Understanding The Indian Startup Ecosystem
Startups have gotten a lot of attention in India and many other regions in recent years. Their numbers are growing, and they are increasingly being recognised as major engines of economic growth and employment creation. Startups can generate meaningful solutions and operate as vehicles for socioeconomic development and transformation through innovation and scalable technology.
The Indian startup environment has evolved considerably during the last two decades. The ecosystem was still in its infancy in the 2000s, with only a few active investors and a small number of support organisations such as incubators and accelerators. There were a few successful exits in the late 2000s, but the number of startups has expanded in the last ten years, and more aid has become available in all sectors. Bangalore has emerged as India’s principal startup hub, while Mumbai, the National Capital Region (NCR), and some smaller cities also see substantial startup activity.
This article aims to thoroughly understand both the growth factors and the challenges that Indian startups confront. It also looks at how the startup ecosystem has changed over time and details where and what help is available. While the article focuses on technology-driven businesses, it acknowledges that non-tech, social, and micro-entrepreneurs have created creative concepts and solutions.
India’s Startups: Growth Drivers and Opportunities
Startups do not live in isolation; they are part of a larger business ecosystem. As a result, the growth drivers of the Indian startup ecosystem must be understood in the context of a number of factors, including earlier economic reforms and current market trends, as well as the impact of technological change and shifting attitudes among government officials, large corporations, and society as a whole.
Scope and Characteristics of the Indian Market
India is frequently referred to as “the posterchild of emerging markets for its vast commercial potential.” Even niche products can have enormous market potential in a country with roughly 1.3 billion people. Economic changes in India in the 1990s shifted the country toward a more market-based economy. The total economic expansion has been dynamic since this liberalisation, and the Indian economy had a GDP of US$2.726 trillion in 2017.
With a GDP growth rate of 7.0 per cent in 2018, India is one of the world’s fastest-growing large economies. As a result, the Indian startup market offers a wealth of opportunities.
India’s incomes and purchasing power are steadily rising as the economy expands. Rising spending is being driven by the growth of the upper-middle and high-income segments of the population, which will climb from one in four households presently to one in two by 2030. Aside from that, the people’s demographics are a bonus. The youth, who make up half of the country’s population, are ambitious. Around 700 million people born between the late 1980s and the early 2000s have material ambitions and the means to realise them.
India’s vast cultural, linguistic, ethnic, and religious diversity has proven to be both a pain and a benefit for businesses. On the one hand, a startup’s understanding of clients is frequently restricted to a few geographic areas familiar with the local language and people. This makes it difficult for companies to reach clients throughout the country.
If, on the other hand, solutions effectively meet the needs of a varied range of clients across India, they will very indeed find market adoption in other regions such as Africa and Latin America and the developed world. Furthermore, many Indian companies don’t just focus on domestic issues; they also provide customised solutions for international markets. Indian startups, for example, frequently conduct pilots and service clients in the United States, where the user base is significantly more affluent.
Innovative solutions, particularly those that reduce poverty and benefit many people, are desperately needed. Low-cost, high-impact solutions are required due to India’s size and limited resources. Technology businesses play a vital role in attaining this because of their scalability and exponential growth potential.
Technological advancements have decreased the cost of developing digital items and opened up consumer marketplaces in recent decades. Companies used to set up physical infrastructure to engage with customers, resulting in high customer acquisition expenses prohibitive for small businesses in the same industry as large corporations. Market access hurdles have been reduced as India’s digital connectivity has increased.
Broadband penetration is rapidly expanding, with the number of wireline subscribers predicted to rise 44 per cent in 2018 during the next four years. The number of internet users was estimated to be 483 million in 2018, with a forecast of 666.4 million by 2025. In addition, the government’s “Digital Saksharta Abhiyaan” effort was launched to promote digital literacy and enable individuals to have a better understanding of the digital world.
Market access, as well as the ability to identify and charge clients, are critical for startups. The ability to establish someone’s identification is grit in the wheels of commerce; as identity verification and digital payments have grown more widely available in recent years, companies can service legions of new clients. The Aadhaar biometric ID system, implemented in 2009 and assigns each Indian resident a unique identity number, has made it easier for businesses to verify client information.
To increase financial inclusion, successive Indian administrations have actively pushed the establishment of bank accounts and the spread of digital payments. As a result, a vast portion of the population may now make digital payments and get government benefits and subsidies, allowing them to participate in the formal economy.
