Startup India 2.0 : A New Phase of Entrepreneurship

India, world’s third-largest startup ecosystem, has seen remarkable growth in entrepreneurship and innovation, with over 100,000 startups. Nevertheless, the startup landscape faces challenges like funding gaps, regulatory hurdles, infrastructure issues, and talent shortage

By Geeta Singh

• DeepTech, SpaceTech, AI, and EVs bring freshness to Indian startups, expanding sectors with innovation and diversity
• India’s investment landscape transforms with increasing participation of women entrepreneurs and investors
• Bengaluru, the primary startup hub, secures $70.4 billion funding over a decade, leading, with Delhi-NCR and Mumbai following closely
• Startup2.0, launched under India’s G20 presidency, propels the Indian startup ecosystem toward global recognition and global impact

FINANCE Minister Nirmala Sitharaman announced some helpful steps for startups in the 2024 interim budget. She praised schemes like Fund of Funds, Startup India, and Startup Credit Guarantee Schemes for supporting young minds in pursuing their dreams. The tax benefits for startups and investments were extended for one more year until March 31, 2025, giving emerging businesses more time to grow.
The interim budget also brought good news for startups, offering a 100 percent tax rebate on profits for three years, as long as they’ve been operating for less than a decade and have an annual turnover under Rs 25 crore. This was part of several initiatives announced by Finance Minister Sitharaman. She also introduced a Rs 1 lakh crore fund for loans at low-interest rates to encourage private-sector investment in research and innovation.

DEEP-TECH INNOVATION

A new scheme focusing on deep-tech innovation in the defence sector was introduced, creating optimism in the startup community. Companies like Ideaforge, Tonbo Imaging, and PierSight, working on defence-related applications, were highlighted for their contributions.

Deep-tech entrepreneurship is also creating new opportunities for science and technology (S&T) innovations in the public sector labs to reach the market. The success at IIT Madras’s Research Park, which has incubated over 200 deep-tech companies collectively valued at over ₹50,000 crores including those in space and aviation; the C-CAMP, which has in its portfolio seven deep biotech startups that have raised more than ₹550 crores; and the National Chemical Laboratory’s Venture Centre support to file and commercialise high-quality patents, are some of the examples of how science in public-funded institutions can reach citizens and consumers, through startups.

In a way, it can be said that deep-tech startups are the main channel through which India is taking technology risks, a crucial element of any country’s process of building new capabilities. The industry has mostly preferred investing in deep-tech startups and acquiring successful scaled technologies, such as the Tatas buying Saankhya and Tejas Networks, Reliance acquiring Faradion and Hero Motors buying equity in Ather Motors etc.

CHALLENGES AND LAYOFFS

Indian startups were very attractive to the young and employed until 2022. But now, some reports suggest that the country’s startup boom is over and their situation is worsening. In terms of funding, the Indian startup ecosystem experienced a decline of 73 percent. However, the previous year proved to be a challenging one for the majority of startups. Additionally, the employment situation was unfavourable. To cut costs and restructure more than a dozen startups resorted to rapid layoffs. According to Moneycontrol’s Layoff Tracker since 2022, 95 startups in the country have laid off about 32,000 employees. They have either lost their jobs or been forced to quit. It is worth noting that many startups do not disclose the exact number of laid-off employees, so the actual figure could be higher than the reported one.

Notable names like Byju’s, Droom, and QueMath were involved in an extensive layoff process last year. Byju’s, the world’s most expensive ed-tech startup, announced a restructuring process through cumulative layoffs of more than 10,000. These layoffs are expected to make up a significant portion of the total startup layoffs in the country.

After 10 years of investing in India, Omidyar Network India is leaving the country by 2024. The firm, which is supported by eBay founders, Pierre Omidyar and Pam Omidyar, follows a dual-chequebook investment model and will stop making new investments. Its exit from India, where it has backed startups such as Tata 1mg, Doubtnut, and Otipy, hurts the whole startup ecosystem.
The biggest reason for this is Funding Winter.

