A golden age for early-stage startup funding in India

As an early-stage venture capital investor, we are attuned to picking up the smallest of signals, and amplifying them after filtering out the noise to build out a narrative that will play out.

So, when I recently interacted with five large domestic and international banks, it spoke highly of the maturing of the startup ecosystem. These banks, which are usually conservative in their approach, have set up startup-dedicated teams in an effort to provide services ranging from forex to working capital.

Even the healthcare sector, which is late to the startup party in India, warming up to this ecosystem. Many healthcare enterprises now setting up startup engagement programmes. Doctors are taking part by either setting up their own startups or becoming significant advisors.

Why then is it that everyone wants to be a part of India’s maturing start-up landscape? If we are to scrutinise the India startup ecosystem, much as we would evaluate a startup along the three key vectors of team, product and market, and factor in elements like current traction, the headroom for growth, and the availability of follow-on capital, that pretty much sums up the key elements driving an investment decision.

Team

When I set up my last fund, the India Innovation Fund, in 2009, startup founders stood the risk that they didn’t tick the checkboxes required to be perceived as suitable marriage material. Today, successful startup founders in India are akin to rock stars, and that has led startup creation topping joining a consulting or a private equity firm as the career of choice at India’s premier institutes.

Some of the best talents are opting to start their own startups. Moreover, inter-founder dynamics are excellent, with successful founders making themselves accessible to new ones both informally and formally.

Lessons learnt are passed on, enabling higher efficiencies in the next generation of startups created. Finally, we are seeing the emergence of a new breed of entrepreneurs from Tier II and III cities.

Product

The first generation of Indian startups were copycats of other successful products in the US and China. Flipkart replicated the Amazon and Alibaba models, Ola built Uber and Didi of India, and so on. The next wave of startups that are demonstrating early success is the SaaS players.

A new breed of startups is emerging that building deep tech solutions for the world–highly innovative, cutting-edge products that build applications in spaces like Artificial Intelligence, Biotechnology, AR/VR, Web3, space tech and other emerging technologies that represent not just the next generation of Indian startups but align well with the new generation of global startups.

Market

In the shifting nature of the products that are being built from India lies the shift in market opportunity. The global TAM of enterprise markets far exceeds the TAM of the Indian consumer market, as we evaluate where the growth opportunity lies for Indian startups.

We are moving from addressing domestic challenges with consumer tech and marketplace offerings to creating solutions that address global problems and inefficiencies effectively through SaaS and deeptech offerings.

Availability of follow-on capital

Viewed from an early investors’ perspective, a startup evolution is a relay, the baton of lead investor being passed on from one to another as the startup navigates through multiple funding rounds to reach scale.

The availability of later stage funding is key as is a vibrant acquisition and IPO ecosystem. The amount of dry powder sitting with established funds in India, all of whom have raised much bigger funds than their earlier funds, complemented with the emergence of new fund managers setting up their first funds, brings the required scale to the capital availability in India’s VC ecosystem.

More importantly, global growth funds are setting up dedicated teams or Investment strategies to invest in Indian startups.

In conclusion, we have reached an inflection point that is marked by both critical mass as well as the confluence of a number of factors setting up a ‘reverse perfect storm’ for the hockey stick growth of the Indian startup ecosystem.

In public equities parlance, we are at the beginning of a long term startup bull market.

And, in VC parlance, India’s startup ecosystem has achieved product-market fit.