Future Of The Startup Boom In India

KR Sekar Mar 06, 2023

Startups play an active role in boosting innovation and creating jobs in India. Their growth has a direct correlation with that of the Indian economy. The booming start-up segment has achieved spectacular growth in a short span of time. The number of startups rose from 471 in 2016 to 72,993 in 2022 and created more than 7,00,000 jobs by March 2022. India has become the third-largest startup ecosystem in the world after the US and China, per the Economic Survey 2021–22. Indian startups raised USD19.3 billion across 1,456 deals in Venture Capital (VC) between January 2021 and October 2021, against USD27.5 billion across 1,355 deals between January 2022 and October 2022. In addition, startups in India are expected to raise USD180 billion in 2023.

Impact of the pandemic on start-ups and government initiatives

Although the pandemic exposed the flip side of almost all sectors, it brought about some positive changes for startups. The global crisis accelerated the implementation of online technology globally, and more so in India. This led many businesses, including VC firms, especially those focusing on tech startups, go digital. Popular tech sectors include digital insurance, FinTech, HealthTech, and social commerce platforms. A NASSCOM survey conducted in April 2021 reported that 9 of 10 startups saw a decline in their revenue. In addition, most Indian startups, especially the non-tech ones, witnessed dismal growth. As a result, many companies were keen on launching technology-based startups and digital-based startups, which had an upswing despite the pandemic.

During his 89th Mann Ki Baat radio address to the nation, Prime Minister Narendra Modi said, “Even during the global pandemic, our start-ups created wealth and value.” India has become home to 100 unicorns with a total valuation of USD332.7 billion by May 2022.2

The prime minister launched the Start-up India initiative on 16 January 2016. The progressive policies of the government made the initiative highly successful. The government recognised more than 77,000 startups, spread over 656 districts from 28 states and 9 union territories of India. As on 7 September 2022, India had 107 unicorns with a total valuation of USD 340.79 billion. A ‘fund of funds’ worth INR10,000 crore is being managed to fuel the growth of the domestic VC industry. Further, a Rs 1,000 crore startup India seed fund was launched in 2021 to aid the set up and growth of new startups. These new startups created 5.2 lakh jobs across the country, with 45 per cent of them having a base in tier-2 and tier-3 cities. India sees the maximum number of startups being added every hour (four start-ups/hour). It houses the third-largest unicorn community and start-up base.

Funding trends in the start-up segment

Funding received by Indian startups has been constantly declining since 2022. Compared with USD 4.6 billion raised in January 2022, these companies raised only USD1.3 billion in October 2022 (a significant improvement over the previous month from October 2021). The Indian startup ecosystem saw a 7.5 per cent year-on-year (y-o-y) rise in the number of VC deals during January–October 2022. However, the total value of these deals declined by 29.8 percent y-o-y during the same period last year as investors are reluctant to make large investments until economic conditions stabilise. Indian startups raised USD19.3 billion across 1,456 deals in VC during January–October 2021, against USD27.5 billion across 1,355 deals during January–October 2022. Alternative lending, genomics, and payments were the top three sectors that received the maximum funding this quarter. Rising interest rates, the Russia─Ukraine war, decreasing energy supply, depreciating GBP/EUR, rising inflation, and public market volatility have made venture capitalists cautious while making investments. Moreover, the amount of funding is also decreasing and fewer start-ups are receiving funds from investors.

The government focuses on green sustainable products, boosting health care infrastructure, making India an agri-business hub, and promoting travel and tourism (offering virtual tours). It pays close attention to the defence, space, and chip manufacturing sectors. Connecting the offline retail market with digital commerce, FinTech, and EdTech, is also a priority. Hence, start-ups in these sectors will see further investments ─ SaaS and EdTech witnessed the highest number of M&A transactions during Q3 CY2.

Employment in the health care and pharmaceuticals sector is expected to increase rapidly as more startups contribute to the development of a robust health care system. Increase in the adoption of digitisation across sectors will continue to create growth avenues for tech start-ups. Education services will boom during recession as people will continue to enhance their knowledge and skills to ensure better career prospects.

Indian startups are poised to survive the slowdown in funding activity. Hiring activity in Indian startups indicates a strong revival of economic growth and the country is taking giant strides in creating sustainable solutions across sectors. In addition, startups continue to bring innovation and disruption in multiple industries, including SpaceTech, FemTech, HealthTech, and FinTech. The stage is set for India to realise its vision of becoming a USD5 trillion economy and global powerhouse by 2024-25.