The transformation of India’s tech startups

Author: Dharish David, SIM Global Education

In the second week of April 2021, India gained six new ‘unicorns’ — startups with a valuation of US$1 billion or more. That’s impressive considering only seven new unicorns emerged in 2020 and six in 2019. That these unicorns emerged while COVID-19 ravages the country, and lockdown suppresses demand and stunts supply, is an amazing feat.

But this was not the same for all startups, a survey conducted by the National Association of Software and Service Companies in April suggests that nine out of every ten startups saw a decline in revenue, reflecting the conservative attitude of many investors amid the pandemic. Faced with volatile demand, the growth of most Indian startups has been significantly restrained.

India was the third largest startup market in 2020 at US$11.8 billion, behind only the United States (US$143 billion) and China (US$83 billion). India’s startup scene is still a hot market for private equity and venture capital from firms like SoftBank, Naspers and Tiger Global, despite new foreign direct investment (FDI) rules designed to restrict the opportunistic takeovers of Indian companies by Chinese players. China is one of the biggest stakeholders in the Indian startup ecosystem, with Chinese investment backing 18 out of India’s 30 unicorns. But the new FDI rules mean these kinds of investments now require government approval.

The pandemic has furthered the rapid adoption of online technology in India. More businesses are shifting or expanding digitally and online, with venture capital firms focussing on tech startups as well as startups in sectors like fast-moving consumer goods, online grocery delivery and home entertainment. The dozen new Indian unicorns that emerged this year span a diverse range of tech sectors, including digital insurance, FinTech, HealthTech and social commerce platforms.

The government can help sustain momentum in these spaces by expanding digital and financial infrastructure and addressing socioeconomic inequality. To its credit, the government helped create an enabling environment through the Startup India initiative, which began in 2016. This initiative aims to catalyse the startup culture and build an innovative and entrepreneurial startup scene that drives economic growth and creates large-scale employment opportunities.

Startup India defines ‘startups’ as companies headquartered in India less than 10 years old and with an annual turnover of less than Rs 1 billion (US$13.7 million). The initiative provides support in three broad areas: reducing regulatory burden, providing financial assistance and subsidies, and enabling an environment for incubation and industry–academia partnerships through innovation labs, capacity development programs such as bootcamps and roadshows, and grants.

Funds for Startup India are channelled through a fund managed by the Small Industries Development Bank of India (SIDBI). As of March 2020, Startup India had cumulatively invested Rs 33.8 billion (US$463 million) into 320 startups. That’s only 1 per cent of the 28,979 registered startups in India, meaning the majority rely on private equity and venture capital funding. Startups financially backed by the government may account for a larger portion in the near future as Startup India announced a new seed funding scheme in January 2021 to provide financial assistance to 3600 startups over four years for proof of concept, prototype development, product trials, market entry and commercialisation.

With India pushing towards a knowledge-based digital economy, the government is attempting to deploy ICT infrastructure and enhance policies for e-governance, investments and technology innovation through research and higher education to support entrepreneurship and spur economic growth. With growing demand for digital services in the post-COVID-19 era, startups in FinTech, EdTech, artificial intelligence, the Internet of Things and cyber security will see increasing user demand and attract more investment.

Yet India’s startup ecosystem is not without its challenges. One problem is that the distribution of startups and funding is concentrated in large urban centres with few options for those in smaller cities or in rural areas. Investments are also heavily concentrated in IT-enabled technology sectors. Future success will depend on diversifying startup investment to an array of sectors including agriculture, manufacturing, social services, healthcare, education and others.

India does not have any truly global businesses, such as Google, Facebook or SpaceX, that began as startups. China, which India often compares itself to, has its own share of successful startups, including Alibaba, ByteDance and DiDi. This could be partly due to inadequate digital infrastructure such as poor mobile and broadband connectivity, few high-tech solutions and meagre investment in research and development. India ranks relatively poorly in innovation and number of patents filed.

There is a large gap between what India is and what it could be. With the unmet demand of a large population and its technology and innovation push, India has the potential to be a bright spot in the global economy. The COVID-19 pandemic has been a turning point in the transformation of India’s startup scene, with a growing demand for digital solutions facilitating the emergence of new unicorns the same way they grew after the global financial crisis, yet many small startups will fail. The pandemic also mapped out the digital economy of the future. Booms and busts are part of cycles; some of the best startups are formed during a bust, and many more towering startups may be in the making in India.

Dharish David is Associate Faculty for the University of London at the Singapore Institute of Management Global Education (SIM-GE). He is also a Research Consultant at the Economic Research Institute for ASEAN and East Asia (ERIA).

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