundraise rounds lead to inflated valuation of startups. While high valuation may be good for the company, overvaluation may pose a risk of downside. As a result investors, especially late stage investors avoid counting on IPOs to make money. On the contrary, early stage investors remain unaffected with the downside risk as they invest early enough to gain positive returns.

As early employees and investors seek liquidity, the private market activity steps up in such a scenario. A delayed IPO would give the late stage investors more time to reap the benefits of the growing valuation and greater returns.

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This article has been co-authored Tamanna Kapur and Vivek Kumar who is in the Research and Insights team of Torre Capital.

 

Upcoming Indian Unicorns: Fintech Companies that are racing to join the Unicorn Club

by Sandeep Kumar

Keep up to date with the latest research

 

The Emerging Landscape of Indian Soonicorns

 

Indian startups are booming and the country has emerged as the third largest startup ecosystem in the world. In 2021, India added three unicorns to the club each month. With a total of over 66 unicorns currently, the number is only growing. While Paytm, Byju’s, Cred, etc. are some of the common names; startups like OfBusiness, Apna, Zetwerk, etc. which were almost unknown over the last couple of years among the general masses have now entered the Unicorn Club. We aim to bring out such names that have not yet achieved the $1 Bn mark but have a huge potential to make profitable deals in the coming future.

 

The Growing Market for Indian Fintechs

 

Currently valued at $31 Bn, the Indian fintech industry is projected to grow at a CAGR of 22% from 2021 to 2025. Despite the pandemic, India’s fintech market has witnessed a growth in investments, raising over $2 Bn in the first half of 2021. Digitisation of financial services in the recent years, along with diversification of the sub-sectors has led to the growth of the market. Paytm, one of the most successful unicorns in the sector, is expected to go public with a valuation as high as $ 25–30 Bn.

 

Looking at the current valuation and fundraise of the companies, along with their market traction, we bring out to you some of the most promising soonicorns in the fintech industry. Early investments in such startups will help investors gain more profits.

 

1. CredAvenue

 

 

Rationale: Founded in 2017, CredAvenue offers comprehensive debt products for enterprises and connects them with lenders and investors. With transactions worth $9 Bn and over 1,500 institutional borrowers and over 750 lenders on its platform as of 2020, the company is set to grow and expects its revenues to reach $67 Mn by FY22. Given the growing need for credit among Indian SMEs and the widening credit gap, CredAvenue has the potential to be among the top performing firms in the credit market.

 

2. ZestMoney

 

 

Rationale: ZestMoney is a fintech platform that allows its users to avail digital EMI and BNPL services, without the need of a credit card or a credit score. The firm enables its users to pay in EMI with the use of digital banking and artificial intelligence. With penetration across 15,000 stores and 6 million users, ZestMoney expects to cross 400,000 stores by 2021. The company expects its revenue to reach $47 Mn by FY22, growing at the rate of more than 120% over the period of two years. The growing trend towards digital payments in India and the need to make it accessible across the Indian population will only boost the growth potential of the company.

 

3. Smallcase

 

 

Rationale: Smallcase offers a wealth management platform to the investors, aimed at democratizing equity investments by providing better investment opportunities in a basket of stocks and ETFs. From a wide range of portfolio options, Smallcase has provided returns as high as 186% to its users. However, these high returns also come along with higher volatility risks. A quarterly managerial fee is charged by the users, which is dependent upon the potential upside of the portfolio. Smallcase has benefitted from Indians’ growing interest towards investments, this is evident from the company’s growing user base — from 1.5 million investors on the platform last year to 3 million in 2021. Given the growing engagement in investment activity, Smallcase is expected to witness high growth in future.

 

4. Rupeek

 

 

Rationale: Rupeek is an asset bank digital lending platform that aims to monetize India’s $2 Tn gold economy. The company is among the fastest growing fintechs in the country, with a tremendous revenue growth rate of 7,295% over the last three years. With interest payments on gold loans starting as low as 0.69%, Rupeek provides a better option than some of the leading loan financing companies making it a preferred alternative among its competitors.

 

5. Khatabook

 

 

Rationale: Khatabook enables micro, small and medium merchants to track business transactions safely and securely. It offers a range of products that provides staff management, expense management, business management and ledger application services to its clients. Despite witnessing a YoY growth of 150% in FY 2020–2021, Khatabook has zero operating revenue. We believe that the company is currently overvalued and this could lead Khatabook to achieve unicorn status very soon.

