Don't miss the Bus: Indian startup ecosystem for long-term wealth creation.

“India is the fastest-growing major economy in the world. From being the 11th largest economy in the world in 2013–14, India has graduated to being the 5th largest economy and in the race to the third spot by 2030.

India among the top three start-up ecosystems globally — the number of start-ups grew by approx 7000 in 2020, the number of seed-stage deals grew at ~13% in 2020. The startup Investor community has played a pivotal role in reinforcing the start-up ecosystem in India and has created more than 3 million jobs directly or indirectly over the past 10 years.

One of the key drivers of strong growth forecasts for India is its diverse economy & attractive demographic profile. India is the world’s largest democracy with 1.37 billion people with a median age of 28 years & is expected to surpass China to become the most populous country by 2024, as per the United Nations population division projections.

The journey so far :

Though theoretically, early-stage companies’ financing commenced during the technology boom in the late 1990s, it was not until 2010–11 that VC investments began to scale up. In 1999–2000, ~80 % of the total venture capital investments were derived from overseas firms. Very often, Non-Resident Indians (NRIs) were important LPs in these funds.

But, in recent years, these funds, on average, raised 25–30% of their capital from domestic sources(Indian HNIs, family offices along with leading institutional investors), this is in contrast to a few years back when the domestic capital pool was generally less than 5%. This clearly shows the change in the interest of domestic investors in this space.

The VC investments have posted healthy growth for the last 10 year period ended Dec 2020. The investment in startups has grown by 21.30 %(Y-O-Y) to $10B from $1.45B in 2011 along with average deal size has shot up approx 10 times in the same period from $1.3M in 2011 to $12.4M in 2020.

Strong Growth in startup ecosystem:

The significant fundraising activity with $3 billion raised by India-focused funds in 2020, 40% higher than in 2019 — marquee VCs have closed new funds for India investments in 2020. Despite the pandemic challenges, India saw the second-best year for fintech funding and attracted $2.7 B in 2020.

The average deal size in 2020 declined by ~15% vs. 2019, driven by a higher number of smaller deals (~500 deals (< $5M) vs 390 in 2019) and growth in seed-stage deals, which clearly shows the increasing interest in new-age tech companies, as there are always new interesting companies to look at.

Government Initiatives:

Budget 2021: “This will be a big boost for startups,” Nirmala Sitharaman said while presenting the first paperless Union Budget.

Startup Ecosystem facilitated through various government departments & programs

• 4100+ Startups have benefitted in the last year through various programs of the Central Govt.
• 960 crore of funding has been enabled to Startups through various schemes & 828 Cr sanctioned funds for infrastructure

With the objective to build a strong eco-system for nurturing innovation and Startups in the country the Government launched a Startup India Action Plan that offers the following support to recognized supports through:

Tax Exemptions

• IT exemptions for 3 years & Tax exemption on investments above Fair Market Value
• Capital gains exemption to people investing such capital gains in the Govt. recognized Fund of Funds

Easy Compliance: Self-certification and compliance of 9 environments and labor laws through the Startup India web portal/mobile app. Online self-certification for Labour

Laws enabled through ‘Shram Suvidha’ portal

Relaxed Norms for Public Procurement: By easing the requirement of prior experience and prior turnover in tenders for application by startups

Creation of Fund of Funds:

• ₹ 10,000 Cr. Fund of Funds to be provided by Mar 2025: Avg. ₹ 1,100 Cr. Per year
• 600 Cr (+25Cr Interest) given by DIPP to SIDBI which further committed Rs 623 Cr to 17 VC. 56Cr has been disbursed to 72 startups catalyzing investments of Rs 245 Cr

Credit Guarantee Scheme for Start-Ups

• Corpus of ₹ 2,000 Cr across 3 years & collateral Free, Fund & Non-Fund Based Credit Support
• Loans of up to 5 Cr. per Startup to be covered along with credit guarantee to benefit 7,500+ Startups in 3 years

Industry/Academia Support: Providing and building infrastructure across the country by setting/scaling up: 31 Innovation Centers, 15 Startup centers, 15 Technology Business Incubators, 7 Research Parks, 500 Atal Tinkering Labs.

Young entrepreneurs & investors are capitalizing on the opportunity offered by the current economic environment to start new-age businesses. In the process, they’re also putting a new spin on the way of wealth creation for them as well as for investors.

Investment approach for growing asset class :

Investing in startups, by default, requires a different approach & belief in the company. Here are a few things that I feel are important to consider:

• Take a portfolio approach always, as the distribution of returns in startups is not normal. The most important point that your hard-earned money should be in the hands of experienced managers.
• Gain a deep understanding, not only of the problem that the startup is solving but the driving factors to why that problem exists and why now is the time for a solution.
• Invest alongside others — group investment and co-investment is a growing space for a reason. Use whatever means you have at your disposal to gain exposure to quality deal flow.
• Don’t get fixated on financial forecasts. Understand the drivers to the startup’s growth — and its customer acquisition.
• Always invest in a disciplined & systematic manner as I have a firm belief in one thing “ The returns are the by-product of disciplined investment approach”.

The Bottom Line

Only five months into 2021, the Indian startup ecosystem already added14 new unicorns( $1B Company). India is currently the third-largest startup ecosystem in the world with a total of 51 Unicorns to date.

An earlier NASSCOM report had stated that India will have 50 unicorns before 2021 ends, but we have already surpassed that number. India is likely to see 100 unicorns by 2023, much earlier than the earlier projection of 2025.

Every day we have the opportunity to learn & experience new things in life, which also holds true in Investing. Seize the opportunity at right time is “the mantra for long-term wealth creation”. When you invest, opportunity cost can be defined as the amount of money you might not earn by purchasing one asset class instead of another.