VARIED CHALLENGES FACED BY STARTUPS

Funding Winter is a term used to describe a period in the business and investment landscape when there is a significant decrease in the availability of funding for startups and emerging businesses. During a funding winter, investors, such as venture capitalists and angel investors, become more cautious and conservative in deploying capital. This caution can be triggered by various factors, including economic downturns, global financial crises, or a series of high-profile startup failures that erode confidence in the market. Several startups have closed down. Many startups struggled with financial crises and eventually shut down. Figures indicate that 90% of startups fail and close down. Among the remaining 10% successful startups, only a few manage to excel. The condition of some became so bad that many startups had to shut down their business. ZestMoney, which reached a valuation of 40 billion USD, closed down on December 31, last year.

Other notable startups which shut down their businesses include Anar (B2B community platform), Belora Cosmetics, Fantok, Dealshare, ConnectedH, DUX Education, and Pillow. The funding winter going on in India’s startup ecosystem is not ending, on the contrary, it is getting deeper. In the year 2023, Indian startups have raised a total funding of $ 7 billion. If we talk about the last 5 years, this year’s funding has been the lowest. Last year, startups raised funding of about $25 billion.

Not just the money crunch, many prominent startups faced various issues and scandals in the startup ecosystem, causing chaos. GoMechanic, an auto after-sales startup, had corporate governance problems. The startup’s founders were accused of lying to investors with false numbers and faced a financial crime branch FIR. MojoCare, a health-tech startup co-founded by Ashwin Swaminathan and Rajat Gupta, confessed to financial mismanagement. After a change in leadership, the startup closed down and returned the money to the investors. Housing.Com, a real estate broker network startup founded by Rahul Yadav, got into financial troubles. Rahul Yadav avoided a bounced check charge of ₹50 lakh by applying for anticipatory bail. BharatPe and its co-founder Ashneer Grover were involved in a dispute. The company lodged an FIR with Delhi Police’s Economic Offences Wing alleging that Ashneer Grover, his wife Madhuri Jain, and their family made fake bills, causing a ₹88 crore loss.

Despite maintaining its strong performance in mergers and acquisitions, India saw a significant drop in both the number and value of deals in 2023, as per the 6th report on global M&A by Bain & Company. The total value of deals fell by more than 38 percent to $21 billion, while the number of deals reduced from 109 in 2022 to 89.

Last year, the fintech sector raised $2.1 billion, a sharp decline from $5.8 billion in 2022. PhonePe led the sector with $750 million in four Series D rounds, accounting for 38% of the total funding. Other notable companies in the sector were Perfios, InsuranceDekho and KreditBee. Previous year,retail sector startups received a total of $1.9 billion, a 67 percent drop from 2022. Very few like Lenskart were the most-funded companies in the sector, receiving $600 million in two Series J rounds. Zetwerk, Atomberg and XpressBees were some of the other top-funded companies in the sector. Enterprise applications received $1.56 billion in funding, which was a significant drop of 78% from the $7 billion they received in 2022. Environmental tech and Space tech, on the other hand, attracted investor interest, securing $1.2 billion and $122 million, respectively. Interestingly, environmental tech experienced a 50% decrease in funding compared to the previous year.

The liberalised privatisation policies announced by the government have made space tech more appealing to VCs and strategic investors. The funding for the sector increased a modest 6 percent from $115 million. Google’s investment in satellite-based imaging company Pixxel was a highlight last year in Indian space tech.

Two new unicorns—startups privately valued at $1 billion or more—were created in India in 2023 versus 23 in 2022, a 91 percent drop. The previous year, InCred and Zepto, both based in Mumbai, were the two companies that joined the unicorn club.

