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The disruption that fuelled the growth of Indian tech startups during the new normal and the road ahead

“Enthusiasm is common. Endurance is rare.”  ― Angela Duckworth

One of the most enduring legacies of India’s technology revolution in the last decade is the rise of tech startups. Indian tech startups have led the digitalisation of both Indian consumers and enterprises through revolutionary products and services delivered through disruptive business models, and in the process, created extremely valuable innovation-led organisations.

It is indeed heartening to know that while COVID-19 brought most of the world to a standstill in 2020, there was no stopping Indian tech startups. The sector demonstrated resilience and the flexibility to emerge stronger from the crisis and thrive in the new normal.

Startup India

Number 3 in the world

At 12,500, today India has the third-largest number of startups in the world, with more than 1,600 added in 2020 itself. India also has 38 unicorns, with 12 of them added in 2020 itself. That recent unicorns have a more diverse background, are global focused, and have B2B offerings indicate the growing maturity of the Indian tech startup industry.

The second half of 2020 saw recovery in the overall investment environment too. Total funding in H2 2020 was 2X higher than H1 2020, and equal to H1 2019 levels. Seed-stage funding in 2020 was similar to 2019 levels while the median funding deal sizes increased steadily through 2020.

Further, the share of first-time funded startups as a percentage of total startups has increased from 29 percent in 2019 to 42 percent in 2020, and reduction in the average age of startups at their first external funding round also points to the confidence of investors on the capabilities of Indian tech startups.

coronavirus

Image: YS Design

2020: The litmus test for resiliency

To begin with, like all other industries, COVID-19 did catch the Indian tech startups industry by surprise. Early 2020 NASSCOM surveys indicated fear and chaos among startups.

But COVID-19 has taught us all one thing, and that is being comfortable with being uncomfortable. Being comfortable with chaos does not come naturally to most. Yet, with the unpredictability in market demand, as well as delivery challenges due to lockdowns, as the year progressed, succeeding NASSCOM surveys showed that tech startups quickly moved from anxiety mode to adaptation mode.

They began by first embracing the remote work model wholeheartedly, and designing effective workflows — virtual sales, product development, business operations, etc. — in the remote world.

Startups started focusing on growth at affordable costs by increasing operational cost optimisation measures and improving bottom lines.

They also concentrated on enhancing customer and employee experiences to strengthen business traction, and enrich employee well-being.

COVID-19 also prompted startups to look at global markets a lot sooner than they would have, and leverage deep-tech to pivot to adjacent sectors to capture new opportunities at minimum effort.

Today, 19 percent of Indian tech startups use deep-tech such as AI/ML, IoT, big data, blockchain, etc., up from 18 percent in 2019. About 14 percent of all startup investments were in deep-tech startups, with 87 percent of that going into AI/ML startups.

Led by Indian companies, corporate M&As in the Indian tech startup sector is also on the rebound. However, collaborative opportunities are not limited to the M&A model only. Co-innovation solution creation, platform evangelisation, joint-go to market, and solution licensing approaches are equally sought after too.

India strategy

Current and future growth opportunities

India’s accelerating digital economy is giving a booster shot to Indian tech startups. India’s $1 trillion digital economy vision is anchored around priority themes such as healthcare, jobs and energy for all, quality education, skilling and e-governance for the future, doubling farmer incomes, and make in India for the world and startups are creating solutions that enable these priority themes at scale.

Did you know 75 percent of UPI payments are through fintechs, and that 35 percent of active retail investors are leveraging fintechs for equity markets?

Within fintech, startup solutions around payments, wealth management, insurance, credit scoring, and regtech saw increased demand. Newer opportunities within that sector include inter-operability enablers, alternative investment assets, revenue flow-based financing, and SaaS financing.  

Within the Indian healthcare sector, there was a 2.2X growth witnessed by telemedicine/teleconsultation platforms, a 1.8X increase in usage of electronic health record systems, and a 2.5X growth in active households witnessed by online pharmacy startups.

In effect, COVID-19 has fundamentally altered both how healthcare providers and consumers view technology. Additional emerging use cases include digital tools for small/medium sized care providers, neurology and neurosciences, low cost connected devices for screening, and emergency care.

Around 1.9X growth in users and 2.6X growth in investments showcase the fact that edtech became a necessity due to COVID-19.

Video/live and gamified learning, virtual class tools, tutor/institute discovery, student performance analytics, and corporate L&D were growth sectors while emerging opportunities include immersive learning solutions, vocational courses, smart education campuses, and outcome-linked coaching solutions.

YS Learn - COVID-19 Innovation

Image credit: Daisy

There was 2.5X growth in demand for fresh produce via agritech startups. End customer (farmers) adoption of digital solutions has boosted agritech sector, as has the steady growth of direct to consumer brands, and collaborative platform development.

Agri input, market linkage platforms, quality assessment, agri financing, and farming as a service saw demand. Upcoming offerings include drone-based precision agriculture, performance-linked farming, and market linkage for livestock.

Over 325 million Indians stream video/audio content on a daily basis. The pandemic, clubbed with the vocal for local wave, has triggered growth across OTT platforms, and short video apps have been clear category winners in the media segment. Gaming sector also saw 4X increase in funding in 2020, and there was a strong preference for multi-gaming platforms that mixes casual, real money, and fantasy sports games on the same app.

Cybersecurity also saw growth, with enterprises driving demand for Edge Security solutions for the distributed workforce. Within SCM & logistics, startups providing route mapping, and analytics, in addition to intracity delivery, have witnessed revenue expansion, while in the hard-hit mobility sector, the shift to electric vehicles provides the silver lining.

Looking at the crystal ball

The tech startups industry is riding into 2021 with a strong digital adoption tailwind. Provided there are no further external shocks, we believe that 2021 will be an excellent year for startups, reflecting India’s innovation capabilities. Investments are likely to return to 2019 levels at the least, if not exceed them.

Exits will increase as the pace of M&A will accelerate further, the IPO pipeline will strengthen, and there will be more competition in the investor landscape.

The growth of deeptech startups is expected to quicken further, as is the growth of new startup hubs. Further, our analysis of the potential unicorn pipeline reveals that India is on track to have more than 50 unicorns in 2021.

Call to Action – ecosystem standpoint

The ecosystem has to come together to make 2021 a great year for Indian tech startups. First up, seed-stage investment levels have stagnated, and it is critical to increase them.

Secondly, India’s dependence on foreign capital is very high, so it is very important to drive the influx of domestic capital. Corporate participation in the startup ecosystem is growing in India, but it needs to grow significantly faster to compare with competitive global ecosystems.

There is an urgent need for institutional support to enable revenue generation for startups, both from domestic as well as global markets.

Last but not the least, there will be a war for experienced talent. It has been demonstrated well enough that quality talent with hand-on experience and exposure have magnified the odds of success for a startup.

With remote work becoming part of the future of work, attracting global talent to the Indian startup industry should be a key prerogative going forward.

ltcg tax

Call to Action – policy enablers

We have forwarded a few recommendations that we hope will get addressed in this year’s budget. There are three broad areas for consideration: the liquidity angle, the taxation regime and easing the burden, and making it attractive for resident investors.

In the first block, ESOPs be taxed only at the sale, and the benefit is made available to “all” startups. Right now, the provisions give rise to notional tax liability and disincentivise the need for employees to hold on to ESOPs for a long period.

In the second block, we have recommended that all-DPIIT recognised startups be exempt from MAT.

Thirdly, there should be parity in LTCG tax in the sale of unlisted shares in resident (20 percent) and non-resident investors (10 percent).

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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