Furthermore, Aadhaar and the payment systems are part of the “India Stack,” which is envisioned as a new social infrastructure that will “assist India is moving into the digital economy of the twenty-first century.” Fintech firms grew in popularity due to increased financial inclusion and the 2016 banknote demonetisation, making it the most well-funded sector in 2018.
Increased political will and support from the government
Prime Minister Narendra Modi, who took office in 2014, put digital transformation at the forefront of his agenda. Startups are increasingly being recognised by the federal government and several state governments as major engines of economic growth. Furthermore, startups are projected to produce jobs, which would help to reduce the country’s high unemployment rate. Startups created 2.64 per cent of all new jobs in India in 2018, and they are expected to produce between 200,000 and 250,000 jobs in 2019.
The Modi government has made several measures to assist entrepreneurs. “New India,” the prime minister’s signature programme, was launched in 2016 with the goal of “building a robust environment that is conducive to the creation of startup firms, to drive sustainable economic growth, and to generate large-scale job opportunities.”
Among the measures are:
- An INR 100 billion fund.
- Financial support for incubators.
- The construction of tinkering laboratories.
- Tax breaks.
- A simplified recognition process for business formation.
So far, the Department of Industrial Policy and Promotion (DIPP) has recognised 14,036 startups, 660 of which have received business support and 132 of which have been funded. Some of the interviewees for this research questioned whether or not ‘Startup India’ had had an impact. They do, however, perceive the initiative as a positive step forward in general.
Businesses Are Increasingly Seeking to Participate in Open Innovation
Large companies are under increasing pressure to innovate faster in an increasingly uncertain and fast-paced business environment. Their task is twofold: to progressively innovate to improve their existing business while also recognising continuing industry developments and planning for more radical advances. The latter is proving tricky, as more huge corporations realise that they can’t rely solely on internally generated expertise and self-build everything. As the ‘closed innovation’ model becomes less relevant, more businesses turn to open innovation methods.
As a result, Indian firms are increasingly turning to startups to boost their inventiveness. They form strategic collaborations and exchanges with startups and provide them with a variety of corporate-specific tools. These collaborations have the potential to be mutually beneficial. While corporate managers needed to be persuaded of the benefits of partnering with startups a few years ago, attitudes have shifted, and many established organisations now see the competitive advantages of startups, particularly in terms of speed and passion.
Changing Attitudes Toward Entrepreneurship
Those who are willing to take chances are the ones who can put their ideas into action and take advantage of opportunities. The majority of Indian company founders claim to be driven by their passion, curiosity, satisfaction from problem-solving, and desire to influence society positively.
Many Indian founders have previously worked in a corporate setting. Still, despite the job security and rewards of high wages and other perks, they saw that employment as stifling their creativity. Because they don’t identify with corporate culture, they typically build something on their own, allowing them to establish their ideals and steer their course.
Furthermore, there is a clear shift in societal perceptions. The success tales of incredible exits and India’s first unicorns have gotten a lot of press. As a result, several founders have become “startup heroes” in India, adding to the present perception of entrepreneurship as “cool” and “glamourous.” Despite some hype, entrepreneurial jobs are becoming more socially acceptable.
There are some common issues that entrepreneurs face throughout the world. On the other hand, specific challenges are unique to the Indian corporate climate. India was frequently mentioned in this report as a challenging environment for businesses. This section discusses the five major problems that Indian startups face.
- Starting and Growing an Indian Business
Indian entrepreneurs confront various obstacles, including hiring and managing a team, interacting with consumers, and devising a marketing strategy. Many Indian entrepreneurs, in particular, come from a technical background and lack business experience.
A considerable quantity of operating capital is necessary to run a startup. Many firms, especially those in their early phases, are bootstrapped, meaning they are self-funded or rely on financing from friends and family. Some startups have enough paying clients to be or become self-sufficient and grow organically due to the money and profits they create.
While not every startup needs outside funding, many begin looking for investors as they prepare to expand. Even if they have received positive feedback on their product and have some market validation, finding the proper investor and raising financing might be challenging.
- Diversity and the Digital Divide
There is a knowledge gap between people who give solutions and those who intend to apply them in general. Startups must overcome this gap and establish a deep understanding of clients and their demands to design successful solutions. This is especially problematic in the Indian setting because the country is highly varied, with many cultures, languages, races, and faiths.
