[Startup Bharat] Why investors are making a beeline for Kerala’s burgeoning startup ecosystem

From one deal in 2015 to 11 between 2018 and 2019, startups in Kerala are not only attracting investor attention but are also building technology that is solving real problems for India.

Wednesday July 10, 2019 , 9 min Read

Kerala is on a mission to become a startup hub in India soon. And while it may not be anywhere close to Bengaluru and other startup hotspots, entrepreneurs in the State are innovating. And investors are noticing.

Robotics, machine learning (ML), artificial intelligence (AI), and many other deep and emerging tech are used in social startups, foodtech, medtech, fintech, and hardware sectors in Kerala.

In fact, Finance Minister Nirmala Sitharaman, in her maiden Budget tabled on July 5, 2019, turned the spotlight on Thiruvananthapuram-based Genrobotics. She announced that the government would provide financial aid in acquiring robots to stop manual scavenging, and Genrobotics, which is the only manufacturer of manhole-cleaning robots in the country at present, will stand to gain much.

It is this innovation-first goal that is making Kerala garner investor attention, especially from its non-metros and towns.

According to YourStory Research data, only one Kerala startup – Corporate360, an enterprise software company, had raised $200,000 in funding in 2015. After a lull period, 11 deals were closed in 2018 and the first four months of 2019, with Kerala-based startups raising a total of $1.77 million in funding.

This may be considered a modest amount, especially when compared to Bengaluru startups’ multi-million-dollar fundraises, but the amount was spread across four deals, while the other seven remain undisclosed.

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What the government does

A thrust on entrepreneurship in the southern State is also due to the Kerala government backing innovation in the country in many ways. From establishing Kerala Startup Mission (KSUM) in 2015 to setting up the 1.82-lakh sqft Integrated Startup Complex and bringing out startup reports, the State government is doing its bit to foster the burgeoning entrepreneurial spirit in Kerala.

In 2018, the State government also facilitated the first edition of Huddle Kerala, touted to be Asia’s largest startups ecosystem congregation, which was held in association with the Internet and Mobile Association of India (IAMAI).

The startup ecosystem report 2018 by KSUM pegged the number of startups in the State at 1,500, which is the current number registered with the Department of Promotion of Industry and Internal Trade (DPIIT). However, around 2,200 startups are said to be contributing to the country’s startup ecosystem right from Kerala. This was at around 325 in 2016, and 757 in 2017.

A few notable and successful startups from the State have managed to raise funding or receive grants. For instance, Kochi-based Bagmo, which makes a blood bag monitoring device had received Rs 47 lakh (approx. $68,000) biotech ignition grant from BIRAC.

There also is Thrissur- based Desintox Technologies, which builds products that help differently-abled individuals lead an easy life. The startup had received a grant of Rs 10 lakh ($14,500) from the KSUM.

Kochi-based Aeka Biochemicals, which claims to be the first biotech startup in Kerala, raised undisclosed seed funding led by Kris Gopalakrishnan, Chairman Axilor Ventures.

Then, there are tech startups like Kochi-based AppMaker actively looking for external funding. Presently bootstrapped, the app builder lets you create quality native iOS and Android apps, and has acquired clients in 35 countries.

Inviting newer funds

Saji Gopinath, CEO of KSUM, says that earlier startups were depending on government grants and small loans. Now, mentorship, access to infrastructure, and incubation support is provided by the KSUM, which has also created a fund-of-fund model where it has invited VCs to invest in startups set up in Kerala.

The State, in turn, will become a Limited Partner (LP) for those funds that invest a significant amount in Kerala’s startups.

“Now, startups are looking at seed, Series A and pre-Series A funding. There are a few that are looking at mid- and later-stage funding too. Most of the startups are looking at deals worth $1 million to $3 million,” Saji explains.

This model has doubled the investment back into the startups as well as helped in bringing angel funds to the State, something that was not available in Kerala before.

“The angel funds operating outside the State have now started focussing on Kerala,” Saji notes. The Indian Angel Network (IAN), in its quest to invest in startups in Tier-II and III cities, has zeroed in on Kochi.

According to KSUM, at present, Rs 623 crore (approximately $87 million) has been invested in startups so far in the State.

Incubation has been amped up in Kerala too. Since February 2018, the State government has supported four startups with incubation facilities at a subsidised cost of Rs 37 per sqft against the original cost of Rs 60 per sqft.

From the idea stage through the early customer stage, the State government also provides support through grants as well as seed loans to the startups.

