India’s Startup Ecosystem is Coming of Age

Sanjay Enishetty

Internet connectivity, homegrown success stories, and loosening regulations: India’s startup ecosystem is ushering in a new dawn.

Gone are the days when being an Indian startup would mean being an app-based aggregator rip-off of an American original. While foreign-inspired businesses such as ecommerce marketplace Flipkart and ride hailing app Ola are worth billions of dollars and are success stories in their own right, Indians today are building products that can service customers and be adopted the world over.

Take for instance Postman, a SaaS startup that helps developers create, share, test, and document APIs. According to a survey by SlashData, there are 19 million developers in the world – this startup, valued at over US$2 billion, claims that its services are used by 11 million of them.

Similarly, consider hotel room aggregator Oyo Rooms, one of SoftBank’s crown jewels. After capturing the Indian market, it has now forayed into international waters, with a rapidly-growing presence in the U.S., China, and the U.K., among other countries.

For a long time, India has suffered from brain drain, with our top scientists and engineers leaving for better prospects at U.S.-based, cutting-edge technology companies. This is being slowly remedied, with several deep tech startups in sectors such as space technology, workforce automation, and artificial intelligence being founded and led by the country’s brightest minds. 

More importantly, these aren’t just sabbatical experiments – they are well-funded by top-tier VC firms such as Sequoia, Bessemer Ventures, Lightspeed India, and Accel Partners, a hopeful indicator of longevity.

Rise Of Tier II and III Startups

The common wisdom until recently for any entrepreneur who sought to be noticed and accepted by the startup community was to set up shop in Bengaluru or Gurugram. It was really tough to build a tech company outside of these bases, as the existing support ecosystem didn’t care to peer into the hinterlands for new ideas.

That status quo has been broken in the past few years – perhaps by the entry of the Tier II and III audience into the digital world. 

The 2016 launch of Reliance Jio, a telecom company launched by India’s richest man, Mukesh Ambani, changed everything. Offering freemium data plans that charged less than a dollar per gigabyte, a price war between telecom players followed, and as a result, Internet penetration increased from 340 million to 700 million in four years.

This has helped open the doors to building and scaling up digital businesses even in other parts of India. According to a study by YourStory, cities like Chennai, Pune, Hyderabad, and Ahmedabad have been seeing good funding flows since 2018 which even continued into the first half of 2020 for a select few. 

The biggest selling point of these startups is that they aren’t just building apps modeled on Western counterparts – their focus is on solving local problems and tapping micro markets that have been previously ignored. 

Edtech startup Cymatic, based in one of India’s poorest and least literate states, provides virtual classrooms in villages where government schools are dysfunctional and teachers don’t want to go. ExpertRight, based in the largely desert state of Rajasthan, helps freelancers connect with employers looking for gig workers. 

These are just two examples of startups that are battle-hardened, having survived years of low cash flows by getting their unit economics right. As unicorns struggle to break even and scale to the ticket size of Tier II and III consumers, many other startups are working hard to solve issues at the grassroots.

The Booster Dose Of Policy

Thankfully, starting up has become a lot easier in India. National and state governments have reduced compliance barriers to registering a business. The national government itself has also become an angel investor of sorts, with a $1.3 billion corpus for funding early stage startups. It has eased norms to allow startups to participate in government tenders, and permitted an income tax holiday of three years.

IPOs remain difficult for late-stage startups in India, as the country’s capital markets regulator requires companies to be profitable for three successive years before listing. Given the relative immaturity of India’s retail investors, this is unlikely to change in the short term. However, there’s a very important change in the offing: the government is mulling a policy amendment that could allow privately-held Indian startups to list on international bourses, opening up new avenues for fundraising.

Funding Flows Are Steadily Increasing

While short cash runways remain an issue, India’s young companies are still snagging a lot of deals. In the first half of 2020, when COVID-19 was decimating the global economy, the number of funding deals rose by 3.2%. The only negative impact on the funding side was that ticket sizes of the deals have reduced drastically, by 17.2% to $10.6 million, according to YourStory.

Meanwhile, the Indian startup ecosystem raised a record $14.5 billion last year, making it one of the biggest. To put this number in perspective, the country’s startups had raised a combined amount of just over $570 million in 2010.

Interestingly, it’s not only investors with decades of experience in funding tech startups that are making the bets. Traditional Indian business houses, with family offices that manage billions of dollars, are also taking the plunge. 

The Big Boys Are Joining The Party

Mukesh Ambani’s Reliance has been on an acquisition spree in the past couple of years, bulking up his portfolio in the telecom, entertainment, and retail sectors. Pawan Munjal, the CEO of one of India’s biggest two-wheeler companies, has invested in an array of startups in the ride hailing and car servicing spaces. Adar Poonawala, the heir to the world’s biggest vaccine manufacturer and one of the companies producing the AstraZeneca-Oxford vaccine for COVID-19, has made a series of bets in areas like healthy snacks and molecular diagnostics.

With billions of dollars riding on them, startups today aren’t the playthings of 20-somethings anymore. While Silicon Valley understood a long time ago that a Mark Zuckerberg would need a Sheryl Sandberg to act as consigliere, this realization came late to the Indian startup scene. Joining a startup as an experienced professional was thought to be a risky career move. The good news is, that’s beginning to change, with serial entrepreneurs and seasoned business executives taking the plunge in founding and leading startups. With motivation, funding, and the right guidance, Indian startups are set to grow at an incredible pace.

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