The Rising Start-Up and Unicorn Ecosystem in India

Start-ups have been receiving a lot of attention in recent years in almost every part of the globe. The number of start-ups has been increasing fast in India and there has been a growing support seen coming in all directions to help them grow. In fact, India is home to the world’s third largest start-up ecosystem, having added over 1,300 tech startups in 2019. Good news is that the number of India’s potential unicorns - startups valued at $1 billion - more than tripled from 15 last year to 52 in 2019, according to a report by NASSCOM.

2018 had been a great year for Indian start-ups as it was for the first time that the ecosystem crossed the double-digit mark in a financial year. While 2018 saw the creation of 10+ unicorns, the previous best year (which was 2014) delivered just four unicorns.

Right from the start, 2019 had been on track to beat 2018’s record-breaking tally; at the start of 2019, seven start-ups had already reached the unicorn status. 
Start-ups valued over $1Bn are termed as unicorns. Interestingly, India is home to 24 Unicorns today, with the addition of seven new unicorns as of August 2019. According to Hurun Global Unicorn List 2019, India has emerged as third largest ecosystems for more successful start ups right behind China and US but ahead of Britain and Israel. Leading the pack from the country are payments solutions platform One97 Communications (USD 10 billion), cab aggregator Ola Cabs (USD 6 billion), online educator Byjus (USD 6 billion), and travel-stay finder OYO Rooms (USD 5 billion). The top 10 sectors that saw the rise of unicorns in India in the last 4 years are - Consumer Services, Automotive, Ecommerce, Enterprise Technology, Fintech, Healthtech, Logistics, Media & Entertainment and Transport Tech.

These billion dollar companies are not only coming out of Tier-1 cities such as Mumbai, Bangalore and Delhi but also Tier-2 cities like Pune and Hyderabad, which have recently produced multiple unicorns. 

The Start-up India initiative launched by the Government of India in January, 2016 further gives a fillip to this momentum. Driven by a 19 point Action Plan spanning across areas, it lays down the roadmap for creation of a conducive ecosystem for the growth of Startups in India while also envisioning building a strong ecosystem for nurturing innovation and entrepreneurship in the country.

The start-up ecosystem in India

According to data released by Start-upBlink, India moved up to 17th position in 2019 from 37th spot last year in the Start-up Ecosystem Ranking. Globally India ranks 17 among 100 countries, based on the strength of its start-up ecosystem. To quote numbers, in 2010 there were only 1.8 k start-ups in India and at present, there are over 40K start-ups. 

“India currently has the world’s third largest start-up ecosystem which includes 21 unicorns,” says Monish Darda, Co-founder & CTO – Icertis. “The ecosystem has really taken off and has evolved dynamically over the last 2 decades. According to the recent NASSCOM Start-Up report, over 1300 start-ups were added in 2019 of which 7 became unicorns. Another 50 companies are closing in on that distinction. Furthermore, in India, successful start-ups take an average time of 5 - 8 years to reach $1B in valuation, which in fact is faster than US (7 – 8 years) and only slightly behind China (4 – 6 years). And those companies are increasingly from industries other than professional services or outsourcing as the early success in those sectors has spawned companies in entertainment, enterprise software, e-commerce, logistics, transportation, energy and financial services. Many of these are enabled by cloud computing, artificial intelligence and mobile-first software development.” 

For Icertis that has become India's third SaaS unicorn with $115M funding, the success mantra in its journey towards this milestone was to focus on the enterprise market and to be the best at tackling the hardest contract management problems while making its platform the easiest to use. “And that hasn’t changed since joining the unicorn club. We still see plenty of opportunity in that segment of the market,” says Monish.

Agrees Kuppulakshmi Krishnamoorthy, Global Head, Zoho One for Startups, “The start-up ecosystem in India has come a long way since what we saw in 2015-16. With various initiatives from the significant stakeholders, especially since the launch of Start-up India by the Government of India, the ecosystem has gained more structure and stabilization. With free and structured guidance available on infrastructure, funding, mentoring, paperwork, it is no surprise that India is now looked at as the fertile ground for disruptive ideas and start-up unicorns.”

It would be wise to say that the Indian start-up scenario has witnessed massive changes in the last decade. “India is an aspirational country, and start-ups are pushing boundaries and breaking records while providing innovative solutions to consumers,” says Krishna Kumar, Founder and CEO – Simplilearn. “India has an enormous young population with the desire to lead a better life, and this drives growth for any country. Funding of around $100Mn is becoming quite common in India. The primary reason is investor confidence, other than the USA and China, if there is one country, where there is enough growth potential, that’s India. We have also seen rapid growth in the number of unicorns mushrooming in India. This trend will only continue as more & more new start-ups get into this league. The size of India’s opportunity is big enough to give birth to many more unicorns in the near future.”

