Indian startups have witnessed a surge in investor confidence as of late, but the ecosystem has a long way to go before it catches up with the likes of China and US
- The year 2018 saw a flurry of deal making activity in Indian startups, leading to the rise of a number of unicorns.
- A KPMG report states that Indian companies are taking less time on an average to become unicorns compared to the US.
- However, the funding activity in India is still limited to a few sectors and specific business models.
- On closer scrutiny, it is evident that while the ecosystem has progressed, a lot needs to be done before it provides the desired disruptive effect on the Indian economy.
2018 will be remembered as the year of unicorns (valuation > US$ 1 billion) in India. Once considered a status club, it seemed to become a run of play all of a sudden, with a number of startups making the cut.
India has 13 unicorns currently according to CB Insights. Progressively, Indian startups have also set new records in terms of the time taken to achieve the unicorn status. A firm like InMobi, which was founded in 2007, took around a decade to get there. In comparison, foodtech startup Swiggy took just three years. B2B e-commerce company Udaan, in turn, got to the unicorn status in just two years.
The year also saw astonishing valuations for some of the Indian startups. For instance, OYO became the most valuable hotel chain in India. Byju’s, on the other hand, became the most valued edtech company in the world.
The acquisition of Flipkart by Walmart at US$ 16 billion in the world’s largest e-commerce deal was also a validation of the potential of the Indian startup ecosystem. In another interesting statistic, it was found that VC funding in 2018 (US$ 6.5 billion) exceeded money raised via IPOs (US$ 5 billion).
Furthermore, a KPMG report released in February 2019 reveals that it takes around 5-7 years for a startup to become a unicorn in India on an average. This is slightly less compared to US (7-8 years) and slightly more compared to China (4-6 years).
Given these statistics, one may be compelled to conclude that the Indian startup ecosystem has truly matured and is at par with the best in the world. The general perception is that the startup ecosystem will have a positively disruptive effect across sectors in the coming years for India. But should we be so optimistic so soon?
THE SCIENCE BEHIND THE NUMBERS
Experts feel that just the sheer time taken for a few companies to become unicorns should not be used to judge the overall health of the startup ecosystem.
One of the issues highlighted in the report is that the rise of unicorns could mean high inequality, i.e. more money concentrated in the hands of a few companies. This obviously means that most of the companies in the ecosystem are struggling for growth capital.
Moreover, does a unicorn rating certainly mean that the business is worth its weight in gold? Yugal Joshi, President of Canada-based consultancy Everest Group, feels that the investments in a startup idea are “many times driven by herd mentality and global pressure, than the soundness of the business.”
The report notes that startup funding stood at US$ 665 billion during the first nine months of 2018, compared to US$ 331 billion during the entire year of 2014. More than half of this funding was garnered by e-commerce, fintech and transport tech firms according to the report.
Even though India seems to be moving faster than the US today, a lot of Indian startups are modelled on US-based business models like Ola and Oyo. US has around 145 active unicorns already that are worth US$ 555.9 billion, which shows the extent of the gap with India.
MILES TO GO BEFORE WE SLEEP
China is known to produce a unicorn every three days. One of the reasons why Chinese startups grow faster could be the relative absence of foreign competition due to the closed market.
Markets like China and US are more tech savvy with higher per capita incomes, which gives easy scale-up opportunities for startups in comparison to India. Take digital payments for instance, which are essentially ubiquitous in China and just picking up in India.
As the data indicates, startup activity in India is still skewed towards a limited number of companies and business models. So it still needs to acquire more depth and breadth to really merit comparison with countries like US and China.
In terms of sheer volume, cumulative UPI transactions in the 10 months ending January 2018 in India were equal to one day’s worth of digital transactions at non-bank payment providers in China in 2016!
Another example is adoption of 5G technology, where India is expected to be at least three years behind countries like China.
To crown it all, the offline vs online equation is showing signs of severe stress, be it OYO vs hotels, MakeMyTrip vs travel agents or Swiggy and Zomato vs restaurants.
Lastly, the policy environment must have a more progressive and futuristic perspective to be in synch with the needs of startups. For instance, the drone policy formulation was initiated in 2014, but finally came into effect in December 2018. The Personal Data Protection Bill is also lying with MeitY. The angel tax issue has already stirred up a hornet’s nest among startups, which needs to be addressed urgently.
Considering these factors, one can surmise that the startup ecosystem has advanced considerably in India over the past four years. However, there is still a long way to go before it actually provides the disruptive impact that the Indian economy needs.