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Emerging Indian Startup Ecosystem, Red Flag, Government Role
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There would be very few Indians who are unaware of the term 'startups' after the success of companies like Flipkart, Paytm, and Dream11. Many young Indian entrepreneurs have taken advantage of the booming Indian economy and a conducive environment to establish their firms as some of their sectors' biggest players. India has 21 unicorns at present, and many more are in the making. Companies are exploiting a huge potential market with the deeper penetration of smartphones and cheaper data. Today, startups are touching every aspect of our lives, and it this myriad of the newly emerging Indian startup ecosystem, let's take a deeper look into some of its key points.

The Indian startup ecosystem continues to be one of the most action-packed sections, even during a tough time. It is a sector where failures and successes exist in equilibrium measures. 

The Indian startup ecosystem is booming for the last decade, with more than 40,000 active startups. These startups are solving some of the biggest issues India and the world is facing (1). 

It is worth noting that India has now emerged as the third biggest startup hub on the planet. It is expecting to observe year-on-year development of steady growth of 15%. 

In 2018, India had about 50,000 new firms, and about 10,000 of these startups are innovation-driven businesses. It brought 1,300 new tech firms into the world in 2019 alone (2). 

Key Drivers of the Indian Startup Ecosystem

The Indian startups have proceeded to raise massive ticket sizes from different homegrown and global assets. Endeavors are recognizing the problematic capability of new startups, and hence they are joining forces and putting resources into them.

Moreover, the Indian government perceives the benefit of working with troublesome trailblazers over the worth chain and utilizing their advancements to improve the general help movement. 

In a nation like India, where ever-increasing individuals are longing to have their business, dreaming, and accomplishing their imagination into a reality, India’s future looks exciting and conceivable. 

Moreover, with the development into the volume of inhabitants in youth, who will be in general hazard and become wildly successful, the startup culture looks like a great deal coming up for them (3). 

Taking a gander from 2014 to 2017 measurements, the country’s rank rose from 54 to 35 on the World Bank’s coordination execution file, meaning the proficiency with which the items can be moved to and from the country (4). It undoubtedly characterizes and brags about India being a colossal market and accordingly inferring the organizations’ development. 

It is not only individuals approaching to have their startups, but the public authority is putting forth attempts to inspire specific networks that would help them have a protected future. With government activities intercession, numerous individuals currently approach and dare to hazard it. With “Stand UP India,” “Make in India,” and “Startup India” appearing, it helped the country accomplish new statures regarding the business venture (5). 

 

Betting Big on Rural India

 The Indian government encourages firms to look at rural India as a great business destination while stressing the Indian rural economy’s huge business prospect.

It’s worth noting that the country’s several world-class products can offer to global markets via the MSME segment. Village industries such as handicrafts, handlooms, Udyog, khadi Gram, and others generate over 80,000 crore INR revenues. It needs to be hiked up to 5 lakh crore INR in the next few years.

There is no denying that the MSME sector is playing a critical role in the country. It can be called the ‘backbone of the Indian economy’ since 30% of the country’s GDP is concluded by the sector, and out of total export, 48% comes from the sector, which has so far created 11 crore jobs (6).

The Indian government is committed to helping the COVID-19 hit sector with the latest initiatives like the new definition of the MSME sector and the Emergency Credit Line Guarantee Scheme (ECLGS); small businesses have well received the ECLGS (7).

 

Driving India in the Overseas Markets

There has been a change in the Dynamics and essence of the Indian company’s commitment to the overseas market.

Because of India’s technological and infrastructural advancement, there has been a rise in the number of startups competing with foreign companies. The Indian firms are being successful at the global level because of workforce availability with skills at a lower cost.

Globalization and the impact of Information and Communication Technology are key trends driving Indian companies’ presence in foreign markets. Globalization has led to the growth of the Indian company’s competitive capability and intense engagement with the global market. 

