Venture Capital (VC) investments in Indian startups in the period January – July 2021 were reported at around US$17.2 Billion. Although this figure is lower than the quantum of investments made in China in the same period, it is a healthy 55% more than the US$11.1 Billion VCs invested in India in the year 2020. Here’s an even more interesting data point: in July 2021, VCs invested around US$8 Billion in India, in comparison, their investments in China were approximately US$5 Billion. This was the first time since 2013 that India attracted more VC investments than China.
One swallow does not make a summer, but there are many reasons to believe that significantly higher levels of risk capital will become available to Indian entrepreneurs- and especially to those in the tech space. While most of these have to do with India’s intrinsic strengths, there are also some external forces at work. Here is what I believe will fuel India’s tech entrepreneurs over the course of the next five years or so.
- Steep increase in the number of Indian unicorns:
The first 9 months of 2021 alone have seen 28 new unicorns (a term that denotes startups with valuations of US$1Billion or more) emerge in India. This number stood at 38 at the end of 2020.
- Fintech innovation:
India has seen several innovative fintech come up in the last ten years, many of which are already unicorns or on their way there. As the global banking and financial services industry look for disruptive solutions and new ways of building ecosystems, many of these “Made in India” innovations will become globally relevant and hence attractive investment opportunities.
- The rise and rise of Edtech:
As a result of the pandemic and the emergence of interactive technologies, the learning and education space has undergone a massive transformation in the last two years. Not just in the early school years but also coaching for various entrance exams. Byju’s for example, is valued at almost US$16.5 Billion, and has already acquired 9 other Edtech companies in recent months. Like fintech, the Edtech opportunity too has the potential to tap global business opportunities.
- Rising interest amongst western VC funds:
Existing investors are looking to expand their Indian portfolio, with some big-name investors like Tiger Global making 25 investments in India between January and August 2021 (in 2020, they invested in 18 startups). New VC firms that have not previously invested in India too are also entering the market. Andreessen Horowitz (a16z) fund, for example, recently closed a US$260 Million investment in crypto player CoinSwitch Kuber (valuing it US$1.9 Billion). Reports suggest a 60% increase in participation by US investors in Indian fintech startups over the last three years. The Unacademy group, another major Edtech player in India, recently raised US$440 million (investors included non-US funds as well)- valuing the startup at almost US$3.5 Billion.
- Many global giants already have an Indian presence:
It was recently reported that one in 12 global unicorns have their technology centers based in India (source: August report of the IVCA). As Indian ventures and their innovations gain global visibility, I believe many more global organizations will set up shop in India (As elaborated in my earlier blog – Global Captive Centers in India: Can add Value If Set Up Differently).
- Strong talent base:
India has a large, trained pool of tech and managerial talent that can be attracted to startups both by higher compensation made possible by Venture Capital backing and the thrill of creating something new. Such talent can form the crucial leadership and middle layers as these startups scale and grow rapidly.
- Entrepreneurship on the ascent:
Increasingly, young graduates are turning entrepreneurs– and choosing this avenue instead of the safety of “safe” jobs with established companies. And of course, there are senior leaders from various companies who are also getting bitten by the startup bug and leaving to start/mentor various early-stage ventures.
Of course, there’s also the elephant (more accurately, the dragon) in the room. The Chinese Communist Party leadership has, in the past year or so, made a number of major policy changes with the apparent intention of targeting China’s home-grown Big businesses (tech and others). The Chinese government’s seeming unwillingness to come to the rescue of defaulting real estate majors is another event that has muddied waters for investors. Western investors have significant exposure to many of these companies whose wings have clearly been clipped. Strains in diplomatic and economic ties between China and the west are expected to trigger a slowdown in fresh investments, if not cause an exit from Chinese businesses.
Capital chases the best risk-adjusted returns and so will always gravitate to where investors expect the best outcomes. India, with its relative political stability, acknowledged track record of democracy, continuing commitment to reforms, and growing stature as a global innovation hub makes it an attractive alternative.
Capital chases the best risk-adjusted returns and so will always gravitate to where investors expect the best outcomes. India, with its relative political stability, acknowledged track record of democracy, continuing commitment to reforms and growing stature as a global innovation hub makes it an attractive alternative.