Because Indian clients are so different, entrepreneurs’ understanding of them is frequently limited to places they are familiar with and where they have local contacts. Comparative advantages are related to certain areas in this way. As a result, establishing a pan-Indian business is more difficult due to their lack of understanding of clients in different parts of the country.
Furthermore, there is a misalignment between company founders and the clients for developing goods. The majority of startup founders are well-educated and come from wealthy families in major cities. Customers of the mass market, on the other hand, tend to come from low-income families in villages, as approximately 70% of the Indian population lives in rural areas. Because of their diverse living situations, companies frequently lack a thorough grasp of their consumers and demands.
- Taking Products to Market and Low Willingness to Pay
Another problem for businesses is getting their products to market in India, which appears to be challenging to break into. One reason is the competitive landscape: many companies are already there, and many more, including copycats, enter the market.
Another factor is that small business are at a disadvantage compared to large corporations. On the one hand, this is because prominent market actors are better equipped to deal with bureaucratic restrictions. On the other hand, public procurement is regarded as ineffective, and the government prefers to sign contracts with well-established firms.
On the other hand, large firms may find it easier to encourage startups (for example, by working with them in the context of their open innovation efforts). A third reason is that customer communication and retention takes time and effort. It’s challenging to persuade Indian buyers, mainly if the firm develops unique items and targets new market sectors.
Furthermore, it is difficult for entrepreneurs to develop demand for their goods and services. India’s client base remains price sensitive and unwilling to pay for goods and services despite rising wages. Customers frequently demand discounts or purchase cheaper Chinese equivalents. As a result, companies confront the difficulty of developing cost-effective solutions, which might sometimes mean sacrificing quality.
As a result, many businesses rely on volume to generate marginal returns. Collecting and ensuring timely payment can be a challenge for companies that do not charge customers using digital payment methods.
- Hiring Qualified Employees
Joining a company as an employee is not an appealing career option for many job searchers, owing to the startup’s inherent risk of failing. Instead, the vast majority prefer to work for huge firms, which offer more secure employment opportunities.
Furthermore, startups can rarely compete with the brand recognition and remuneration structures that large corporations can provide. After a few years, many people who work for startups move to established companies. Because many people become accustomed to the benefits of corporate employment, job transitions in the opposite direction are less common.
The second problem is that many job seekers lack the necessary qualifications. Startups notice a disconnect between the knowledge imparted to students in institutions and the expertise required for jobs, particularly in industries where technology evolves rapidly. Fresh graduates are typically not immediately employable due to their lack of understanding of industry needs. As a result, when employing new personnel, companies must devote a lot of time and money to training them.
A third aspect is that many highly qualified specialists relocate to other countries in search of work. At the same time, Indian companies have yet to attract international talent, in contrast to many other startup centres worldwide. Because of bureaucracy and visa regulations, hiring staff from outside India is tough, and ex-pats are drawn to areas like Singapore, where the living standard is greater.
- Complex Regulatory Environment
The Indian government has implemented regulations to make the business environment more conducive to startups. The current regulatory environment in which startups operate, on the other hand, is widely seen as arduous, inefficient, and unpredictable.
India is ranked 77th out of 190 countries in the World Bank’s Ease of Doing Business index and 137th out of 190 countries in the World Bank’s Starting a Business Ranking index.
In India, many startups are hampered by bureaucratic processes that lack fundamental norms. They don’t have enough ways to find information, and there’s little certainty about how long methods will take. Furthermore, regulations might change, and entrepreneurs may receive unexpected notices. As a result, startups are forced to come up with inconvenient workarounds, squander time, or flip their business strategy.
Other difficulties include legal incorporation and registration as a startup and firm closure. Despite the government’s stated desire to speed up starting a business, most people regard it as time-consuming and expensive. It necessitates numerous permissions, posing a significant barrier to 2entry. Formal registration as a startup is required when the legal setup is completed to qualify for tax breaks and other benefits. The government’s startup definition has specific criteria, yet few firms have met them.
The requirements were later relaxed, but it appears that startups are still having trouble acquiring registration certificates. Although some firms fail, it has been said that shutting down a business is far more complex than starting one.
The tax policy, and its implementation, are thought to be unfavourable to entrepreneurs. On the one hand, the Good and Services Tax (GST), which went into effect in July 2017, is an example. There is still some ambiguity about how it works and which products qualify as tax bases or not. Even if they have yet to earn any money, entrepreneurs must file their taxes regularly.
