The Upsurge in Startups Needs to be Sustained

The rapid upsurge in startups witnessed in 2015, coupled with the fresh policy support and state funding is going to further strengthen the eco-system for the startups in the country. The Indian startups-ecosystem has seen a record inflow of risk capital in 2015­to touch $16.8 billion (about Rs. 1.1 lakh crore), smashing the previous best of $ 14.5 billion of 2007. According to the Economic Survey for 2015-16 as well, India has witnessed setting up of more than 19,000 technology-enabled startups, led by consumer Internet and financial services startups. According to the survey, in India startups have raised $ 13.5 billion in funding in the first half of 2015, and the number of active investors in India too has increased from 220 in 2014 to 490 in 2015. As of December 2015, eight Indian startups have found place in the elite ‘Unicorn’ club (ventures that are valued at $1 billion and upwards).As per NASSCOM’s “Startups-India: Momentous Rise of Indian Startups Ecosystem” report, India ranks third globally with over 4200 startups.

If we look at the total funding of venture capital-backed Indian companies, they had attracted $12 billion (Rs. 82,500 crore) across more than 1,220 deals in the past two years, with $7.3 billion investment in over 880 deals in 2015 alone, according to startups data aggregator Tracxn.  The startups in the country are concentrating mostly in the large metros only.  The 65 percent of these startups are housed in Bengaluru, NCR and Mumbai. Bengaluru, often referred to as India’s Silicon Valley, and listed within the world’s 20 leading startup cities in the 2015 in the Startup Genome Project ranking. Chennai, Hyderabad, Pune, Ahmedabad, Jaipur are also emerging as startup-hubs in the country, and few more cities may also come  up fast, with the new announcements coming from the centre and states.

In the mature ecosystems, like Silicon Valley and Israel, quicker exits keep the risk capital investors happy and the pot boiling. This is one of the major reasons for acceleration in the pace of startups abroad. Therefore, until that happens in India too, the uncertainty over how long would it take for the investors to plough back tangible returns shall keep their risk-taking enthusiasm on restrains. So, even though, startups are emerging and getting funds with growing data on rising venture capital support, the truth is that M&A lags way behind, even the tiny Israel. 

So, it has to be remedied. Exits, mergers and acquisitions are important for risk capital investors viz the Venture Capital Fund (VC’s) and private equity (PE) firm. They keep the pot boiling with tangible returns which VC’s and PE firms can reinvest into new startups. 

According to report of the “Expert Committee on Innovation and Entrepreneurship”, constituted by NITI Aayog as well, Indian entrepreneurs have to spend an average of four-to five times more effort raising funds compared to their American counterparts. The report cites early stage funding as a challenge, with angel investments in India comprising only seven percent of early-stage investing as compared to seventy-five percent in the US. It is largely due to poor exit route in India. Investors in India are therefore more keen towards later-stage funding, in companies which have already begun to generate revenues, betting large sums of money in fewer companies, says the report. 

Since, eight out of ten Venture Capital funds and Private Equity Firms are foreign-based, so there is also a need for a greater number of home grown Venture Capital Funds and Private Equity firms. Numerically India can even be said to be somewhat alright. But, in monetary quantum, we are lagging behind even the tiny country like Israel. There were 467 VC or private equity investments into Indian technology product companies in the four years from 2010 to 2013. It may compare bit favorably with the little lesser number of 381 investments in Israel. Though it should be borne in the mind that Israel has only 8.2 million population and 24,000 sq. km area vis a vis 1.25 billion population and 3.28 million sq.km area. The investments in India were only twice as much as the Israeli ones-US$ 3 billion, against an aggregate of US$1.5 billion in Israel. On coming to the exits as well, there were 141 M&A deals involving Indian tech companies between 2010 and 2013. We find these way more than the 88 in Israel. But, in value, the Indian deals amounted to a mere US$ 1.26 billion, which is quit embarrassing as it is one seventh of US$ 8.76 billion for the Israeli M&A deals. The average size of an M&A deal in India is US$11 million, which is a small fraction of the US$100 million that an Israeli M&A deal amounts on an average, or the US$147 million average deal size of a Silicon valley exit of  a startups.  

Indeed, the exits for investors, especially through the initial public offering route, continue to remain very feeble due to being driven down by a combination of choppiness in markets when compared globally and tough listing rules in India. But, inspite of some such odds, India has still seen a continuous upsurge in startup funding. According to data from YourStory, a media body that covers startups, capital worth $9 billion has been invested in Indian startups in 2015, which is equal to the cumulative funding in the 2010-2014 period. Online and mobile categories dominate the deals, owing to the rising Internet population of India, now over 350 million, offering huge potential for such startups. Active investors in India too have increased well from 220 in 2014 to 490 in 2015, NASSCOM’s report. As of December 2015, eight Indian startups - Flipkart, Snapdeal, Ola, InMobi, Paytm, Quikr, Zomato and MuSigma - form part of the ‘Unicorn’ club (startups having valuation greater than a billion dollar). Excluding MuSigma, the other seven held the major share in 2015 funding, as around $3billion (33 percent of total) was put into the Unicorns, says the YourStory report. ShopClues, an online marketplace, has also made it to the Unicorn club recently, following an undisclosed round of funding led by GIC, a Singapore-based Sovereign wealth fund. The department of science and technology (DST), has increased the overall funding to startups from Rs 40 crore to Rs 200 crore. It will provide seed capital to 50-80 new ventures with funding ranging from Rs 50 lakh to Rs 1 crore per company, according to the secretary of the department Ashutosh Sharma.               

   
So, India's startup ecosystem has to develop faster, inspite of poor exit options for risk capital investors, who have pour billions of dollars, backing home-grown ventures. So, at a time when India's startup landscape, is seeing a deluge of venture capital and private equity funding, it will once again see a significant number of startups ventures hitting the market for fresh capital, according to a report by venture debt firm Innoven Capital. According to a report titled 'India Startups Outlook Report 2016', released by  the Temasek and United Overseas Bank-backed venture debt firm, about 130 startups  are expected, and would be  raising about $700 million (about Rs 4,784 crore) over the course of 2016.

So, for further promoting and strengthening the culture of entrepreneurship, the government too has on Jan 16, announced a slew of incentives including a Rs 10,000-crore corpus for innovation-driven enterprises, a three-year break from paying income tax on profits, a Rs 500-crore per year credit guarantee mechanism, and exemption from capital gains tax for startups. So, the startups are going to change the economic landscape of the country, if the minor road blocks like poor exit etc are eliminated timely.