Akash Gehani, Co-Founder & COO – Instamojo has a different take on the present state of start-ups in the country. “There is a slowdown in economic activity and uncertainty around the world as well. While this may not sound great, conventional wisdom indicates such times are when great start-ups emerge. We are seeing that from a funding perspective, where not only a lot of money is flowing into start-ups but also in to new domains which investors were reluctant to invest in earlier. Number of unicorns do not matter, what is more important is if the ecosystem is creating start-ups that generate lasting value.”

According to Srikanth Iyer, Co-Founder & CEO, HomeLane the disproportionate increase in the online domestic consumption is another reason that is giving rise to start-ups. “Tier 2 & 3 cities are beginning to pull their weight as  1/3rd of Amazon and Flipkart users come from these cities, which is the highest ever in India. All this shows that we are headed to more shoppers online, bigger market consumption and Indian companies being more ready to serve those customers,” he says. “These are clear indications that we should expect to touch the 100 mark by the end of 2020.”

So what is the average time taken by Indian start-ups to become a unicorn?

Aileen Lee, the Founder, Cowboy Ventures, coined the term ‘Unicorn’ in 2013 when India had no unicorns in its start-up system. The very next year, there were three unicorn start-ups. This number grew to 11 in 2018. Though there have been companies that have achieved this status quicker than others, the Indian ecosystem has a relatively short time to build a start-up into a unicorn, as pointed out by Krishna Kumar.

“The 2019 Start-up Ecosystem in India by KPMG surmises that, on an average, it takes five to seven years for a start-up to become a unicorn in India. This report also states that start-ups in the US take an average of seven to eight years to reach a unicorn valuation while Chinese start-ups are taking an average of four to six years to achieve the same valuation. A closed market with acceptance of technological innovation across the country is leading Chinese start-ups to have faster growth to becoming unicorns. In comparison, the US and India markets have to compete with home grown and foreign start-ups,” he observes. 

According to Devang Mehta, Partner - Anthill Ventures, the rate of Unicorn creation will actually grow as more informed investments decisions will be taken. “The start-up ecosystem India is growing at a steady clip and is also maturing. Indian start-ups take at least 8 to 10 years to become a unicorn as compared to 5 to 6 years in the Silicon Valley.”

 “As per research of a sample set of 31 Indian unicorns over the year, the contribution of 2019 was 26% (till Q3 2019) - seven start-ups reached this mark this year,” says Vamsi Krishna, CEO & Co-Founder, Vedantu. “Some start-ups take more than 20+ years while there are some start-ups who rise above in just 2 years.  In India, most of the start-ups are localized spinoff of international start-ups which are more successful in their respective countries.” 

Srikanth Iyer on the other hand observes that the time to become a unicorn has become lesser. “Flipkart took half a dozen years to get where they are but companies like Byjus and Swiggy have proven that this can be done in a much shorter time frame. And as we go forward, this time required is going to be shorter and shorter.”

With time however, as pointed out by Akash Gehani, the time taken to reach this status may further reduce significantly. But as Rohit Goyal, Managing Partner - Windrose Capital puts it, the time taken to reach the Unicorn status is not the most relevant parameter to measure the success of an eco-system. “We should rather be focusing on value creation and the impact we drive for the society and economy.” 

The VC ecosystem in India

India has a massive growth potential and this, in turn, has boosted Venture Capitalists to take the leap of faith and invest in start-ups across the country. Venture Capital funding has become bolder and bigger in the last few years in India. As a result of rapid growth, start-ups in India are attracting capital from various nations around the globe. 

According to the NASSCOM report, investment in start-ups was steady at $4.4 billion in January- September 2019 across 450 start-ups, at a 5 per cent year-on-year growth. Funding saw a huge spike at the early stages (Series A, B) as well with $1.6-billion investment being recorded at 70 per cent y-o-y growth.

India also saw multiple start-up exits, and these successful entrepreneurs are turning angel investors. They are not only investing money but also sharing their learning and wisdom with new entrepreneurs. 

“The VC ecosystem has grown by sheer volume, and by investment focus both by sector and stage. The continued growth of this ecosystem gives much more confidence to start-ups in getting funded to catalyse growth ambitions,” says Devang Mehta. 