Furthermore, if consumer payments are delayed (which is not unusual), startups risk running out of cash. They risk paying hefty penalties if they do not file their taxes on time. On the other side, the so-called “Angel Tax,” enacted in 2012 to combat money laundering, has received a lot of flak. (After the study’s interview period ended in August 2019, the government declared that ventures registered with India’s Department for Promotion of Industry and Internal Trade would no longer be subject to the tax.)
The Indian market provides many prospects for businesses, and startups, in turn, have high hopes of promoting growth and creating jobs. In India, more companies have arisen in the previous two decades, and the related ecosystem has proliferated. As a result, support has expanded in various areas, including office space and infrastructure, business mentoring and networking, and the availability of financial capital.
There is a strong sense of optimism about the ecosystem’s future development. Despite this, Indian startups confront tremendous difficulties. Overcoming such obstacles will necessitate the efforts of all parties, including ecosystem actors, government agencies, and entrepreneurs themselves. Changes in the larger cultural environment might also be beneficial in encouraging people to take risks and maybe generate effective solutions.
Startups are not isolated entities; they are a part of the larger economy. Startups are projected to gain from policy reforms that improve overall economic conditions and investments in digital and physical infrastructure (for example, internet access, roads and public transportation, power and electricity).
In terms of the regulatory framework, it is thought that enhancing the implementation of existing startup regulations and eliminating inefficiencies within the bureaucracy are critical to making it easier for startups to do business. Reduced paperwork and documentation, improved information availability, and more standardised operating procedures and clear criteria (for example, how to compete for government contracts or obtain licences) would all benefit startups.
Furthermore, investments in education must be channelled to generate a larger talent pool. Participants in this study, in particular, urged for the inclusion of entrepreneurship courses in college curricula, which would better prepare students for careers as entrepreneurs.
While angel and venture capital investments in Indian businesses have expanded significantly, the ecosystem still lacks resources. Because investors prefer to fund more established firms, more money is needed to assist the younger ones in developing prototypes and MVPs. To bridge the gap between creativity and the next step, businesses and ecosystem actors expect government officials to incentivise angel investments by eliminating the angel tax or providing additional tax perks.
Furthermore, government measures to establish a seed fund and give subsidies to companies are regarded as successful projects. Moreover, it was suggested that larger, established corporations acquire more startups. Furthermore, in mature startup ecosystems, the phenomena of established entrepreneurs supporting promising younger firms need to gain traction.
With the capital increase, support has expanded in terms of office space and business support dimensions. On the other hand, the ecosystem actors are geographically concentrated in metro centres, making it more difficult for businesses that are not located in these areas and cannot relocate bases to prosper.
Entrepreneurs in smaller tier 2, 3, and 4 cities must be supported. India requires low-cost, high-impact solutions due to resource restrictions; therefore, to focus on scalable digital firms. However, this should not detract from other types of entrepreneurial endeavours may also provide effective solutions.
Market and user research are essential for startups. While mentors may provide them with market knowledge, they will almost certainly still need to speak with their customers to gain a deeper grasp of their demands. To bridge the gap between startup founders and clients, especially in rural India, they need to conduct more field research and get more face time with people on the ground.
When it comes to sourcing talent, companies may need to cast a wider net and be willing to train first-time hires. Because most startups cannot compete on salary with major corporations, they must rely on other means of attracting personnel, such as providing learning opportunities. Furthermore, maintaining a positive work culture can aid in attracting and retaining talent. Again, eliminating the male-dominated “bro-culture” will help recruit qualified women and create a more inclusive and innovative atmosphere.
Aside from the abovementioned elements, another vital consideration is the broader culture’s attitude toward entrepreneurship. Startups have gotten a lot of press lately, and stories about successful exits and “startup heroes” have appeared in the media and popular culture. As a result, being a company founder is now considered “cool,” and entrepreneurial jobs have become more socially acceptable.
However, many enterprising people continue to be discouraged from pursuing their hobbies by their families and social environments and are under pressure to select a job and lifestyle that is seen to provide more stability. Instead, society should be more supportive of people who take the initiative and develop something independently.
The willingness to take chances should be rewarded more, and failure should be seen negatively. Furthermore, breaking prejudices is a critical step toward increasing diversity, which would enable today’s big ideas to receive the ecosystem of support they require to succeed.
This research gathered a variety of viewpoints on the current state of the Indian startup ecosystem. It identified the opportunities they see, the obstacles they encounter, and the imperatives for strengthening the pillars of entrepreneurship support.