India welcomed six new ‘unicorns’ in the second week of April 2021. These startups have a valuation of $1billion US dollars or more. That is seriously impressive when you consider that only 7 new unicorns surfaced during 2020 and in 2019 only 6 emerged. The fact that these unicorns surfaced while the country was dealing with the Covid-19 pandemic and the resulting lockdown which impacted demand and affected supply is really quite extraordinary.
Is this growth in startups happening across the board?
However, this was not the case for all startups, excluding perhaps an EasyBet Casino. A survey was carried out in April 2021 by the National Association of Software and Service Companies that found that out of every ten startups, nine of them saw a reduction in revenue. This would seem to reveal a somewhat conservative mindset of a lot of investors during the time of the pandemic. In light of this unpredictable demand, the increase in many Indian startups has shown a significant slowdown.
In 2020, India had the third largest startup market reaching US$11.8 billion. The United States was at $143 billion and China at $83 billion. The startup domain in India is still a vibrant one in terms of private equity and venture capital from companies such as Naspers, Softbank and Tiger Global.
This, in spite of the fact that there are new rules affecting foreign direct investment (FDI) preventing Chinese opportunists from taking over Indian companies. Chinese investment is responsible for backing 18 out of the 30 Indian unicorns, making them one of the largest stakeholders in India’s startup ecosystem. However, now that there are new FDI rules in place, it means that these investments will need to get government approval.
Did the pandemic have an impact on startups?
The adoption of online technology in India increased dramatically during the pandemic. Many businesses are moving or increasing their digital and/or online presence and venture capital firms are turning their sights to tech startups.
At the same time, they are also focusing on startups in other sectors like those involving fastmoving consumer goods such as home entertainment and online food and grocery delivery. The twelve new unicorns in India that have surfaced this year cover a whole range of tech sectors; these include HealthTech, FinTech, digital insurance and social commerce platforms.
It would be beneficial for the government to support and maintain this momentum by increasing the digital and financial infrastructure and also looking at socioeconomic inequality. To give credit where it is due, the government did create the Startup India Initiative back in 2016 which created an enabling environment for the startup culture. It initiated an innovative and entrepreneurial startup setting which encourages economic growth and huge potential for large-scale employment.
The definition of ‘startups’ by Startup India are companies that have their headquarters in India, are no more than ten years old and that have an annual turnover of no more than Rs 1 billion (US$13.7 million). There are three areas in which the initiative offers support: providing financial aid and subsidies, reducing regulations and creating the environment whereby industry and academic partnerships can flourish via innovation laboratories, developing programs like roadshows, bootcamps and grants.
Monies are fed through a fund managed by the Small Industries Development Bank of India (SIDBI) to Startup India. By March 2020 Startup India had invested a cumulative amount of Rs 33.8 billion (US$463 million). A total of 320 startups had received this investment. However, that is a mere 1% of the number of registered startups in India which is actually 28,979. That means that the large majority of startups are relying on private equity and venture capital funds.
It could be that those startups receiving financial aid from the government may rise in the near future. In January 2021, Startup India announced a new seed funding scheme. This scheme provides financial aid to 3600 startups over a 4 -year period for “proof of concept, prototype development, product trials, market entry and commercialization.”
India is now well on its way towards being a knowledge-based digital economy. The government is attempting to implement ICT infrastructure and improve policies for electronic governance, for investments and for technological innovation via research and education which would aid entrepreneurship and stimulate economic development.
Post pandemic, we are seeing the growing demand for digital services. Many startups in EdTech, FinTech, artificial intelligence, cyber security and the Internet of Things will experience an influx of new users and this will also bring about more investment.
Some issues that still need to be addressed
But there are still challenges ahead for India’s startup ecosystem. One problem area is that the bulk of startups and funding is mainly in large urban centers leaving few options for those startups located in smaller towns or in more rural regions. The concentration of investments is firmly in IT enabled technology spheres. There needs to be a diversification of investment in startups to encompass a whole range of sectors which should include manufacturing, agriculture, healthcare, social services and education.
India cannot lay claim to world-renowned businesses, like Google, Facebook or SpaceX, which started as startups. India is often compared to China, and China does have a number of very successful startups, such as Alibaba, ByteDance and also DiDi. The reason for this could be the result of poor digital infrastructure – inadequate mobile and broadband connections. Also, there are only a few high-tech solutions and limited investment in research and development. India doesn’t rate high in innovation and has a poor number of patents filed.
So, India still has a way to go. India has great potential to be a real hub in the global economy, with its yet unmet demand of a huge population and its attempt to really push technology and innovation.
The pandemic was really a catalyst for the transformation of the startup scene in India. It created a demand for digital solutions and this saw the birth of new unicorns. However, not all small startups will succeed. The pandemic also showed us the way in which things will play out in the future digital economy.
The digital economy seems to function in cycles. There are booms and busts. Many of the top startups emerge during a bust. Perhaps we are yet to see some really exceptional startups emerge in India.
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