India’s market expansion will now support more rapid start-up scale-ups

Pranav Pai | Updated on June 24, 2021

The top 15 VC-backed unicorns have created $80 billion in value   -  Getty Images/iStockphoto

With IPOs lined up and the wave of acquisitions and buyouts by Indian conglomerates set to continue, the start-up scene is set for exciting times

India’s start-up ecosystem is now the third largest in the world, only behind the US and China. The country is home to over 50,000 start-ups, with $11-14 billion in start-up funding being invested every year. With over 700 million internet users and half a billion social network users, India is also amongst the largest open digital markets on the planet.

Global capital has voted favourably in support of India’s overall growth story, with record-breaking FDI of over $81 billion during FY 2020-21 of which $11.5 billion was into start-ups alone. A generational transformation is underway, and investors around the world are paying more attention to the story now.

Growing unicorns

India’s start-ups have created over $300 billion of value in combined market capitalisation, having raised $70 billion between 2014-2020 alone. Just the top 15 largest VC-backed unicorns (companies with $1 billion+ in valuation) in India have created over $80 billion in value already. The first half of CY 2021 has been a particularly newsworthy time for the Indian ecosystem, with the creation of over 15 unicorns in just these two quarters!

With close to a dozen unicorns also in different stages of their IPO processes, the market is positive about the future prospects of these category leaders using technology to create new value. The next 12-18 months should continue to see lot more positive news from the ecosystem.

The total Indian unicorn count now crosses 50 and shows no signs of slowing down. When we first started with venture in 2011, an optimistic ambition for the ecosystem meant projecting the creation of 100 unicorns in India by 2030. Over the pandemic-year that was 2020, India still attracted over $11 billion in funding and created 11 unicorns.

As of the end of the first half of 2021, 15 more have been added to the list. The count is now 56 in total. It is no longer just an optimistic hope that India will reach 100 unicorns – it is simply a matter of when. In the process, a number of important characteristics of Indian start-ups have been assessed deeply and validated. These are important signals to all observers of the ecosystem and reflect the transformation of the economy underway.

Firstly, there has been a clear and observable acceleration in the evolution of several key markets and sectors in the country. Adoption of digital products and services has seen growth that was projected over years being compressed within months.

Total addressable market

Several key markets have seen the retention of this accelerated adoption continue, leading to the now stronger belief that there is new habit formation happening in front of our eyes. From the acceleration of digital education and health to the growth of challenger brands and a transition to a post-cash economy, it is becoming more apparent that the total addressable market (TAM) is certainly as large as expected. It is also becoming clearer that the serviceable portion of the TAM is larger and coverage is within reach faster.

This has lent significant support to these start-ups as they claim category leadership and now have a much larger opportunity in front of them to grow into.

Showing resilience

Secondly, these start-ups have come through a global correction event even stronger. While obituaries were being written for the ecosystem in April 2020, since then most of these businesses have witnessed rapid acceleration of key metrics and revenue.

In digital and social media, the exponential demand for content and communication technology has led to a natural transition from Chinese-led platforms to apps built by Indians for Indians. Startups like Dailyhunt, Sharechat, Koo, and more have grown exponentially through this time.

In consumer and FMCG, the rise of challenger brands is coupled by the establishment of scale brands that have created or taken over new categories — companies like Licious, Mamaearth, and Boat are just the start of the ₹1,000 crore revenue brands that will now become a regular feature of the mainstream economy.

Large logistics companies, fintech platforms, and household names like BigBasket, Swiggy, Zomato, and Pharmeasy, and more have all grown exponentially to firmly demonstrate their claims at unicorn status, if not decacorn (companies with $10 billion+ in valuation) status.

IPOs galore

Finally, 2021 has long promised to be the year for sizeable exits and the return of invested capital that has been piling up in India over a decade. With close to a dozen IPOs being planned, and highly positive reception from the markets in anticipation, the next 12 months should certainly be a fitting tribute to the transformation these value creators have supported.

The founders of these companies are some of the ecosystem’s best and brightest, and the access that retail investors will now have to participate in this transformation is an enriching experience for all. Corporate India is not far behind, as the wave of acquisitions and buyouts led by conglomerates like RIL, Tata, and more continue.

Easing regulations

This has further increased the return of liquidity and given support to the exit trajectory of the Indian start-up ecosystem. In a welcome move, India’s regulators are now allowing pension funds and insurance companies to invest in Indian venture capital funds — this should further accelerate the participation of Indian capital in this growth story as a new cycle starts this year.

Venture capital is, at the end of the day, definitely a risky asset class where failure is part of the daily vocabulary. However, the ecosystem’s commendable success, built upon the tenacity and awe-inspiring talent in Indian start-ups, also reflects a cultural evolution in young India.

Founders and start-up team members are literally building a new future every day, and we now all have the opportunity to participate in the construction of a more prosperous, inclusive, and dynamic ecosystem of innovation together.

The writer is Managing Partner, 3one4 Capital

Published on June 24, 2021

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