They are creating a strong presence in foreign markets. Many companies have recently formed regional and global leadership positions in sectors ranging from automotive, pharmaceutical, consumer goods, telecommunications infrastructure, and energy (8). Indian giants also hold iconic brands like Jaguar, Land Rover, Tetley tea.

Most Indian startups today are building the business for global markets and are getting a major part of their services outside the country. 

Leading Indian startup, Zomato is one of the largest food aggregators globally has already been claiming itself to be the number one player in space with a presence in 24 countries and more than 10,000 cities worldwide (9).

Another homegrown cab-hailing startup, Ola, has expanded its presence in New Zealand, Australia, and the UK. It is also planning to expand into Kenya, Netherlands, Dubai, Israel, and Brazil (10). 

Oyo Rooms, one of the world’s leading hospitality chains, has crossed the mark of 50 million app downloads in September 2020. The majority of downloads are from India, Malaysia, Indonesia, the US, and Brazil (11). 

The Indian startups are establishing a new global consumer base and showing their prominence in global businesses.

 

Indian Startups are Clocking Big Investments

India is emerging as a pioneer in magnetizing overseas investments in different sectors, in which the startup ecosystem is growing billions of investment. It is mainly due to the Indian government’s emphasis on Indian manufacturing and the ‘Make in India’ initiative, which has gained impulse in pushing India’s dream of becoming Asia’s next global powerhouse. 

Indian startups have raised more than 400 million USD amid pandemic and made their way into the elite unicorn club with more than 1 billion USD in valuation. The startups had attracted both international and domestic investors when the cash flow issue adversely impacted most sectors. The startup companies include Postman Firstcry, Razorpay, Zerodha, and Unacademy (12).

It’s worth highlighting that from 2016 to 2020, more than 5,000 Indian startups had received over 16 billion USD investments, making India the world’s third-largest technology startup hub.

Moreover, Indian firms mark the Fortune 500 list, with Reliance jumping ten places to break into the world’s top 100 company on the Fortune Global 500 list.

In the past several years, many Indian companies have grown rapidly in both domestic and overseas markets. Some of these companies took the merger and acquisition route to expand quickly. From the mergers and acquisitions strategy, Indian firms can showcase their capabilities at the global level. Their major focus is to gain access to a larger market, achieve economics, and increase their customer base.

There is no denying that Indian companies demonstrate maturity in the international market and are doing successfully well in developing and developed markets. These forms are now elevating the status of low-cost producers to innovative businesses. They are boasting distinctive of the targeted overseas markets’ rings and are now more focused on delivering quality products to win the global market (13).

 

Holding the Momentum

The year 2020 also observed a change in Indian unicorn startups. It is known that several startups quickly gain funds to enter the billion-dollar club but ended up having a valuation collapse because of the permanent losses. Nevertheless, unicorns define the startup ecosystem, and India is no exception. 

The large deals and valuations are touted when VC pitch to secure new funds. 

The number of unicorns is also an indicator of the ecosystem’s maturity. A unicorn startup’s quality is determined by how much money it has secured to get the billion-dollar valuation. The lesser, the better as raising, for instance, 600 million USD for the unicorn valuation is more about funding math and less about quality. 

It is one of the biggest criticism against the unicorn culture since many of these unicorns see fast fall as they rise. India has also observed at least three unicorns losing its valuation. ShopClues, one of the country’s earliest unicorns, was sold last year for 80 million USD (14). Simultaneously, Snapdeal is observing a shadow of its peak valuation of 6.5 billion USD. Quikr, a unicorn in 2015, also saw its valuation falling 50% by its investors in 2019. 

It happened because even as a unicorn and a mature firm, many startups still burned cash in growth pursuit when profits were nowhere on the horizon. It is especially true for consumer internet firms. 

It is worth highlighting that, while a billion-dollar valuation looks good on presentations, they indeed require to build stable and sustainable businesses. 

Recently, India’s unicorns look more sustainable. Of 2020’s unicorns, Nyka, Postman, Pine Labs, and nearly all of them are operationally profitable. It is a rare sight previously when Flipkart, Paytm, Oyo Rooms, and Ola became unicorns.

