Wednesday, April 24, 2024

Exploring the Indian Startup Frontier

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Wise investors should keep their eyes fixed on India and its booming startup ecosystem, which is the third largest as of 2024. Since Prime Minister Shri Narendra Modi began the Startup India initiative in January 2016, funding for the country’s startups has increased 15-fold. The coming year promises even more growth for this ecosystem, with valuation projections of more than $450 billion by 2025.

These startups cover a vast range of emerging sectors and are vital contributors to India’s transformation into a fully developed nation. Combined with strong government and corporate support and increased ease of business, India has created well-developed investment opportunities with big returns and significant impacts.

Already the world’s most populous country and largest democracy, India is on track to become the most extensive startup ecosystem outside the United States, with expected year-over-year growth pegged at 12% to 15%. Investors would do well to learn about this ecosystem, from its critical industries to its risks and challenges. This post covers some of the most essential information for investors to consider.

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Emerging Sectors and Positive Change

Those investing in India have more options than ever before. More than 100,000 startups are registered with India’s Department for Promotion of Industry and Internal Trade (DPIIT). These span a wide range of industries, but two with excellent market potential are technology and renewable energy.

The technology sector covers many bases, but fintech and deep tech are the most prominent players. According to a Hindu Business Line report, India possesses the third-highest fintech count globally, with more than 9,000 as of 2023, accounting for 14% of current startup funding. In the same report, Elevation Capital partner Mridul Aroroa states that India’s “fast-growing digital population, world-class digital public infrastructure, and proactive regulators” will help the fintech sector expand to $400 billion in total value by 2030. Savvy investors are already making significant investments in India’s fintech startups, with the city of Bengaluru alone receiving $949 million in fintech funding in 2023.

Deep tech is a fast-growing sector that encompasses hot global markets: AI, blockchain, and quantum computing. Venture capital funding has doubled over the past decade, with investments of $100 million or more becoming increasingly common. Investors can rest assured that India is already ahead of the curve in this highly relevant sector, with 3,000 deep tech startups growing at a 53% CAGR since 2013. Like fintech, deep tech is poised for exponential growth this decade. Ramkumar Narayanan, Chairperson of Nasscom’s DeepTech Council, predicts more than 10,000 deep tech startups will exist in India by 2030. India is more than prepared to meet the demands of investors looking to make reliable profits in the age of AI and blockchain.

The other major sector, renewable energy, is very pertinent for India. The country is the third largest in total energy consumption and comes fourth in renewable power capacity additions. Because it aims to achieve an ambitious goal of 500 gigawatts in renewable capacity by 2030, as well as net-zero carbon emissions by 2070, it is no surprise that India is providing support to clean and renewable energy startups. The Clean Energy International Incubator Centre (CEIIC), a joint venture between the nonprofit Tata Trusts and the Indian government that was launched in 2018, has “incubated 25 startups”, according to the International Energy Agency, supporting those that “could effectuate deep and lasting social and environmental impacts.” Investors can provide support in this sector, knowing that India is committed to delivering a green future with the help of its startup ecosystem.

These and other sectors are rich markets for investors, and they are a vital piece of the Viksit Bharat, Prime Minister Modi’s vision to make India a fully developed nation by 2047, the 100th year of its independence. The Prime Minister’s website states that fostering India’s startup ecosystem is “contributing to an environment that encourages innovation, entrepreneurship, and global connectivity, thereby propelling India’s standing as a thriving hub for startups,” a significant step toward its path to complete development. By investing in India’s startups, investors are not only making smart profits but becoming valuable players in the country’s future.

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A Solid Foundation for Business

The Prime Minister’s website also highlights a significant factor in India’s blooming startup economy: an increased ease of business and greater support for startups. The website states, “Since 2016, the government has undertaken over 50 regulatory reforms…facilitating capital raising and reducing compliance burdens within the startup ecosystem.” Such reforms have included greater protections for intellectual property, a streamlined process for procurement, and a three-year exemption for income tax. These have led India to jump to 14th place (from a previous ranking of 63rd) in ease of doing business, according to the 2020 Doing Business study from World Bank Group. The same research placed India in its top 10 improvers for the third consecutive year, a remarkable feat highlighting India’s dedication to its startup ecosystem.

