Startup Ecosystem in India

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    • Recently, the startup ecosystem in India has started bracing itself for a long and bitter winter.

    About

    • Reason: With funding starting to dry up due to global macro-economic factors and potential mass lay-offs in the next 12-18 months, particularly in sectors such as ed-tech and gaming that got a significant push during the pandemic. One more reason was the lock down in China that has led to risk averseness amongst investors. 
    • Funding: In the April-June quarter (2022), start-up funding fell by about 40% to about 6-7 billion. Prior to this, start-ups were seeing investments of about USD 10-11 billion per quarter.
    • The three main areas of costs for start ups where cost-cutting is being looked at are:
      • People, 
      • Technology and infra, and 
      • Marketing.
    • Result: As start-ups look to extend the runway with existing funds, job losses across start-ups have been making headlines. 
    • Rise in Start- ups was due to: 
      • India’s strong digital boom
      • Relative ease of funding
      • An intent to ramp-up growth through new offerings – including products and solutions.
      • Government’s intent for the same with Programs like Startup India.

    Image Courtesy: TH

    Startups in India

    • Startup India Initiative: Since the launch of the initiative in January 2016, more than 69,000 startups have been recognized in the country till May2022.
    • Sectors: They were launched across 56 diverse sectors, including:
      • 13% from IT services, 
      • 9% from health and life sciences, 
      • 7% from education, 
      • 5% from professional and commercial services, 
      • 5% from agriculture, and 
      • 5% food and beverage. 
    • Government Data: As per data from the Ministry of Commerce and Industry, the number of people employed in start-ups covered under the Start-up India initiative stood at about 1.74 lakh in 2021.

    Challenges in Fund Raising

    • Post COVID situations: Sectors which got a huge natural push during the pandemic such as ed-tech and gaming, their growth has now plateaued, and they are in more trouble. 
    • No funding in the last 2 years: There are startups which have not raised capital in the last two years. Irrespective of which sector they operate in, they will also face challenges in raising funds.
    • Global policy changes: The global slowdown and tightening monetary conditions will likely add to investors’ uncertainty and the situation may not improve till the US economy revives. 
    • Business model failure: A lot of the slowdown is happening in places where an experiment has failed or the business model itself wasn’t ready for the scale. Start-ups continuously experiment and it is only natural to see some of this play out
    • Forced mergers and acquisitions and other issues: The Indian start-up ecosystem may succumb to a sharp correction in valuations and a decrease in venture capitalist funding for the next one year, especially for first-time entrepreneurs. 
    • Governance issues: Amid all this mergers and acquisitions and buy-outs etc, governance issues in start-ups will play an important role.

    Stability in Future

    • Global investors state that there is limited visibility on when things will stabilise due to factors:
      • Overall macroeconomic scenario, 
      • Inflationary pressures, 
      • War and fall in the stock markets, 
      • Supply chain disruptions, 
      • Rising cost of capital. 
    • However, India-focused start-ups may have a better value and revival will be higher in the days to come as India is expected to bounce back shortly.
    • Layoffs, while high in isolation and very unfortunate, are minuscule as compared to the total number of employees in this sector and largely restricted to non-critical areas such as customer support, operations, etc. 
    • A similar trend was seen in 2016-17 too as start-ups back then in a similar scenario started focusing on productivity and cost reduction measures.
    • Mergers and Acquisitions may also help stronger companies and genuine start-ups with a better product to emerge from the crisis.
    • Consolidation is likely to take place in certain sectors like technology/fintech and healthcare as established companies may use this situation to their advantage for buy-outs of start-ups

    Conclusion

    • Those Indian start-ups that are focused squarely on their mission, remain lean, and avoid frills, will be able to tide through these tough times, and potentially bask in the sun again. 
    • However, as a country, India is a long way off from a course correction for the better in the immediate short-term.
    • There will be a slowdown in the sector only if the current scenario turns into a prolonged slow down.

    About Startup India/ Data and Statistics 

    • Startup India was introduced in 2016 as a call to innovators, entrepreneurs, and thinkers of the nation to lead from the front in driving India’s sustainable growth and create large scale employment opportunities.
    • The entrepreneurial portal had more than 65,000 startups registered.
      • Of which, 40 attained the ‘unicorn’ status recently, bringing the total as of date to 90.

    About Startup Ecosystem in India

    • India has the 3rd largest startup ecosystem in the world; expected to witness YoY growth of a consistent annual growth of 12-15%.
    • The pace of growth in the startup ecosystem has increased to 15% year-on-year in 2018, while the growth of the number of incubators and accelerators has grown to 11%
    • Significantly, the number of women entrepreneurs stood at 14%, up from 10% and 11% in the previous two years.
    • Bangalore has been listed within the world’s 20 leading startup cities in the 2019 Startup Genome Project ranking. 
      • It is also ranked as one of the world’s five fastest growing startup cities
    • The Indian startups have gone on to raise sizable ticket sizes from various global and domestic funds. 

    Initiatives for Promoting Startups

    • Atmanirbhar Bharat: Digital India Atmanirbhar Bharat App Innovation Challenge.
    • Make in India: Promotion to indigenously made goods and services under the initiative.
    • Start-Up India Programme: A flagship initiative, intended to build a strong eco-system for nurturing innovation and start-ups in the country to drive sustainable economic growth and generate large scale employment opportunities.
    • Start-up India Digital Platform: It is the world’s largest virtual incubator with over 300,000 registered start-ups and aspiring entrepreneurs.
    • Start-up Grand Challenge: It channelizes the entrepreneurial capacity between Indian and Korean start-ups to work together and build solutions for the challenges facing the world.
    • Atal Innovation Mission (AIM): Launched by NITI Aayog as a flagship programme, it aims to promote a culture of innovation and entrepreneurship in India.
      • Some initiatives of AIM are AIM iCREST and Mentors of Change.
    • Project Chunauti: It is a start-up challenge under the Next Generation Incubation Scheme (NGIS) initiative. Selected startups are provided human resources, legal, intellectual property rights (IPR) and Patent matters guidance as well as other incubation and mentorship facilities.
    • National Initiative for Developing and Harnessing Innovations (NIDHI): It is an umbrella programme for nurturing ideas and innovations (knowledge-based and technology-driven) into successful startups.
    • Other Reforms: Reforms such as opening up sectors like space-tech for private participation, tax holidays for startups fulfilling certain eligibility criteria such as annual turnover and year of incorporation to tide over working capital requirements, and creation of state-run incubators, among many, are lowering the odds of establishing successful startups and helping them grow. 

    Source: TH