Byju’s, Policybazaar, and Dream11, unicorns of the past two years, are all looking profitable or are at least close to profitability. 

In the case of Razorpay (15), a Bengaluru-based startup, broke into the club a month ago, mainly buoyed by the Indian digital payments ecosystem’s overall growth. As a B2B player, Razorpay has managed to keep its cash burn restricted, and it has also been quick to innovate. 

The startup has now also broadened its base into payouts for businesses, neo-banking, digital account opening, and many others. Analysts also suggest that it has gained the valuation primarily because it is a banking product rather than merely a payment gateway business. 

Similarly, Pine Labs has also gone beyond card payments under its new CEO and fintech veteran Amrish Rau. It builds solutions for merchants and helps them with lending, EMIs, offers, UPI, and more. It has quickly deployed its PoS, smart Point of Sale solutions at large merchant outlets with several features and has ensured that its customers stick (16).  

“The newer unicorns also look more sustainable because they have an ecosystem ready for building. Digital payments, cheap and fast internet, and faster adoption than ever have enabled better unit economics. So the newer unicorns need to spend less on customer acquisition,”

says Anil Joshi, managing partner at Unicorn India Ventures, an early-stage investor (17).

An Investment Destination

It is the precise time for the country to position itself as an investment destination, emphasizing its long-term growth potential rather than short term afflictions. India must bring forth nuggets of positivity like demographic dividend, young and skilled population, yet to be developed infrastructure, urbanization, agro-climatic zone; capable of growing innumerable crops, tourism, under one roof.

India is expected to remain a young country for the next three decades, and its sizable young population ties greatly with the basic supply-demand law of economics.

The bigger the pool of human resources, the bigger the presuming market. It can also be validated from a well-known fact that India is the back office or industrial zone to worldwide firms that benefit from countries’ cheaper and highly educated English speaking workforce. Notably, India is also a major market for products and services. 

The entire population needs to contribute significantly to all countries’ economic sectors for its all-round progress. Strategies should revolve around creating employment opportunities in both rural and urban areas. It can be achieved via the extraction of natural resources or revenues via the Indian government initiatives focusing on infrastructure generation and self-employment via startups.

The biggest factor that showcases the Indian regulatory environment’s improvement is essential for business growth is its ‘Ease of Doing Business’ rankings. 

Before the pandemic onset, India’s ranking improved in six years by 79 places to 63 ranks in 2019. It is a record among emerging economies. Undoubtedly, India has propped up its image from the standpoint of entrepreneur real environment global competitive indices and attractiveness.

Eliminating the aberrations caused due to the covid-19 pandemic will hopefully gradually fade such positive indicators and surely move global firms looking for new investment destinations. 

With the Indian government’s flagship ‘Make in India’ scheme, which is further in force by the Atma Nirmal Bharat Abhiyan and other reforms, it is fair to be optimistic that a boom across all the sectors is around the corner, especially in the manufacturing sector. It would enhance the country’s competitiveness associated with the global value chain as a reliable entity.

India is also a land of diversity and culture and countless experiences to offer. India needs to ramp up expansion projects associated with highways, waterways, and aviation networks to scale up tourism returns. 

The Udaan scheme’s launch has done a commendable job and has opened up new destinations in different parts of the country. Moreover, wildlife safaris and the rich heritage of culture and tradition can open up avenues with significant revenue potential. India can drive tourist footfall by developing experiential and impact tools for remote rural areas. It would also bring prosperity to the Hinterland and help check local youth migration to cities searching for employment. It will add to rural prosperity, which is already being stressed by positive strides evident in the agriculture sector.

India is acknowledged worldwide as a knowledge hub since it has contributed immensely to other countries and has been part of its development journey. India’s association with the Nobel prize goes a long time back. It is also a prime time to reverse the brain drain so that India can benefit by implementing new ideas to get pulled from an emerging economy’s status to that of an enterprising developed country.

