Mumbai: Venture capital investments in business-to-business (B2B) startups set new records in 2018, investors said, adding with access to large global markets and growing focus on artificial intelligence, 2019 could be even bigger.
Venture capital funding frenzy in B2B startups may continue in 2019
According to venture capital data firm Tracxn, 2018 saw investments of $3.09 billion in B2B startups across 415 rounds, 28% more than the $2.41 billion allocated in 2017, across 534 rounds.
Fewer rounds and bigger values also point to large deal sizes, as investors focus on a few winners from each segment.
“Unlike B2C, a software or deep tech startup can begin with customers abroad. Their market is much bigger right from the beginning,” said Sanjay Nath, managing partner, Blume Ventures.
The larger B2B space comprises smaller sub-segments such as trucking and logistics, software as a service (SaaS) and robotics, which attract funding. These are present across early and late stages. Some of the bigger names in the B2B space include trucking logistics firm Rivigo and software provider Freshworks.
Last year saw several unicorns (startups with valuations of $1 billion or more) emerge in the B2B space, including Freshworks, logistics startup Blackbuck and marketplace Udaan.
B2B startups also have other sectoral tailwinds, such as realistic valuations, faster exit routes for investors and a focus on intellectual property (IP).
“In B2B, valuations are far more realistic because of low spend on advertising and marketing efforts,” said Sunil Goyal, managing director of YourNest Venture Capital that runs a pre-Series A fund focused on deep-tech investments, which are mostly B2B.
The early-stage B2B space has also seen the rise of dedicated funds for these startups.
pi Ventures, which runs a ₹225-crore fund, invests primarily in artificial intelligence, or AI-based startups, which normally cater to businesses, not individuals.
Similarly, Cornerstone Venture Partners is raising a ₹300-crore fund to invest in cloud-based and software B2B startups.
“The biggest beneficiaries of new tech, such as AI, will be old brick-and-mortar businesses. For example (robotics startup) Grey Orange has moved from a vendor of robots to a full stack warehousing automation platform serving global clients,” said Blume’s Nath. Blume Ventures is an early backer of Grey Orange.
B2B startups have significant fundamental advantages, said Nath, adding that they are more capital-efficient, have global markets and generally have higher margins.
“Capital efficiency, the ability to be profitable faster and a faster window to exits via mergers or an initial public offering (IPO) are advantages of B2B startups. These startups can go global from day one and because of getting better pricing margins from global customers, they don’t need successive large capital raises.”
The traction for B2B startups is also expected to continue because of a change in investor thesis, said Manish Singhal, managing partner, pi Ventures. “The main reason is that we are undergoing a shift in venture capital thesis across the ecosystem. Most funds are shifting their focus from a market share-led thesis to an IP-led product thesis, which is dominated by B2B.”