 

6. Open

 

 

Rationale: Open is a neobanking platform primarily for SMEs and startups that offers business accounts and other services that makes finance management easy for businesses. Open successfully processes $20 Bn transactions annually, and aims to grow from catering close to 2 million SMEs, to 5 million paid subscribers by the end of the year. Still in its nascent stage, the neobank platform is looking forward to expanding its services to cater to the needs of accountants, and possesses great potential to rise in the long run.

 

7. Mswipe Technologies

 

 

Rationale: Mswipe Technologies is a point of sales solutions platform for all types of payments that serves the smallest of merchants. Backed by Ratan Tata Associates promoted fund, Mswipe currently has about 670,000 merchants in its network and hopes to expand it to a million merchants. However, the company’s revenue-to-loss growth gap widened in FY 2020, with operational revenue increasing by 35% and losses increasing by 250%. Apart from the growing demand for PoS solutions in India, Mswipe’s plans to turn into a digital SME bank in the coming 4–5 years, might improve Mswipe’s financials over the years.

 

8. Acko

 

 

Rationale: Acko is an insurtech company that offers automobile and health insurance policy options to its customers. As of Q1 of FY 2022, Acko has experienced a substantial sales growth of 120% for automobile insurance policies, compared to that of FY 2021, with a gross premium of about $11 Mn USD (INR 81 Cr). The company is looking forward to raise $200 Mn in a late stage VC round which could provide Acko a unicorn status with a 2.5x jump in its valuation.

 

In the Flurry to be Unicorns

 

The valuation of Indian fintechs has grown in 2021, and it will continue to grow in the coming years with growing interests in digital payments, e-commerce, investments, etc. Coinswitch Kuber, being the most recent one to enter the unicorn club, saw a valuation growth of 4 times, jumping from $500 Mn to about $2 Bn. With the most awaited Paytm IPO, fintech exits are expected to boom in the next couple of years. Grabbing on these opportunities a little early will provide higher returns to the investors.

 

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This article has been co-authored by Tamanna Kapur , who is in the Research and Insights team of Torre Capital.

 

 

The state of European Fintech and with the explosive growth and maturity, who are here to stay?

by Sandeep Kumar

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Overview of European Fintech Market

From payment processing to insurance and wealth management, the digitisation of the financial services has led to a massive growth of the fintech market all across the world. In this article we will be focusing on the European region in particular, where the fintech market is growing so rapidly that the fintech adoption in the region has surpassed that of the USA. At the start of the year 2021, Klarna was the only fintech decacorn in the region and now Revolut and Checkout have also joined the club. The year saw a record growth in the number of fintech unicorn additions as 19 startups were promoted to unicorn status.

Source: Crunchbase

Surge of Fintech Funding in Europe

Overall funding to European fintech scale-ups reached €4.55 Bn in 2017, but fell to €3.52 Bn in 2018. However, in 2019, European fintech businesses, particularly those in the growth and late-stage stages, witnessed a massive increase in fundraising rounds, culminating in a total of €8.81 Bn in fintech funding, a 150% increase over the previous year and nearly double the number in 2017. Around €4 Bn was raised by European fintech businesses in the first half of 2020, already more than in the full year of 2018, but lagging behind the trend of 2019, when more than €8.8 Bn was raised.

Fintech Investments size in European Funding Round till H1 2020

Regulatory Environment

The rise of non-financial companies into the tightly regulated financial sector has resulted in a rising need for regulators, the fintech community, and the financial services industry to properly engage with developments in this space. The vast bulk of financial services legislation and regulatory norms predate rapid technological advancements and consumer demand for change. While governments in a lot of nations want to be viewed as promoting innovation, the law has been slower to catch up.

Regulatory authorities across Europe, including the European Central Bank, the FCA in the United Kingdom, the AMF and ACPR in France, the AFM and DNB in the Netherlands, the European Commission and Parliament, the BaFin in Germany, the CSSF in Luxembourg, and the European Securities and Markets Authority (ESMA), have publicly stated their support and launched new regulatory initiatives to encourage innovation, along with the European Commission and Parliament, the European Central Bank, and the European Securities and Markets Authority (ESMA). The EU Commission has started a study on technology and its influence on the European financial services industry as part of its customer finance action plan, which is expected to have a substantial impact.