It is not arduous to re-establish India as one of the world’s fastest-growing and emerging economies and aspires to become a major economic hub. Strongly believe that India is bound to stand out in the new normal (18).

 

Red Flag: Foreign Funds

It is perhaps the first red flag in the Indian startup ecosystem. The curators of significant Indian startups have stated that foreign funds are the new East India company that colonizes successful Indian startups by transferring ownership overseas to skip Indian taxes and regulations. 

About 17 trillion INR of market cap has been transferred overseas after young Indian startups were forced to shift their firm overseas by foreign investors, promising the capital they require for growth (19). 

“Shades of the East India Company type of situation here – Indian market, Indian customers, Indian developers, Indian workforce. However, 100% foreign ownership, foreign investors. IP and data transferred overseas. Transfer pricing issues foggy. The institutionalized transfer of wealth away from India while living off the Indian market and Indian labor somewhat like the Company rule days.”

– Sanjeev Bikhchandani, Internet Entrepreneur (20). 

In such a case, all shareholders will own stakes in that overseas firm, including founders, employees, and investors. It is accompanied by the transfer of all IP and data owned by the Indian firm. Such a company is substantially outside of Indian jurisdiction and the influence of Indian regulators. 

While foreign funds are welcome, the Indian government and regulations must insist that data and the IP belong to the Indian subsidiary and the overseas entity cannot own them. In the short term, it doesn’t seem to matter as all Indian startups are getting funds, but it can have a significant and seriously negative impact on the Indian economy in the long run. 

The investors want to access the Indian market and customers but not the Indian government, tax authorities, and regulators. The foreign firms need to have a conversation with the government if some rules they feel should be changed instead of shifting overseas. At the same time, they build India’s product, use the Indian workforce, and sell to customers in India. 

Suppose that starts happening on a massive scale. In that case, we will end up with a situation where the company, investors, value capture, the IP, and the data are all shifted overseas with little accountability to Indian regulators. While the customers, workforce, IP development, data capture are all in India. 

In short, it is an institutionalized mechanism for transferring wealth out of India on a large scale.

Notably, more than 500 to 1,000 startups have changed their domicile in the last five to seven years. If we consider 500 of India’s best startup shift overseas and even if 2% of them become successful, there would be a loss of over 17 lakh crore INR market cap to India at the current price.

The Indian government must be the best custodian of the country’s interest. There is a need for a policy with a comprise package of both incentives and disincentives to encourage and discourage certain behaviors (21).  

 

Conclusion

Indian startups have now spread across the length and breadth of the entire country. The shift in global focus is on promoting women entrepreneurs and fostering an innovative and inclusive environment. Stakeholders are now making efforts in the Indian startup ecosystem to elevate domestic policies in concurrence with worldwide trends. 

The state government’s role has become essential in developing the necessary infrastructure and support to Foster the startup ecosystem. Because of the given constraint of infrastructure and supporting services, the nation needs to built upon low cost and high impact solutions. 

Even though there has been an increase in Angel and venture capital funding, the amount invested must be augmented. The ecosystem must be well integrated to connect startups to stakeholders and other fund houses. 

While it is necessary to elucidate the overarching features of the Indian startup ecosystem, it delves deeper into the role of states and Indian Federal structure in building the startup ecosystem and closely monitoring futuristic measures that can aid its growth story.

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Rucha Joshi, currently managing a team of over 20 content writers at TimesNext is fueled by her passion for creative writing. She is eager to turn information into action. With her hunger for knowledge, she considers herself a forever student and a passionate leader.

Disclaimer: The views, thoughts, and opinions expressed in the article have been curated for our audience and does not warrant a 100% accuracy. All the information mentioned in the article is subject to change according to the changing viewpoints. Feel free to reach us at [email protected] for any change or copyright issues.

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Team Rucha Joshi
Team Rucha Joshi
Rucha Joshi, currently managing a team of over 20 content writers at TimesNext is fueled by her passion for creative writing. She is eager to turn information into action. With her hunger for knowledge, she considers herself a forever student and a passionate leader.

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