Key Trends Defining India’s Startup Ecosystem
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Key trends defining India’s startup ecosystem
The start-up ecosystem has come a long way, especially in the last 5 years, when the term ‘start-up’ was officially recognized by our Indian Government in 2016 under the ‘Start-Up India’ program. The initial years comprised the evolution stage when fledgling start-ups struggled to compete with big players, followed by the stabilization phase, where start-ups, supported by a robust investor community and a slew of favorable Government policies, launched innovative products to grow market share and subsequently 2020, the year of the pandemic that brought to the fore the innate resilience of start-ups and ushered in large-scale acceptance of digital solutions offered by start-ups.
Capturing the growth momentum
India has the distinction of being the 2nd largest start-up hub in the world. Currently, 34 startups have unicorn status with a cumulative $115Bn valuation and it is predicted that by 2022, 52 soonicorns would achieve unicorn status. The GOI’s dedicated website encapsulates the key achievements of India’s startups:
Source: Startup India
How startups transformed the COVID adversity into a digital opportunity
2020 posed several challenges to start-ups in terms of changed customer expectations, restrictions on mobility, supply chain disruptions, canceled orders, and in certain cases a complete standstill of operations. Resilient start-ups tweaked their business model with a focus on digital, to suit the altered dynamics, helping them to tide over the COVID-crisis.
The unabated start-up growth story
A report by Yourstory highlights the evolving paradigm, whereby the new business model helped many start-ups survive the severe economic downturn caused by the pandemic. Fintech continued to dominate the theme, with 136 deals, and drew funding to the tune of $ 1.6Bn. The below charts reflect the funding and the number of deals between 2015-2020. Despite the pandemic, start-ups continued to attract funding, though there was a marginal dip in the funding amount in 2020, indicating smaller-ticket size funds and a clear preference for equity-based funding.
Favorable government policies
The Government, on its part, has been actively supporting the proliferation of the start-up ecosystem through multiple reforms and fiscal concessions including:
(i) Easing the rules related to setting up of one-person companies (OPCs), which would help entrepreneurs with limited capital to launch their business
(ii) One-year tax holiday extension for startups
(iii) One-year extension of capital gains exemption for investment in startups
(iv) The Government announced the Startup India Seed Fund Scheme injecting a corpus of INR945 crore to facilitate funding to eligible start-ups
(v) Other landmark measures encouraging start-ups to thrive include Stand Up India promoting entrepreneurship, AtmaNirbhar Bharat encouraging the development of indigenous products, and ‘Vocal for Local’ aimed at creating demand for domestic products.
Democratization of offerings
Digital payments, e-commerce, and retail witnessed large-scale adoption across income segments, demographics, age-groups, and location.
Digital payments saw a surge in transaction volumes as well as value, as the preferred mode of payment, being touchless and instantaneous. Ecommerce goods, especially staples like food, grocery, and medicines witnessed huge consumer demand through online orders and home delivery fulfillment with a user base in excess of 50 Mn. Retail underwent an overhaul, including the traditional Kirana stores, who embraced modern technology tools and digital payment to reduce the entire cycle from order to payment.
The chart below captures the business model profile of start-ups:
Technology as the differentiator
It is expected that in the coming days, tech-enabled startups would continue to grow with new players emerging and would attract the bulk of the funding. As per Praxis, India is the 3rd largest technology start-up hub. Further insights indicated that while 1/3rd of investments were towards late-stage funding in the case where the start-up had achieved break-even or started generating profits. The bulk i.e. 65% funding was distributed across stages in the growth journey, which included seed funding and funding rounds comprising Series A, B, C, and D.
Seed capital enables entrepreneurs to obtain the necessary capital to launch their startup. Series D funding is specific funding towards a growth strategy including inorganic channels or a deal implementation. Series A, B, and C are aimed at helping a start-up move through the growth phases namely product launch, scale-up, lateral hires, and market expansion.
The chart below summarizes the key sectoral trends dominating funding by amount:
Factors contributing to the vibrant startup landscape
Several factors have positively impacted the start-up ecosystem in India including the availability of skilled technical talent, growing preference towards entrepreneurship and risk-taking amongst the youth, transfer of learnings from ex-employees of global tech, e-commerce, banks, and MNCs turned startup founders, robust tech infrastructure, low-cost internet connectivity and high mobile phone penetration levels, India’s consumption demand-driven economy with a market of over 1Bn, the inflow of foreign and domestic capital to fund start-ups with superior growth prospects.
India’s digital edge is summarized below:
Source: HDFC Securities report dated December 17, 2020
Transitioning from nascent to flourishing
A report by Inc42 estimates that by 2025, the number of Indian startups would have exceeded 100K, providing employment opportunities to over 3.25 Mn, raking in the funding of over $150Bn, and generating value upwards of $500Bn. Clearly, it is evident that India is a shining spot for start-ups, with sizeable business potential – both in volume and value terms. One of the reasons behind the success of start-ups is that most start-ups adopt a customer-centric approach and aim to solve real problems faced by customers across sectors. Plus, start-ups begin on a small scale, enabling them to correct any shortcomings along the way and scale up the business through the latest, cutting-edge technology. Additionally, at the initial phase, the core offering of the start-up is a dominant theme and once the idea succeeds, the start-up can diversify into allied offerings in the value chain.
Case in point: Digital Payments
For example, many of the big names in digital payments initially focused entirely on convincing the customer to move away from cash to cashless. After the business model achieved economies of scale, the start-ups were able to pivot into related domains, correlated with digital payments namely financial services like unsecured credit, biller services, investment products, wealth advisory, insurance, etc.