VC funds in India have always preferred quality over quantity. Several sectors like education, fintech, logistics, mobility and more have gained the attention from investors showing a wide diversity in the Indian VC market. Investment into start-ups saw a steady flow with $4.4 billion being invested during Jan-Sep 2019 across 450 start-ups at a 5 per cent year-on-year growth.

VC funding has seen significant changes since the time Tiger invested in Flipkart. There are platforms that have evolved which help entrepreneurs raise money. “One development which has helped significantly is the rise of founders who have taken to angel investing. These have helped start-ups a lot,” says Akash Gehani.

While there used to be just  a handful of people funding businesses in the earlier days, today there are tens of hundreds of companies doing this at various stages - seed stage, pre-series A, series A etc. There are also instruments like venture debt that didn’t exist before, which has enabled more runway to start-ups.

On the contrary

With the boost in start-ups across the country and the government promoting the same, the start-up culture is becoming a norm rather than an exception. However, despite there been a mushrooming growth of start-ups in the country, with thousands of them getting registered every year, it is also true that many of them get shut down within a year or two. The truth is that it is not easy to build a business from scratch. Out of those who survive the first year, some of them end up becoming a unicorn.

There have been many start-ups that even after having a promising product couldn’t make beyond a certain line [up to Series B funding]. As Vamsi Krishna puts it, there are more competitors in the same space in India due to high price elasticity of demand in India. “For instance, WeChat is the major messenger player in China, whereas India has plethora of messenger apps. Similarly,     TinyOwl lacked strategic investment whereas Foodpanda belonging to the same domain, had business model problems (deep tech integration with all stakeholders - efficiencies), which Swiggy was able to solve.”

India is a couple of steps behind US and China in maturity of the ecosystem, in terms of infrastructure development, and in spending power of consumers. To add to this, the prevalent policies don’t make it easy for someone to start up. Add to it the fact that India is a very open market. As such not only is starting a business more challenging, but also scaling it due to the competition from domestic and international players.

An important factor that Rohit Goyal points out in achieving high valuations is the size of the market the company is trying to capture. “It’s their potential to serve a sizeable chunk of the total market that leads investors to highly value them. It’s important for the ecosystem players to be cognizant of the fact that most successful companies get acquired before they earn the Unicorn tag. For all companies, not the valuation but the value they create for all stakeholders should be the right measure of their success.”

Another reason that Shivi Rao, Digital Marketing Lead, 72 Networks puts forward is the lack of investors, or if the investors are willing to put money in an idea. “Most of the times the market is driven by herd mentality, market trends and global pressure than the status of a promising business,” she says.

She further continues, “Another major reason for a start-up to lag the race to join the Unicorn club is the lack of decision making. Most of the founders lack the basic financial knowledge and do not understand the business nitty gritty. They forget that calculated risks are a fundamental part of the essence of successful business ventures. Also, the most quintessential thing for a successful start-up is to solve a market problem. A start-up fails when the technology or the business model does not give a cure-all for the pain point in a scalable way.” 

Vishnu Gullipalli, CEO & Solution Advisor, Retail Insights however says that the present state start-up needs support from Government at ground level in terms of GST, Income Tax, PF, State establishments etc. “There are around 5-6 establishments to maintain which is real pain rather than focus on business. It will take at least 5 years to improve the situation as I see challenging macroeconomic conditions in various parts of the world.”

Having said that, there are many successful start-ups who are doing great work delivering very strong outcomes for their customers and shareholders, but not necessarily a unicorn. And this does not make them inferior to unicorns as they are playing the role of an enabler in the marketplace.

To conclude

It is needless to say that the India market is different from the US & China - US is obviously a far more online economy than India in terms of value & size and so is China. India should not set its benchmarks based only on those 2 countries but rather look at India as a separate and brand new market.

“I do believe that we shouldn’t compare to anyone else, we are a unique country and must focus on yardsticks that are relevant to us,” reiterates Srikanth. “For example - If you look at the start-up funding in US and China versus India - it is far more flattering for India in terms of money deployed vs unicorns coming out. The money deployed has also been lower, hence fewer unicorns comparatively. There is a lot of start up funding required to fuel this unicorn growth but we are steadily growing.”

Indian start-ups have a lot of potential in them. It is about time that they start focusing on the promising product/service/solution, than to be obsessing over racing to the billion-dollar mark. The focus should be on quality, impact, customer delight, and on staying profitable. 

As Kuppulakshmi Krishnamoorthy says, the question should rather be, "what kind of start-ups that are/should be in existence that help generate more jobs? How to win customers by providing them with valuable products or solutions or services?"