What young entrepreneurs should know about India’s funding ecosystem

With close to 40,000 startups and 59 unicorns, India comes third in terms of the most active startup ecosystems in the world. While the pandemic surely took a toll, Indian startups have managed to somehow navigate through it encouragingly.

In fact, several new startups and business models scaled during the pandemic. Indian startups have already raised over $20 billion this year and we can see that the numbers are exponentially growing.

To give a further boost to the Indian startup ecosystem, many startups are now being backed and supported by the government, NASSCOM, and leading conglomerates. They have been helping Indian startups through their various incubation programmes such as Startup India and 10000 Startups initiatives.

In the past year, we’ve also seen several established organisations sign up to support startups by investing, mentoring, and helping them scale. Startup accelerators are being launched across the country by several state governments and private institutions to support early-stage startups.

When we look at the startup ecosystem from a funding point of view, we can categorise the startups into two broad categories. The first being where the startup focuses on the “urban elite”, mostly led by aggregator models where they provide niche solutions, convenience, and superior user experience over traditional solutions.

The second are the ones that focus on “mass India i.e. Bharat”, their focus lies in the segment that has not been explored, and the population that has largely been underserved. They know that the future is digital and that they can provide their services/products to people living in smaller cities, towns and even villages.

The biggest domains that have gained the investors' interest especially after the pandemic are ecommerce, payments/fintech, and edtech sectors.

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The Indian startup ecosystem is a hot market for the HNI (high net worth individual), PE (Private Equity) and VC (Venture Capital/Capitalist) investments, especially after the pandemic as it has given a nitro boost to the adoption of online-led businesses.

We can see that now more and more businesses are shifting or expanding digitally and online, with VCs focusing on tech startups as well as startups in sectors such as online grocery delivery, home entertainment, and fast-moving consumer goods.

The over dozen new Indian unicorns that emerged this year come from a diverse range of tech sectors, that include fintech, social commerce platforms, digital insurance, and healthtech. Investor confidence is at an all-time high, not just in late-stage startups but also early-stage startups, as long as they solve unique needs.

Therefore, investors are interested in both the categories of startups, as for them, what truly matters is “what’s the unique customer need that the startup is solving? What is the plan to scale and become profitable?”

These days, there are about five major key startup domains that are getting a lot of attention — right from people who are looking for ways to innovate in these sectors using technologies like AI (Artificial Intelligence), blockchain, automation etc, to the investors who want to be a part of them or the bright Indian talent that wants to work in these startups. They are namely social ecommerce, education/edtech, finance/fintech, entertainment, and healthcare.

In addition, aggregator-based models especially in the traditional unorganized sector will likely continue to thrive e.g., home decor and interior design, household solutions. While there is no shortage of capital, given that there are approximately 40,000 startups in India, they are extremely picky while making large bets, especially after Series A and Series B funding rounds.

They are moreover interested in startups from a point of view of — what are the untapped needs that the startup is solving, how is the startup uniquely positioning to scale, and what’s the path to profitability.

This is perhaps the right time for the youth of the country to explore the dreams of entrepreneurship. Apart from the above, few things that young entrepreneurs should also know about fundraising in India:

Breaking the clutter from all the other startup ideas that are getting pitched to VC’s

This will only be possible when the founders have a clear vision about what exactly they are trying to solve, they should have a deep understanding of their customers and their needs, and lastly, should have a fair knowledge about the market, how relevant and big is the need, and what benefits will it provide to the customers. Investors are looking for solutions that are tailor-made for the Indian market. ‘Me-too startups’ that copy from other geographies are less likely to succeed in the long run.

Having a better understanding of the financial aspects in regards to fundraising

• One should know what all options are available for raising funds — (bootstrapping, equity, debt, government funding, crowd-funding)
• Understanding whether to approach Indian investors or foreign investors
• Having a fair knowledge about the shareholding structure
• Understanding how valuation, dilution works

Knowing the legal aspects in regards to fundraising

• Knowing the basics of legal, tax laws and FDI policies – what’s permissible and to what extent
• Understanding contractual agreement terms
• Being aware of the changing laws and reporting requirements depending on the industry of operations