India’s Buzzing Startups
When I received my first venture capital (VC) cheque in May 2000 for a new media startup, no one used the word startup. There was no real ecosystem for startups. I had earlier divested equity in my first media firm, Sterling Newspapers Pvt. Ltd, to the Indian Express group in an entirely old-fashioned promoter-to-promoter transaction.
At the beginning of the new millennium, things began changing. The first glimmer of the future had come in 1999 when serial entrepreneur Rajesh Jain sold his website for Rs 499 crore – a stunning coup at the time. In the two decades since, Indian startups have come of age. Not a day goes by without a raft of VC, private equity (PE) and angel funding deals being announced. In the first six months of 2018, 411 startup deals valued at $3.6 billion were struck. Unlike 2017, most were small-ticket deals in food tech, artificial intelligence, automation, online education, logistics, finance and healthcare.
Between 2014 and 2017 startup deals were driven by big e-commerce players like Flipkart and Snapdeal as well as e-payment firms such as Paytm. Calendar 2018 is likely to end with over 1,000 startup transactions or three a day, most in the golden triangle between Bengaluru, Mumbai and Delhi/Gurugram. Older startup deals are meanwhile maturing with big exits. Walmart’s acquisition of 77 per cent of Flipkart’s equity for $16 billion, valuing the 11-year-old startup at $21 billion, is likely to close by the end of this year.
The Economist in its July 7, 2018 issue called the Indian startup ecosystem “the world’s most vibrant tech scene after America and China”. Some of today’s deals point to where that ecosystem is heading. For example, unicorns valued at more than $1 billion are proliferating. The latest startup to join the billion-dollar club is Automation Anywhere, a robotic process automation (RPA) platform. It recently raised $250 million, valuing the firm at $1.80 billion.
The importance of startups to the broader economy can’t be overstated. Apart from innovating world-class technology, they create jobs. For instance, online insurance aggregator PolicyBazaar plans to hire 2,500 people in fiscal 2018-19 across functions – technology, customer service and digital marketing. The food tech sector is particularly vibrant. Swiggy and Zomato are battling it out for primacy in the food delivery space. Both are advertising heavily in print, television and social media. Flipkart and Paytm, among “mature” startups, are cranking up volumes. Flipkart is expected to treble its gross merchandise value (GMV) to $17.6 billion by 2020-21. American rival Amazon is virtually neck-and-neck with Flipkart in GMV metrics. Both are hiring staff copiously, giving the overall economy a lift.
The total Indian e-commerce market is expected to be worth $57 billion by 2021. Flipkart’s biggest revenue earner is, not surprisingly, mobile phones followed by white goods, home appliances, fashion and the fast-growing grocery vertical. Online payments is likely to form the firm’s next big bet. The sector is currently dominated by Paytm with several others making rapid strides to tap finance-deficient tier-two and tier-three towns. Meanwhile, the Unified Payment Interface (UPI) is setting new records. Month-on-month transaction growth spurted 30 per cent in June 2018. The instant bank-to-bank fund settlement interface recorded 246.3 million transactions in June 2018 worth Rs 33,288 crore. On a year-on-year basis, UPI has zoomed 2,000 per cent in transaction volume.
Paytm, PhonePe and Google’s Tez continue to lead the online payments industry. Of the 246.3 million transactions done through the UPI interface, 148 million transactions were done by Paytm and Tez. Paytm claims to have reached a run rate of five billion annual transactions with a flow of $50 billion through its platform. The company reported that “a bulk of these transactions are originating in tier-two and tier-three cities like Surat, Durgapur, Meerut and others with more than 25 per cent of the users using Paytm in regional languages”.
The elephant in the buzzing Indian startup room is Amazon. Jeff Bezos is determined to dominate e-commerce in the Indian market. With US tech and e-commerce firms blocked in China, India is the market every global firm covets. Amazon has revved up its PrimeNow app. Currently available in Mumbai, Delhi, Bengaluru and Hyderabad, PrimeNow offers lightning fast home deliveries in two hours. Fresh grocery deliveries are especially popular, giving startups like BigBasket a run for their money.
When N.R. Narayana Murthy, one of the founders of Infosys, was asked about the company’s success, he said it happened not because of but despite the government. Murthy was reminding his audience that the best government is the least government. For startups that is the key. The success of large entities like the Indian Space Research Organisation (ISRO) and the Delhi Metro is due to the fact that scientists and technocrats run them. The government has a minimal operational role.
If there is one potential speed breaker the Indian ecosystem faces, it is tax and regulatory uncertainties. The bizarre proposal to treat domestic VC/PE investment in startups as taxable income rather than tax-free capital has thankfully been laid to rest before it could cause serious damage. Other concerns remain. For example, e-kyc norms for online payment banks and e-wallets are an unnecessary bureaucratic hurdle that can slow the development of a truly digital society.
Indian startups are still small in size compared to their American and Chinese peers. But the US had built a big lead with its Silicon Valley ecosystem that drew on tech talent from around the world, a clutch of top class universities like Stanford and CalTech as well as deep-pocketed VCs who backed innovation. India is still building that interlinked network of universities, investors and entrepreneurs.
China has created an entirely different model by restricting foreign firms and in effect subsidising domestic tech giants like Alibaba, Tencent and Baidu, protecting them from global competition. Paradoxically, Chinese firms are among the largest investors in Indian startups like Paytm.
India has wisely followed the US model of keeping innovation open to the world. That is the right way forward. The rewards may today be smaller than China’s but they will foster a broader, more democratic startup ecosystem.
