Indian startups race, challenges and their fate

Indian startups race, challenges and their fate in today’s scenario

Entrepreneurship is integral to the socioeconomic foundation of any country.  It is in this aspect that India has come a long way in the last two decades and has galloped to newer heights in the last five years. A couple of decades ago business was mostly a domain of the privileged. The first signs of change came with the inception and growth of tech services ecosystem from the 80s through the 90s.  The first decade of this millennium saw those ripples turning into waves riding on the back of large, ambitious, English speaking, technically educated population and fuelled by the wage gap with the west. India had undeniably made its mark at the global level as a robust tech ecosystem by the end of the decade. But a number of startups were still far and few. Even fewer were the number of youth from middle class background chasing their dreams. And then there was this constant critique about our capability to develop and scale indigenous tech products and platforms.

Fast forward 5 years: with 3100 startups (fourth largest by country trailing closely behind UK and Israel), USD 9 billion invested across 1000 plus startups in 2015 (from USD 1.6 billion across 300 startups in 2013), 500 plus active angel investors in India, we probably have put those criticisms to rest once and for all. The number of startups is estimated to grow to 11000 plus by 2020. 73% of founders are below 36 years, 48% have left an MNC job and 36% have an engineering background. That leaves no doubt about the much desired paradigm shift in the social composition of entrepreneurs.

With 70+ active VCs and PEs, 550+ angel funds and 80+ incubators and accelerators we have built a robust funding ecosystem that would continue fuelling the growth of startups for years to come. With numerous success stories from e-com to enterprise tech to food tech our youth have gained the confidence that we have the capability to be successful at a global level. Also the availability of multiple opportunities and growing acceptability of people working with startups has tremendously reduced the psychological risk of failure. But we are yet to cover a lot of ground in terms of systematically developing entrepreneurial skillsets through our formal educational institutions. Although many of the premier institutes have entrepreneurship cells, most of them are merely honorary in terms of guidance and infrastructure. We have also gained confidence of the global tech and finance community in terms of our capability to develop robust and scalable platforms and products, which is endorsed by the close to 100% YOY jump in investments in startups.  With close to 400 million internet users, 35 million online shoppers (in Q1 2014) – expected to grow to 100 million by the end of 2016 and more than 40 million taxi app users (Oct 2015) leaves little doubt regarding: 

  1. a) the presence of a sizeable market with considerable dispensable income, and
    b) readiness of the market to adopt various tech products.

All in all, over the last few years we have developed a very robust ecosystem conducive of fuelling, facilitating and scaling startups particularly of tech nature.  

There are of course certain areas, which need improvement and some, immediate attention. Regulations and archaic protocols (especially in tech sector) continue to be a huge roadblock for everyone in the ecosystem, from the enthusiastic founders to the funders. Infrastructure would be another domain, which continues to play a spoilsport, especially when consumer startups try expanding beyond tier one cities. The lax and often ambiguous intellectual property laws don’t help someone planning to invest considerable resources in innovation. But we have been able to achieve the fourth spot globally despite being 142nd in the ease of doing business. This is a testimony to the fact that we have been largely able to work around these bottlenecks. 

Lately the overly festive mood of the startup space is a bit on the decline and caution has started creeping in with frequent parallels drawn with the 2001 tech bubble by many critiques. It’s the nature of anything (more so for commerce) to cross the equilibrium point when it’s in momentum. Moreover the present situation does have certain uncanny resemblance with the 2001 period – meteoric rise of fund infusion, valuations based on short-term superficial parameters rather than long term business fundamentals, etc. But it has certain fundamental differences this time around. Unlike 2001, the tech infrastructure (connectivity, device capability, and digital transactions) has come a long way. We have a huge market, which is capable of consuming the present offerings. This is proved beyond doubt with the dramatic shift in the consumer’s purchase of various products and services that have come in the last 5-10 years. This wasn’t the case in 2001. 2001 was driven by global internet adoption for which we were neither infrastructure wise nor technically ready. This time around the marketplace drives it and mobile first approach for which there’s a ready market. Moreover a look at historic NASDAQ data would show:

a) 600% plus growth between 1995 and 2001 compared to close to a 100% in the last 5 years. If anything that’s a reflect of the irrational amount of positive market sentiments back then, and
b) even after the 2001 crash the index settled at a new normal which was much higher than the previous normal.

There’s no doubt about the fact that the changes in the way we consume products and services is going to stay this time around. Yes, there might be a lot of correction in valuations that has been driven mostly by parameters like GMV and market expansion rather than basic business fundamentals of profitability, lifetime value VS customer acquisition costs, etc. There would also be some M&A and closures in mid to long term.