Growth in Europe’s FinTech Deals

With about a third of the region’s unicorns belonging to the fintech sector, companies have attracted the interest of the investors. With a collective valuation of $178 Bn, the market has raised more than $11 Bn in the present year. In the first half itself, the market had raised funding that was 1.5x of the previous year. While the number of deals in Q2- 2021 fell sequentially by 8%, the investments have grown by 30%. This has resulted in hitting a quarterly record of $7 Bn which was facilitated by megarounds of Klarna, Trade Republic, SaltPay, etc. The recent focus of investors as observed has been on wealth management and insurance tech.

Source: Crunchbase

Record Year for Fintech Exits

The growth of European fintech has also facilitated the rise of fintech exits in the region. The first half of 2021 witnessed about $26.5 Bn (or €22.6 Bn) worth of exits. This has been a record high in the exit scenario, and gives high hopes to investors, particularly after less than $2 Bn worth of exit activity in 2020.

The most successful one this year has been the public listing of Wise — a London-based money transfer company. The company went for direct listing in the London Stock Exchange which increased the company’s valuation to over $13 Bn as of August 2021. Apart from this, Tink and Currencycloud were strategically acquired by Visa for $2.1 Bn (€1.8 Bn) and $960 Mn (£700 Mn) respectively.

In total, fintech exits banked VCs $70 Bn during the period from January till July. Of the total figure, about 20% of the exit figures have come from Europe.

How are Different Segments Faring?

The use of technology in financial services is vast and gives rise to various segments including payment processing, neobanks, insuretech, crypto-exchange, wealth management tech, etc. Let us have a look at how some of these sectors have been performing:

 Payment Platform — With the digital payments sector expanding across the globe, this segment has benefited from a high proportion of funding received over the years. This is evident from the success stories of Klarna and Checkout. The pandemic has further accelerated the potential of the sector. Looking at the top 10 VC backed fintech exits in the region, more than half of the companies belong to the payments and money transfer segment, these include WorldPay, Wise, Adyen, etc.

 Insurtech — This segment has been witnessing greater attention from investors since 2020. In the first quarter of 2020, insurtech comprised about 20% of the total fintech rounds in Europe. The sector’s combined valuation for the year amounts to over $23 Bn. Insurtech funding in Q2 of 2021, has increased by about 403% on just Quarter on Quarter basis.

 WealthTech — Wealth management technology companies, or simply the WealthTech sector has also led growth along with the insurtech sector, witnessing an increase in the investor preference. While the number of deals for the segment increased by only 9%, the funding in Q2 of 2021 grew by 272% on Quarter on Quarter basis.

 Cryptocurrency and DeFi — Cryptocurrency and Decentralised Finance (DeFi) are gaining momentum in the finance world. With great buzz around crypto, the funding in such companies has jumped 300% from what it was in 2019, amounting to $1.4 Bn this year. Some examples of companies in this segment include — Elliptic, Blockchain.com, Copper, etc.

 Other Segments — Looking at the Quarter on Quarter funding rounds, funds in fintechs involved in the banking segment as well as capital markets rose by 70% individually and digital lending by 64%. On the other hand, QoQ investments in real-estate fintechs fell by 87%.

How has the Pandemic Impacted the Market and What is the Way Forward

With the onset of the Covid-19 pandemic, there has been greater reliance on digitization of various operations across different industries. This has facilitated the growth of the fintech sector post-pandemic as businesses are working to adapt to the new normal. The regulatory environment has also supported the growth process in the European region, so much that it is now performing better than North America. Particularly, the payments segment has always been investors’ favourite, however, the post-pandemic focus of investors has shifted towards insurtech and wealth management tech firms.

We believe the current boom of the fintech market in the continent is to be continued in the coming years. This is evident from the significant growth in the VC funding in recent years, with the overall funding round size average increasing by over 100% compared to three years ago. Investors are expected to gain huge returns from the growing valuations of some unicorns and their great successful exits.

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This article has been co-authored by Tamanna Kapur and  , who is in the Research and Insights team of Torre Capital.

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