CHANGING DYNAMICS OF FUNDING LANDSCAPE

Startups are now exploring alternative avenues to generate profits and sustain their operations, moving away from dependence on unicorn and VC funding. The optimistic outlook on IPOs indicates a strategic shift towards prioritizing profitability. Zomato’s Rs 2 crore profit in the first quarter of the current year exemplifies this shift, and numerous startups have adapted and enhanced their business models accordingly.

In the past year, the IPO landscape remained stable, witnessing 18 tech companies going public, a slight decrease from the 19 in 2022. Noteworthy IPOs included IdeaForge, Yatra, and IKIO Lighting in 2023. Ideaforge’s shares were listed at ₹1,305, Yatra experienced an 8.5% decrease, while IKIO Lighting’s shares surged by 37% to ₹392. This surge in IPOs is expected to persist, as indicated by a recent report from Redseer, suggesting that approximately 40 startups may embark on IPOs by 2025, and this number could potentially surpass 90 by 2028.

A recent report titled ‘India’s Evolving Tech Fundraising Market,’ by Redseer, highlights significant transformations in the tech fundraising landscape. The headline-grabbing projection from the report suggests that the total market capitalization of listed new-age stocks in India could reach $1 trillion by 2033. This ambitious forecast indicates a major shift in the value and perception of the Indian internet economy.

According to the report, publicly listed new-age companies in sectors like internet retail, fintech, and SaaS are expected to see a tenfold increase in their market capitalization over the next decade. Currently, despite the presence of prominent names like Zomato, Nykaa, and Paytm, Indian tech startups collectively make up only 1% of the total market capitalization.
The Indian tech ecosystem stands at a transformative crossroads. With a projected market cap of $1 trillion by 2033 and a flurry of anticipated IPOs, the sector is gearing up for a period of significant growth. However, this journey will require overcoming substantial challenges and adapting to an ever-evolving market landscape.

The Great Indian Startup Boom of the last decade, led by young entrepreneurs and catalysed by the government’s Startup India movement, created an environment of entrepreneurship in the nation. The Modi government in January 2016, inspired young entrepreneurs to create a culture of entrepreneurship in the nation. This Startup movement reached every corner of the country, not only in the metro cities but also in the suburban and rural areas. Currently, the government recognizes over one lakh startups, with almost half of them coming from Tier 2 and Tier 3 cities. This movement has given India’s youth a sense of entrepreneurship and freedom, enabling them to shape their futures.

By 2027, it is projected that around 50% of Indian unicorns will become profitable. This is a significant improvement from the past situation, indicating a positive trend in the startup ecosystem. However, not all unicorns will enjoy favourable conditions, about 20 percent may face difficulties. India is one of the fastest-growing major economies in the world, expected to grow at a 6.3 percent annual rate this year, and expected to maintain or increase this pace in the next fiscal year. With a large consumer base consisting of the world’s largest young population and growing urban incomes, India is poised to see good growth in the coming years.

India secured the third position globally in terms of the number of startups due to the subsequent surge. Various cities, apart from traditional hubs like Bengaluru, Delhi NCR, and Mumbai. Cities like Chennai, Hyderabad, Pune, Ahmedabad, and Jaipur, are emerging as new startup hubs, diversifying the geographical landscape of innovation. Indian Space Research Organisation (ISRO) and Microsoft joined hands to work together to foster the growth of space technology startups in India. The partnership would provide space for tech startups across the country with technology tools and platforms, go-to-market support and mentoring to help them scale and become enterprise-ready, as per a statement by Microsoft. The collaboration is expected to reinforce ISRO’s vision of leveraging the market potential of the most promising space tech innovators and entrepreneurs in India.

