January , 2024
India is focusing to upgrade startup ecosystem to boost growth
20:47 pm

Tushar K. Mahanti

“The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into smaller manageable tasks, and then starting on the first one.” observed Mark Twain, the American humorist and author. Mark Twain's words seem to have shaped the mindset of the Indian startups – a beginning is the secret of success. Indian start-ups began small each with specific intent and its work mechanism. With a huge technology support and the ambition to succeed, India’s startup ecosystem has grown to a global leader.

The story of Indian startups indeed began small in the 1980s with a handful of pioneering IT service companies such as TCS, Infosys and Wipro with their innovative enterprises and technical supremacy placed India firmly on the global technology map. These companies invested in technology and leveraged the country’s young, English-speaking workforce to provide cost-effective technology services to clients across the globe. The result is the emergence of a booming technology industry that currently employs about five and a half million people and generates an estimated $ 250 billion in revenues.

Since most of the startups are tech-driven and India has a vast pool of tech hands, the startup ecosystem has grown steadily over the past years. India continues to have a deep technology talent base and is estimated to have a total employee count to approximately 5.4 million in 2023, according to the Nasscom report, ‘Technology Sector in India 2023: Strategic Review.’ The rise of Software-as-a-Service (SaaS) companies, GCCs, cloud solutions, and emerging technologies such as DeepTech, Gen AI, robotics, and SpaceTech are expected to drive new requirements for talent. The industry is investing in new talent hiring and skilling as well as partnering with the government and academia. Developing talent and enhancing the talent pool in the new tech areas would be one of the key success factors for the technology-based sector including startups.

What is a startup?

First, what is a startup? As the term suggests startup refers to a company in the first stage of operations. A startup venture could be defined as a new business that is in the initial stages of operation, beginning to grow and is typically financed by an individual or small group of individuals or friends and or relatives. It is a young entrepreneurial, scalable business model built on technology and innovation wherein the founders develop a product or service for which they foresee demand through disruption of existing business or by creating entirely new markets. Startups are basically ideas which manifest into innovative and unique commercial ventures.

Ensconced in an innovative mindset, a startup aims to remedy deficiencies of existing products and or create entirely new goods or services, disrupting existing ways of thinking and doing business. That’s why many startups are known within their respective industries as “disruptors.”

A startup is different from other existing companies in speed and growth also. Startups aim to build on ideas very quickly. They often do this through a process, called iteration in which they continuously improve products through feedback and usage data.

Realising the scope and far-reaching impact of startup ventures in the economy the government launched 'Startup India' initiative in 2016 for creating a conducive environment for startups in India. It has defined startup as a business entity incorporated as a private limited company or registered as a partnership firm or a limited liability partnership. Its turnover should be less than Rs 100 crore in any of the previous financial years of its incorporation. An entity shall be considered as a startup up to 10 years from the date of its incorporation.

Growth of India’s startup ecosystem

As the larger part of the startup units are tech-driven and India has a vast pool of tech hands, the startup ecosystem has grown steadily over the past years. India's technology industry has emerged as a vibrant force propelling the nation's employment opportunities, and overall economic growth. Being one of the largest offshoring destinations for different IT companies across the world, the business process management (IT-BPM) has contributed 7.5% in Indian GDP in 2022-23 according to Statista, a German online platform that specializes in data gathering and visualization. The IT and BPM industries' revenue is estimated at $ 245 billion in FY 2023 -- up from $ 226 billion in FY 2022. Looking ahead, the industry is on course to achieve the $ 500 billion milestone by 2030, as per the Nasscom report. The domestic revenue of the IT industry is estimated at $51 billion, and export revenue is estimated at $194 billion in FY 2023.

Gaining from its huge pool of technology talent, India continues to grow and remains one of the most preferred destinations globally for technology and knowledge services, as well as global capability centres (GCCs). With over 1,570 GCCs estimated in FY23, the GCC sector is experiencing an accelerated expansion, with several global industry majors setting up and expanding their captive centres in India.

According to the 2020 global technology industry innovation survey report of KPMG, India has moved to the second spot and tied with China for innovation, adoption and promotion of new-age technologies such as artificial intelligence (AI), machine learning (ML), blockchain and internet-of-things. India has continued to improve its ranking in the Global Innovation Index prepared annually by the World Intellectual Property Organisation, headquartered at Geneva – up from 81st in 2015 to 40th in 2023. Rapid urbanisation, a younger demographic in the country along with an increase in venture capital in recent years have boosted the growth of the sector.

India has emerged as the third largest startup ecosystem globally with over one lakh DPIIT recognised start-ups across 763 districts of the country as on October 3, 2023. To note, as per eligibility conditions prescribed under G.S.R. notification 127 (E) dated 19th February 2019, entities are recognised as ‘startups’ under Startup India initiative by the Department for Promotion of Industry and Internal Trade (DPIIT). Since the launch of Startup India initiative in 2016, DPIIT has recognised 1,12,718 entities as startups as of October 3, 2023.

India has retained its second rank in innovation quality in 2023 with top position in the quality of scientific publications and the quality of universities among the emerging economies. The innovation is not just limited to specific sectors but spread over diverse areas. The country has recognised start-ups solving problems of 56 diverse industrial sectors with 13% from IT services, 9% healthcare, 7% education and 5% each in agriculture and food and beverages.