“We also have a good procurement policy model where people can fly out their products to get feedback from the government departments so that they can take it to the next level. We are also encouraging startups to take the IPO route,” explains Saji.

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Startup’s own country

The State is aiming to be a part of a startup’s journey right from the start. “In Kerala, we are looking for more of a ground-level model where we are nurturing the startups from the college level onwards. For the last 2.5 years, the infrastructure is in support of the startups,” Saji says.

KSUM states that close to 70 percent of the 599 startups that it is incubating are ready with the product or in the market. This number, Saji adds, has increased over the past two-and-a-half years.

Hardware top the list of sectors working well for startups in Kerala. Saji says the reason being Kerala’s good electronic incubator with sound infrastructure facilities. Most of these startups have raised some level of funding, even from the public sector; for instance, Asimov Robotics, a robotics company, Agnikul Cosmos Launch Vehicles, a hardware deep tech startup, and a few others.

Saji adds that currently, the biotech sector comes second on the list followed by fintech and medtech startups. Some of the biotech startups based in Kerala are Aeka Biochemicals, Green Clones, Greenle Life Sciences, etc. Medtech startups include Bagmo Technologies and Kollum-based Waferchips Technologies, among others.

“As we have a large number of space scientists available in Thiruvananthapuram from ISRO, they serve as mentors to the new space tech startups that we intend to boost,” says Saji.

Prasad Balakrishnan, CEO of Kochi-based Makers Village, considered the largest electronic hardware incubator and electronics system design and manufacturing (ESDM) facility in the country, says it provides its startups with all the resources needed to build their products, and also provides them market access, mentorship, and other support.

“Three of our startups have already been selected by the Defence Research and Development Organisation (DRDO) for their projects. The focus on electronics is to look at building products that solve multiple problems. The idea is to find a balance by bringing technology to work that is being done in cumbersome ways,” he adds.

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Challenges for startups in Kerala

But challenges abound for any young ecosystem finding its feet, and Kerala is no exception. Much until recently, startups in the State struggled to raise funding. Arun Ravi, Co-founder and CMO of Kochi-based startup Agrima, says they found it difficult to spark investor interest when they had launched their startup in 2014. Most investors within Kerala had sought high valuation or huge equity share.

Agrima, a food detection, identification, and orchestration platform, uses ML and AI to operate its business. Arun says,

“As a founder, this was something we can’t go forward with as it is not feasible to grow the company then. This is the reason why we look out for investors from outside Kerala and India. But the problem is that most of the investors based in the North are not encouraged to invest in the startups based out of Kerala.”

Agrima had finally raised funds in 2015 from US-based angel investors, and again in early 2019 from Kerala-based investors. The startup has offices in Bengaluru and the US.

Further, since Kerala does not have large cities, most places are predominantly homogeneous and startups may fail to stand out. Saji believes many are yet to be exposed to different kinds of mentors and working styles from the industry.

“We also require investors for larger deals. Angel funds are sorted out but for funding Series-A deals and upwards, we need investors in Kerala. Right now, they are all in Bengaluru,” Saji says.

For this situation to be addressed, there needs to be more startups in the State, propelling Kerala to become a critical market to invest in for VCs. “Over a period of time this issue will be solved if people focus on real problems and create strategies to tackle them,” he adds.

Besides, there is innovation happening in towns and non-metros that have their finger on the Bharat pulse. There is Wayanad-based software startup Corehub Solutions, Palakkad-based robotics startup V-Robotics Passenger Information System, Malappuram-based healthcare startup Ecogiene Healthcare, among others taking on challenges in Tier-II and III India.

This is where a player like IAN comes into the picture. In a recent statement, it said that close to 15 percent of its investee companies are from Tier-II and III cities.

“Whether it is the blockchain and AI push in Kanpur or the ‘fintech valley’ push in Visakhapatnam, the governments have ensured that startups become mainstream in India, even in the smaller towns,” Padmaja Ruparel, President and Co-founder at IAN and Founding Partner at IAN Fund, says.

The IAN itself has invested Rs 40 crore (around $5.8 million) in 10 startups from cities like Nagpur, Belgaum, Kochi, Madurai, and Ahmedabad.

According to Saji, in two-three years, Kerala will have quite a number of tech startups operating from the State, especially in domains like space, medtech (specifically in the area of cancer detection), and electronic-hardware infrastructure. Some, he believes, will also be in the IPO route.

With the government making all the right noise and investors looking at innovation coming from God’s Own Country, Kerala’s startups will be uniquely positioned to make the State an entrepreneurial hub in the coming years.

(Edited by Evelyn Ratnakumar)