POSITIVE PROJECTIONS AMID CHALLENGES

It is a good time for the government to support this second phase of entrepreneurship, a Startup India 2.0, focused on deep-tech sectors. The support should come from two ways. First, more risk capital for deep-tech startups. The government should focus more on these sectors in the SIDBI Fund of Funds. Industry should increase and direct their research funds to finance deep-tech startups. Second, mass procurement of local technologies. This has started in some Ministries like Defence, Smart Cities and Health; but a coordinated push across the government is needed. Industry and industry bodies should aggregate demand in their sector, to start local technologies. This can be done by co-creating products and solutions at incubators, testing and certifying quickly, and supporting procurement of innovative goods at scale, as the government has done in some sectors.

The government has relaxed some of the angel tax rules in the 2023 Budget for non-resident investors in startups. Angel tax, a 30.6% income tax, applies when an unlisted company issues shares to an investor above its fair market value. This was extended to non-resident investors from April 1, 2023. Angel tax depends on the fair market valuation of the company and this causes conflict between startups and the income tax department. The difference in the valuation method makes the startup pay a high angel tax of 30%. Angel tax reduces the investible surplus of the startup and hurts its growth and feasibility. In May, last year the Finance Ministry gave an angel tax exemption to investors from 21 countries, like the US, UK, France, Australia, and Japan, for their investments in unlisted Indian startups. But some countries like Singapore, Netherlands, and Mauritius, which are major sources of foreign direct investment in Indian startups, were left out.

With the launch of the first-ever engagement group, Startup20, under India’s G20 presidency, the Indian startup ecosystem is advancing toward global recognition and impact. This initiative highlights the importance of startups in driving economic growth and innovation and the country’s commitment to promoting the ecosystem globally. Startup20 brings together entrepreneurial ecosystems from member countries to exchange ideas, collaborate on initiatives, and drive development worldwide. The engagement group’s goal is to create a platform for businesses to engage with policymakers and key stakeholders to foster an environment that encourages collaboration.

NEW GROWTH DRIVERS

India’s startups span various domains, from health and climate-tech to clean energy and deep-tech. They can benefit from the sunrise sectors, which are fast-growing and crucial for the country’s economy. Some of these sectors are:
The electric vehicle (EV) industry is one such sunrise sector where India aims to shift gears with the ambitious target of having 30 percent of its vehicles powered by electricity by 2030. The government’s push toward green mobility unlocks enormous opportunities for businesses to explore and create charging infrastructure, battery recycling, and energy storage solutions. EV companies witnessed the highest-ever funding in 2022, with a year-on-year increase of 117 percent. Additionally, government initiatives like the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) scheme further incentivise EV adoption.

Another sunrise sector is clean energy, which promises a golden opportunity for companies to develop cutting-edge solutions to innovate further solar panels, wind turbines, and energy storage systems. CleanMax, ReNew Power, and John Cleantech are companies operating at the forefront of this industry and helping to drive clean energy growth.

The government aims to make drone manufacturing and adoption a US$ 20 billion industry by 2030. It has taken positive steps like banning drone imports, launching a PLI scheme, and centralising drone certification. Startups are exploring drone applications in irrigation, security, surveillance, transport, etc. The sector got more than double funding in 2022, with ideaForge, Garuda and Skylark Drones as leaders.

Agriculture is vital for the Indian economy, but it faces challenges like soil degradation, water scarcity, and climate change. Businesses can promote sustainable development by offering sustainable agriculture solutions. Ag-tech startups have a US$ 24 billion opportunity in the next four years. AgroStar, Bijak, and BharatAgri are providing innovative solutions to help the agriculture sector flourish.
Over the last decade, women have played a vital role in propelling India’s entrepreneurial landscape forward. Women-led startups have witnessed substantial growth, with total funding reaching $1.1 billion in 2023, up from $0.456 billion in 2014. Out of the total unicorns, twenty are led by women, underscoring the growing influence women have on shaping the country’s startup landscape.
The scope of impact and scalability of sunrise and sustainable startups in the future is enormous. While significant steps have been taken in recent years to boost the startup ecosystem, a lot more still needs to be done for India to emerge as a global entrepreneurial hub.