Over the last decade and a half, India’s entrepreneurial ecosystem has changed dramatically, from the emergence of new businesses to increased interest from international investors and improvements in infrastructure and legislation. In 2021, the Indian start-up ecosystem did incredibly well; investor confidence in Indian businesses is expanding, and start-ups are advancing through all stages of their growth journey, including seed-stage investment. In this article, we will delve deeper into the prospects of the Indian start-up ecosystem.
Current Scenario in India:
India can be dubbed a start-up hotspot. In the year 2021, Indian companies raised more than $23 billion, closed over 1,000 deals, and 33 businesses were inducted into the exclusive Unicorn Club. Whereas, in the year 2022, 13 more start-ups have entered the Unicorn Club. After the United States and China, India has emerged as the world’s third-largest start-up ecosystem.
The number of start-ups in India is quickly expanding at the moment. According to the ‘India Venture Capital Report 2021’ released by ‘Bain & Company,’ the total number of start-ups has increased at a 17 percent compound annual growth rate (CAGR) since 2012, reaching 1,12,000.
Why this growth is taking place?
India has recognized the need to develop innovation and incubation centers for its large student community so that innovation and entrepreneurial mind-set can be fostered in them through academic institutions. An increasing number of incubators and a regular inclination of young executives to start their own ventures are also fueling the entrepreneurship and early-stage startup ecosystem in India.
Besides, the availability of young talent filled with enthusiasm, expertise, and entrepreneurial mindset is giving India’s early-stage start-up ecosystem an advantageous position to capitalize on the rapidly growing market opportunities.
Moreover, the Government of India has been playing a vital role in facilitating the growth of early-stage start-ups through the implementation of progressive policies and the creation of relevant infrastructure. Under the ‘Start-up India’ initiative launched in 2016, the government has attempted to simplify complex legal, financial, and knowledge requirements to encourage the participation of potential early-stage start-ups. Aside from that, reforms such as opening up of areas like ‘space-tech’ to private participation, ‘tax holidays’ for start-ups that meet certain eligibility criteria, and the creation of state-run incubators to establish successful start-ups and help them in their development.
Various corporate-start-up partnership programs are driving innovation and accelerating the growth of start-ups in India. It is noteworthy that Microsoft India has spearheaded over 4,000 start-ups, while Tata Motors is associated with half a dozen start-ups and is looking for partnerships with 20 others.
There has been an extremely encouraging shift towards engineering and product start-ups. The strength of the Indian start-up ecosystem is most reflected in the growing risk-taking abilities and ambitions of young Indians.
What are the challenges?
Funded start-ups constitute only about 8% of the total start-ups and India accounts for just 4% of the number of unicorns globally, while the US accounts for 65% and China accounts for 14%. The US invests more than $135 billion annually in venture capital and start-ups, and China over $65 billion, with more than 60% of local capital. In contrast, India invests just $10 billion annually, of which 90% is foreign capital.
India has a ‘funding bubble’ or fear of high valuations that venture capital investors seem to pay for at times. This fear stems from an inadequate understanding of the investment strategies and risk management frameworks used by successful venture capital firms.
Moreover, India currently has about 30 unicorns domiciled outside the country, who moved out due to outdated foreign exchange rules, non-implementation of relevant federal regulations, tax terrorism, and lack of local capital incentives. Deep-tech and healthcare start-ups still do not get enough starting capital to grow in the country and are forced to do foreign domicile.
Education, reskilling, and upskilling of India’s workforce are critical to grow beyond current capabilities and reap the demographic dividend. There is a need to understand that apart from the domestic policy environment, the global environment and technological developments are also changing and it is necessary that India is prepared for this revolution/transition.
The rapid growth of the start-up ecosystem necessitates significant amounts of financing and hence the role of venture capital investors and angel investors is important. Investors also need to understand that the success rate of start-ups is comparatively low and they should build their investment strategies on this basis. Venture capital investors should have an adequate risk management framework at the portfolio level as it is an important part of all successful venture capital operations.
India needs strong regulations for both global and domestic investment in the start-up sector. Global investors should be assured that they can freely invest in India and get returns on their investments. We need to create a repository of Investor-KYC where traceability and uninterrupted governance are ensured.
Future collective efforts of the public and private sectors to improve physical and digital connectivity will help to ‘unlock’ the untapped potential of rural and semi-urban India, thereby truly leading to the Fourth Industrial Revolution (Industry 4.0) and beyond. The Indian start-up ecosystem should focus on developing solutions that allow businesses in key sectors to meet goals of national importance.
Apart from that, India’s corporate sector is also responsible for promoting entrepreneurship and creating synergies for building effective technology solutions and sustainable and resource-efficient growth. India stands on the cusp of unprecedented economic growth and has the opportunity to become a global game-changer. In this campaign, along with the youth of the country, speed, inclusion, and sustainability will play a major role.