India’s startup landscape has witnessed a remarkable transformation over the last decade. Today, it is seen as one of the hubs for global innovation. From 2.200 startups in 2013, India is now the third largest startup ecosystem in the world with 90,000 startups, of which 107 are unicorns.
While the ecosystem has been thriving, this journey has not been without its fair share of challenges. Let’s look at the factors that contributed to the growth of Indian startups, and the road ahead for the sector.
Digital transformation
India had the third largest smartphone base with 117 million users in 2013 and was expected to grow 45% in 2014. That number stands at 600 million as of December 2022.
The rapid internet penetration and smartphone adoption led to the rise and growth of the app economy in the country. This in turn opened a trove of opportunities for budding entrepreneurs to innovate and disrupt existing business models while contributing to the Indian startup story.
The accelerated pace of digital transformation and adoption across enterprises provided the much-needed fillip the SaaS, PaaS and IaaS startups in the country needed.
Sectoral and geographical diversification
In 2013 investments in Indian startups surpassed $1.6 billion across 293 deals, according to both publicly disclosed venture capital (VC) and angel investments. Ecommerce and consumer web startups received the most amount of funding that year. In time, the number of startups continued to grow but the notable change was the different sectors that saw the rise of new-age companies disrupting and challenging the traditional ways of business.
Today, there are technology led startups mushrooming across sectors like agriculture, education, insurance, and healthcare amongst others.
This diversification was also seen in the number of Tier I and II cities coming up as startup hubs competing with the likes of Bengaluru, Mumbai or Delhi. Cities like Chennai, Ahmedabad, Pune, Jaipur, Chandigarh, Indore, Kochi and Vadodara are emerging as the preferred home for the new crop of startups.
Startups are also steadily rising to the top of the list of biggest employers in the country. Studies show that 1.7 lakh jobs were created by the Department for Promotion of Industry and Internal Trade (DPIIT) recognised start-ups in the period 2020-2021 alone.
Funding winter
The year 2021 saw the highest investment in the country so far with nearly $37 billion raised by startups. This number dropped by 33% to $24 billion in 2022. As it stands, Q1 of 2023 has only seen investments worth $2 billion, a 75% drop compared to Q1 2022. As it stands, the total funding in 2023 January to June period amounted to $5.5 billion, a 24% drop compared to H2 of 2022.
This does not come as a surprise though. During the pandemic, a huge influx of funds from the US Federal Reserve and other central banks stimulated the economy and lowered interest rates.
This led to more disposable cash in the hands of global venture capitalists looking for the ‘next big thing’. Naturally, their eyes turned towards a large emerging market amid a rapid digital revolution with a solid entrepreneurial culture and burgeoning startup ecosystem–India.
The sheer volume and scope of post-pandemic recovery in India was enough to lure VCs. This subsequently led to a bubble of hyper-valued startups which has tapered ever since. Startup valuations are now sane again and the pool of what once seemed like unlimited VC funding has dried up. Why?
Rate hikes in developed markets have led to investors pulling out from risky illiquid assets to more stable ones. It goes back to the old saying, “When the US sneezes, the entire world catches a cold.” While many startups have successfully gone public, many have also had their hands burnt on listing dates due to initial inflated valuations.
The ultimate blessing?
While nobody wants to refuse a hefty infusion of capital into their business, the recent boom and bust funding cycle must serve as a cautionary tale for future entrepreneurs. Startups are not in the business of raising funds, and while society may treat valuation as the be-all and end-all, entrepreneurs must be more prudent.
Instead, they must focus on sustained growth through an emphasis on strong fundamentals and profitability. While this rollercoaster has created many opportunities and challenges for entrepreneurs, it has also exposed the need for a more balanced and mature approach to building a resilient startup.
If this funding winter forces startups to rethink their priorities and focus on what matters most, which is going back to first principles, and solving real problems, it may well be the ultimate blessing in disguise.
Sidharth Malik is the Chief Executive Officer at CleverTap
