Buoyed by India’s consumption, investors flock to fund retail startups, ET Retail

Buoyed by strong consumption growth in India, venture capitalists are investing in retail startups en masse.

Investor confidence in retail start-ups and startups has surged, with retail funding increasing 32 percent to $1.63 billion in the first half of 2024, up from $1.23 billion in the first half of 2023, according to data analytics firm Tracxn.

India’s economy is on track to become the world’s third-largest by 2026. Last year, the country’s consumption grew at a faster pace than developed economies such as China, the US and Germany, a UBS report noted.

The report further noted that household consumption in India has almost doubled over the past decade to $2.1 trillion last year, at a compound annual growth rate of 7.2 per cent, higher than the aforementioned countries. India is also expected to overtake Germany (in 2024) and Japan (in 2026) to become the world’s third-largest consumer market.

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Commenting on the interest of venture capitalists in new retail companies, Harmanpreet Singh, Co-founder and Managing Partner, Prath Ventures, said, “India’s GDP is projected to touch $8 trillion by FY32, with consumption remaining at around 60 per cent of GDP. India’s consumption is therefore expected to cross $4.5 trillion during the same period. In comparison, this is more than double the current consumption and will be equal to China’s consumption in 2015. In this context, there is a natural need for venture capitalists to catch up and invest in this space,” he said.

He believes that companies like Zomato and Nykaa have delivered attractive results in the consumer technology space. However, investors have witnessed major setbacks due to unsustainable unit economics and misallocation of funds. The industry is perhaps overcorrecting, focusing on more conventional businesses like retail and omni-channel brands, where more sustainable business models are funded.

“We expect that our focus on profitability and sustainable business models will ensure that this sector remains at the forefront of investor interest through 2024 and beyond,” he added.

Singh said investors have been heavily favoring internet and consumer technology companies from 2020 to 2022, due to the COVID-19-induced surge in digital adoption, which has led to high growth and controlled customer acquisition costs. However, two key takeaways have emerged: the number of consumers willing to spend significantly online is limited to around 40-50 million, and even these customers still value the trust and reliability that offline retail and distribution provide.

Shravan Shetty, Managing Director, Primus Partners, said, “The sector’s share has increased as interest in the sector has remained high while enthusiasm for other sectors has waned. Venture capital has been behaving similarly to markets where the long-term consumption story has increased compared to other themes like fintech which has seen lower interest compared to previous years.”

According to a report by Tracxn, there were 8 funding rounds of over $100 Mn in the first half of 2024, including Flipkart’s $350 Mn Series J round with participation from Google, Apollo 24|7’s $297 Mn PE round, and Meesho’s $275 Mn Series F round, underlining the strong intentions of VC investors to fund retail companies.

Dr Ashwini Mahajan, who led the delegation of economists that met Finance Minister Nirmala Sitharaman to make suggestions, told ANI, “When it comes to investors, they always compare economies and India, due to its sustained performance on the GDP front, is one of the best places to invest. Due to its growing economy and consumption, the country is capable of attracting investments.”

The Indian economy has witnessed a significant change in the way consumers spend their money, with spending in rural areas rising 164 per cent and in urban areas 146 per cent since 2011-12, at current prices, data from the Household Consumption Expenditure Survey showed recently.

According to the survey, the country recorded a significant increase in the monthly per capita consumption expenditure (MPCE) in 2022-23, with the expenditure in rural areas reaching Rs 3,773 crore and in urban areas Rs 6,459 crore, reflecting a growth of 164 per cent and 146 per cent, respectively, since 2011-12 at current prices. When 2011-12 prices are considered, the growth is 40 per cent in rural areas and 33 per cent in urban areas.

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