The fact that there might be certain fundamental changes but the overall direction of things would continue is proven by the fact the number of deals (in terms of investment) are still growing steadily despite caution creeping in over the last couple of years.

startup fundingThe above chart shows the number of fundings that has happened in the tech space in India in the last one and a half years. The number of fundings hasn’t taken a toll and has in fact risen. The interesting thing to notice is the shift in trend between late stage funding and seed funding. With caution and fundamentals gradually making a comeback we will see more people investing in early stage ideas rather than the sometime irrational valuations at late stage. We will also see the late stage fundings going down both in terms of numbers and value, as companies would be expected to prove themselves on their capability to grow without compromising business fundamentals, which would be a major challenge especially for consumer tech. 

As far as consumer tech unicorns are concerned, it would be an interesting scenario to observe. While the numbers leave us with no doubt about mass population using these services, a large part of it is driven by massive discounting. With the sustainability of GMV based valuation strategy being questioned, it would be interesting to see how these companies sustain and grow the base while being on the road towards profitability. Customer loyalty, frugality and backward integration strategies rather than discounts would determine the results in the long term. 

Another important factor to keep in mind would be the fact that expansion beyond the top tier cities might not be as smooth as:

a) 70% of India’s GDP and hence purchasing power is with less than 30% of the population residing in urban areas. Hence the rest 70% population has very minimal purchasing power, and
b) the infrastructure challenge of reaching the rest 70% which is not concentrated in closed localities. In the next 2-3 years each of the consumer tech sectors would witness large M&As.

Another crucial sector to follow would be the enterprise tech sector – the Davids of the tech startups. Although most of these lack the glamour and recall of consumer space, they are:

  1. a) fundamentally stronger, and
    b) are giving their global counterparts a competition even outside India.

At present 37% startups are B2B and they generate revenue of 600 million USD and have a combined valuation of USD 3 billion. This segment is expected to generate revenues of USD 10 billion and grow to a valuation of USD 50 billion by 2025. Many of the bigger ones are growing by 50% to 100% YOY and are also profitable. Moreover it’s much easier for an enterprise tech startup to approach the global market than for a consumer tech startup.

There have been paradigm shifts in terms of India’s tech startup ecosystem, consumers and investors, which would form the foundation for future growth.  There would be certain changes in the rules of the game, but the startup story of India is far from plateauing, if anything the last five years marks the beginning.

The author is Mr Upal Pradhan,Founder and CEO Kratos

Upal Pradhan Founder and CEO KratosUpal Pradhan, an engineer by education who further studied Management, began his career at an interesting time when the merging of technology and marketing had just begun.  At the turn of 2007, as manager for Digital marketing and new media for RPG Enterprises and Saregama, he was at the frontier of using Digital marketing in India. Putting technology to use for marketing, he increased revenue and market share of the company on various Telecom VAS platforms – CRBT, IVRS, WAP, M Radio. He also introduced new VAS platforms such as internet, kiosk in the marketing mix.

A marketer at heart, by 2010 when he joined Techzone as Head of Marketing and Operations, he was a veteran of digital and mobile marketing.  Techzone one of the major spenders on mobile advertisement was the perfect choice for the merger of his experience and passion. During his tenure at Techzone Upal, along with Naveen’ in the evolution of TZ from regional to one of the largest VAS players was instrumental in the evolution of Techzone as one of largest mobile entertainment and platform companies.

Upal’s ability to spot opportunities and predict changing customer requirements saw him nurturing Techzone to grow from a regional company, to one of India’s most significant VAS players. Upal became fascinated with the enormous opportunity that mobile technology offered marketers.

As a user of mobile advertising technology, he faced the challenges of a mobile technology ecosystem, which was not keeping up with the marketers needs. Therein he saw an opportunity to extend his 9 years experience of mobile ecosystem and mobile advertisement to create a company that provided the various stakeholders in the mobile ecosystem, solutions that were technology based, transparent and based on ROI.

Thus was born Kratos and an entrepreneur who had worked in the trenches and is passionate about pushing the envelop of Ad Tech. Driven by the excitement to experiment with new technology, build scalable systems and on a mission to change the way advertisers view mobile as a medium.

Upal Pradhan is an expert in creating world-class organisations.

He has a Master in Business Administration (MBA) in Marketing from IIT Kharagpur and a Bachelor of Engineering (BE) from Bengal Engineering and Science University, Shibpur.

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