How is a startup defined?

Though there is no standard definition, the accepted characteristics of a “startup” include its age, scale of operations, and mode of funding. It is usually defined as a young company, and yet to establish a steady stream of revenue. These organizations have a small scale of operations, usually with a working prototype with the potential to grow and scale rapidly. They are initially funded by the founders’ own private network of friends and family and actively seek additional funds to sustain themselves and become a viable business.

Introduction

The Indian startup ecosystem has exploded and boomed in recent years. The number of Indian startups is on the rise and has been widely recognized as the driving force for the growth and generation of jobs in the country. They can act as vehicles for socio-economic development and transformation, innovation, and scalable technology generating impactful and innovative solutions. 

The last two decades have seen the Indian start-up hub evolve and change dramatically. in the last ten years, the number of startups increased fast and more support has become available in all spheres of the startup ecosystem. Bangalore has emerged as India’s primary startup hub, but significant activity is also taking place in Mumbai and the National Capital Region (NCR), as well as some smaller cities.

India is quite often described as the flag bearer and poster child of emerging markets due to its huge commercial potential for startups. In a country with a population of nearly 1.3 billion people, even esoteric products can prove to have high market potential. As India is one of the fastest-growing large economies in the world, the Indian market is perceived as being capable of offering an abundance of opportunities for startups and entrepreneurs seeking to launch them.

Role of government and entrepreneurs 

There is also a large talent pool seeking to be entrepreneurs. India has recognized the need to develop innovation and incubation centres for its large student community to foster innovation and entrepreneurial mindset through academic institutions. Thus the number of incubators increasing in stride with the steady inclination of young people to create their own ventures leads to propelling the Indian startup ecosystem in a favourable direction. This availability of young talent with the right blend of passion, expertise, and mindset definitely puts India’s early-stage startup ecosystem at an advantage ready to cash on the opportunities of a booming market.

The Indian government has been playing a crucial role in facilitating the growth of early-stage startups through the implementation of progressive policies and the creation of relevant infrastructure. The startup India initiative launched in 2016 aims to simplify complex legal, financial, and knowledge requirements in an effort to encourage the participation of early-stage potential startups.  include income tax exemptions on capital gains and investments above fair market value, options for self-certification on various compliances, fast-tracking of patent applications at a discounted rate, the ability to sell to the government, and the ability to wind up a failed company within 90 days. The initiative recognizes 27,000 startups as of 2019. 

Such opportunities are strategic and are being taken advantage of by new entrepreneurs in the game leading to an exponential rise in the number of early-stage startups. 

Role of investors in the Indian startup boom

India is witnessing rapid growth in the number of startups. The incidences of the next round of funding by the startups have been on the rise, signalling the dawn of a matured investment phase in the Indian startup ecosystem. 

Digital transformation and tech-enabled startups have largely benefited from improving price discovery, removing middlemen, and reducing transaction costs for both the producers and the final consumers. These startups have  benefited from the digital transformation garnering more investments suggesting a large market size and higher returns

It has been seen that the increasing investor confidence in Indian startups is overwhelming and has helped them gain momentum across different growth stages right from the preliminary seed-stage funding. The foundation of this startup boom was led by early-stage investments across sectors. There has been a steady increase in the number of early-stage investment deals pre and post-COVID.   Early-stage investments in potential startups are impacting the entrepreneurial ecosystem in a big way and are being viewed as promising investment options across multiple varied investor communities, including high net worth individuals (HNIs) and ultra-high net worth individuals (UHNIs). 

What attracts investors to the Indian Startup ecosystem

There are multiple reasons why early-stage investments are crucial and are continuing to grow in Indian startups. Angel investors are keen to provide backing and also understand how this system works. the newer generation has a background in traditional businesses but is also aware of the kind of changes new technologies are bringing in and is keen to hop on to the investment bandwagon as well. 

The frenetic pace of investments in early-stage deals comes as many of the more mature bets have become unicorns in India and many established startups are finally exploring taking the public markets. India has birthed 14 unicorns this year, up from 11 last year and just six in 2019. Many established firms are now chasing early-stage deals. 

For investors with large amounts of money, there are many rewards for spotting a promising startup in its initial years. They can buy a much larger stake in a startup for lower prices before the valuation of the startup — assuming things work out well — exponentially rises. Investing early also reduces the amount an investor may lose should things with the portfolio firm go south.

 

VCs are getting more aggressive now because they are seeing a growth in online transactions. With increasing clarity on consumer trends and the adoption of technology, tech startups are benefiting a lot from investors. The pace of investments has thus rapidly increased. 

More angel investors coming onto the scene. The stock market returns have been excellent, and at the same time, other traditional asset classes like real estate have not delivered on their performance. Investors are constantly looking for the next big thing to invest into startups, which has led them to the startup ecosystem. 

Investors don’t want to be in a situation where they have invested in a large number of companies, and all of them are consumer-oriented and are facing the same challenge. They are thus looking for opportunities to back B2B companies.

Investors are willing to take the risks of investing in early-stage startups as they are seeing high returns here compared to private investments. Early-stage investment activity has proven to be increasing with bigger transaction sizes and higher valuations, a clear indicator of a maturing early-stage startup ecosystem.

Role of IPOs

Given the number of startups going public, it appears that the Indian market has finally caught the IPO fever.  companies like Zomato and CarTrade have had reasonably successful IPOs, and several other startups are on their way to joining them. India will see more startups going public leading to bringing a shift in the investors’ mindset and enabling them to increase direct private investments.

In a nutshell

The tide seemed to have turned in favour of entrepreneurs. The time is right for Indian startups to boom as the ecosystem is seeing increased availability of innovative talent, and promising markets marked with favourable government policies. This early-stage cycle of investment in the startup ecosystem has become a lucrative prospect for domestic and global investors alike. This is ultimately raising the bar of quality,  growth, return as well as risks on investment. And we are seeing the investor ecosystem witness robust growth and continued evolution.

Author Bio: Namita Gupta is a content strategist and author with a keen interest in financial topics. She has 5+ years of writing content for different publications. In her free time, she loves to play badminton. You can catch her on Twitter at @namita_g30