In addition to reforms, the government is providing support to startups via government initiatives. There is the previously mentioned Startup India, but other initiatives exist, such as the Credit Guarantee Scheme, which provides credit guarantees for startup loans recognized by the DPIIT.

Indian startups are also receiving help from corporate connections and India’s network of accelerators and incubators. Prominent companies are throwing weight behind startups; Facebook has partnered with Startup India to disburse cash grants of $50,000 each to five handpicked startups. Microsoft has thrown its hat in the ring as well, aiding 16 startups through its Venture Accelerator program. These corporate partnerships offer mutual benefits, furnishing startups with essential connections, expanded market reach, innovative opportunities, and access to fresh talent.

India also has a wide network of startup incubators and accelerators, which total a combined portfolio of 5,420 companies. Incubators provide startups with solid guidance during the early stages and connect them to a network of angel investors and venture capital funds. Accelerators take on the role of intense mentorship, usually lasting for no more than a year, facilitating rapid growth through education and networking in exchange for 6% to 10% of the startup’s equity.

With such wide-ranging support, it is easier for India’s startups to get off the ground and for investors to support them with confidence.

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Risks to Consider

Startups are potentially volatile businesses, and even in an ecosystem as robust as India’s, some are susceptible to issues that, left unaddressed, can lead to failure. Most of these issues are ones that startups worldwide face: poor market research, lack of long-term planning, and conflicts arising from a misaligned vision. While unfortunate, these shouldn’t be unusual to the average investor. There are risks unique to Indian startups that investors must be aware of when considering where to put their money.

Infrastructure is one obstacle impeding some startups. India continues to struggle with infrastructure gaps, primarily concentrated in its Tier-II and Tier-III cities. These gaps make it difficult for startups to establish themselves outside the crowded market in urban areas, as well as develop spaces to accommodate incubators and accelerators.

Tier-1 cities fare better but still face overcrowding and inadequate transportation. There is also a risk of “brain drain” as bright young Indians choose to make their fortune in the United States rather than navigate the logistics of managing a startup in India. The good news is that the government is actively investing in enhanced infrastructure and is allocating $134 billion towards it in this year’s budget. This is intended to create jobs and stimulate economic growth. Infrastructure remains a concern for startups, but investors can rest assured that improvements are not far away.

India’s wide demographics pose another challenge to startups. As populous a country as it is, the majority of India’s internet users have access only to basic smartphones, limiting the consumer outreach of many startups. Purchasing power in India’s middle class, the prime demographic of most startups, is lower than that of other developed countries, making it difficult to retain a customer base that is already price-sensitive. However, India has the world’s largest youth population. These young consumers, more educated and urban than previous generations, could be the open-minded and experimental consumer base that startups can leverage to their advantage.

Challenges like these shouldn’t deter investors. As with all investments, a bit of due diligence and consideration should protect from serious losses in the event of a startup’s failure. As India continues to support its startups and develop its infrastructure, these risks will be mitigated.

The Future of Investing in India’s Growth

Investing in India’s startups offers investors a unique opportunity to support the country’s elevation to a developed nation. Major corporate players have already noticed this: Google has invested $10 billion toward India’s fintech potential, and Amazon Web Service plans to invest $12.3 billion toward cloud infrastructure by 2030. India is cultivating a startup environment that is as fertile as Silicon Valley. And as it moves closer to realizing the Viksit Bharat, it could be on its way to becoming a global power on the level of China, thanks in part to this burgeoning ecosystem. Challenges remain, but the government has shown itself prepared to meet them.

Continued investment will lead the way in India’s development. Investments made today could have ripples lasting well into the next century. The time has never been better to invest in India.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Rudenkoi


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