As of May 2023, the Indian Generative AI landscape had more than 60 startups dedicated to offering solutions and services to their customers spread across various industry verticals. More than $590 million in funding has already flown into this space, with 2022 being the year with the heaviest funding inflow. The report ‘Generative AI Startup Landscape in India – A 2023 Perspective’ reflects Nasscom’s perspective on this evolving space. The study outlines the market composition, funding environment, technological environment, value creation across use cases, and revenue trends/expectations reported by the Gen AI startups in India. Also included are Nasscom’s recommendations to various ecosystem players on what they can do to create a favourable environment that facilitates large-scale Generative AI potential unlock and promotes market growth.

Space startup – the new-age multiplier

India’s successful moon mission last year has brought India at the forefront of space research. India accounts for a paltry 2% of the $360 billion space economy but its early days and it is all set to explore the market at its own terms. 

Indian companies are finding their niche in software and services to support the space sector. India recorded a historic 2022 with its first private rocket launch and multiple other satellite launches. In 2022 alone as many as 100 space-tech startups got registered with the Indian Space Research Organisation.  According to Union minister Jitendra Singh India has now 190 private space startups compared to just one four years back. The growth was facilitated by opening up the sector to the private sector.

The growth has come on the back of approximately $233 million in funding raised by India’s Spacetech startups across more than 30 deals between 2014 and May 2023. According to Inc42’s ‘Indian Spacetech Startup Landscape & Market Opportunity Report 2023’ the spacetech sector is estimated to reach a market size of $77 billion by 2030. 

In a major boost to the Indian space startup sector, Alphabet, the parent company of Google, announced $36 million of investment in Bengaluru-based space startup, Pixxel, in June last year. It was the first major investment in the Indian space sector after the privatisation policy of the Indian government unveiled last April.

The approval of Indian Space Policy 2023 gave a major impetus to the Indian private space industry, by making it a lucrative investment option for investors. Amid a favourable ecosystem for space startups in India, companies like Skyroot, SatSure, Dhruva, Bellatrix, etc. are flourishing to become India's SpaceX

Growing number of unicorns

Significantly, more than the total number of startup, the success of the startup ecosystem is measured by the number of unicorns as it shows the success of the ecosystem. Unicorn is a terminology in the venture capital industry to describe a startup company that is valued at $ 1 billion or more. 

Indeed, India’s startup ecosystem is not just growing horizontally but is also growing vertically suggesting the success of existing units. This is reflected in the increasing number of unicorns. Indian unicorns are flourishing in the fast-paced and dynamic economy that has begun recovering after witnessing rapid deceleration following the coronavirus pandemic.

Till 2016-17 about one unicorn was added every year. Over the past four years since 2017-18 this number has been growing exponentially. As of October 3, 2023, India is home to 111 unicorns with a total valuation of $349.67 billion.The year 2021 saw a sharp rise in the birth of new unicorns -- as many as 45 unicorns were born in 2021 against just 11 in the previous year, Covid-19 caused a great amount of socio-economic disruptions and a number of start-ups in logistics, food, education and health grew immensely driving the spurt in unicorns.

Geographically, the centre of India's high-tech industry, Bengaluru is India’s unicorn capital with the largest number of unicorn headquarters followed by Delhi (NCR) and Mumbai. Traditional sectors such as E-commerce, Fin-tech, E-commerce, Supply Chain & Logistics, Internet Software & Services do dominate the arena but a strong wave of unconventional sectors such as Content, Gaming, Hospitality, Data management & analytics, etc are making their place on the list. 

Government initiatives

India’s unemployment rate climbed to the highest in more than two years last October as joblessness in rural areas increased, according to the Centre for Monitoring Indian Economy. This was not a one off situation, high unemployment rate is a perennial problem in the country. It is one of the biggest problems of India and it needs a huge number of new jobs every year. Startup entrepreneurships may prove a crucial player in creating more jobs because it brings new innovations, new jobs and competitive dynamics to the business environment and enterprises.

Recognising the importance of the startup the government launched the ‘Startup India’ program way back in 2016 with a stated objective to build a strong ecosystem for nurturing innovation and startups in the country that would drive sustainable economic growth and generate large scale employment opportunities.

Under the provisions of this plan, startups were entitled to a number of benefits such as tax incentives including capital gains tax exemption, governments’ assistance in funding, prioritisation of startups in public procurement, etc. The Fund of Funds (FFS) scheme for startups was established to provide funding support for development and growth of innovation driven enterprises as well as to address one of the key challenges faced by startups, that is, access to risk capital

The world is embracing knowledge economy-led growth. On this path, one of the strongest force-multipliers of India is technology-based innovation and the startup economy. IT services paved the way in the 1990s - taking advantage of the internet boom and liberalisation - and has grown steadily for 30 years. The next step is to identify and strengthen industries with similar value propositions. Now is the turn of the startups to focus on developing solutions that would allow businesses in key sectors to challenge the global competition.

All is not well

However, everything is not hunky dory. Despite a sharp rise in the number of new registrations, the Indian startup ecosystem faced a serious funding decline in the first half of 2023 compared to the same period of 2022. According to the India Tech semi-annual report 2023 by market intelligence platform Tracxn, funding in the first six months of 2023 witnessed a 72% decline totalling about $ 5.5 billion compared to $ 19.7 billion in the same period in the previous year.

With a total funding of $7 billion India has dropped from 4th place in 2022 to 5th place in 2023 among the highest-funded geographies globally. The last quarter (Q4) recorded the lowest funding of $957 million to date, marking it the lowest-funded quarter since Q3 2016. 

However, despite the overall funding slowdown, sectors such as environment tech and spacetech have garnered investor attention. Environment tech received $1.2 billion in funding, while spacetech saw a 6% increase with $122 million raised so far in 2023 brought about its privatisation by the government. 

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