Start-ups to scale-ups

The trends emerging from 2021 indicate that India’s startup ecosystem is on its way to becoming a global hub for innovation and emerging entrepreneurs. With over $38 billion in funding spread across 2,055 rounds, 12 initial public offerings, and the emergence of 40 unicorns, 2021 proved to be a landmark year for India start-ups. Amidst rising global investor confidence in Indian businesses, there are two other encouraging developments. First, start-ups are increasingly driving focus more towards the business-to-business (B2B) space. Almost half of the country’s start-ups are offering enterprise-focused services. This is a significant shift from the initial rush of young entrepreneurs who were merely replicating successful business models from Silicon Valley, primarily aimed at retail consumers. While these businesses have made services such as booking a cab or a hotel room more affordable and convenient, the reality is that Indian start-ups are way behind in terms of creating products as Google and Microsoft do. However, there has now been a rapid growth in the number of deep-tech start-ups and those focusing on underserved markets. There are over 2,000 such companies in India engaged in high-end engineering, which is 70 per cent higher than the number of deep tech companies in 2018.

The second major trend is the rising number of start-ups that are becoming scale-ups. According to Nasscom, the start-up ecosystem is expected to add additional 250 scale-ups by 2025 in emerging areas like EdTech, Logistics, Automotive, FinTech and HealthTech. Even though the time to scale is expected at five years, faster funding and larger ticket size rounds will accelerate future growth and valuations. While the pandemic disrupted lives in many ways, it has also been the push that many start-ups needed to propel their businesses.

That said, India’s startup ecosystem has miles to go before it catches up with other countries like Israel, China, and the US. India has always had deep technical and scientific talent which is not necessarily reflected in the patents issued. The best of Indian minds look for better opportunities in other countries because there is a strong focus on R&D there. Countries such as Israel decided early to invest in intellectual capital and create a knowledge-based economy; as a result it has more hi-tech startups per capita than any other country. Indian startups should focus more on solving real-life problems in areas like agriculture, air purification and water management. Indian founders should realise that profitability cannot be neglected in the pursuit of valuation. In the rush to raise more funds and celebrate unicorn status, startup entrepreneurs should not forget the need to scale up with a sustainable business model. A sudden reversal in funds emanating from the VC/PE space in the wake of a turn towards tighter monetary policy could leave some start-ups high and dry. Start-ups need to do their homework well in this scenario. Otherwise, the momentum of the last 10 years may turn into a bubble.

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