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Riddhi Kanetkar
- India's startup ecosystem is one of the world's largest, trailing behind Europe and the US.
- Startups in the region landed a record $49 billion in 2021, according to Dealroom data.
- Insider spoke to investors and analysts about why the region is set to boom in 2023.
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When Indian neobank OPEN bagged a $1 billion valuation in May 2022, it became India's 100th startup unicorn.
It was a major milestone for the country's tech ecosystem — and one that highlighted the momentum the region has gained over the past six years.
India's tech ecosystem has long been in the shadow of its more established counterparts like China, Europe, and the US. The country also saw droves of talent migrate out of the region in what was billed as the 'great Indian brain drain', as workers searched for plush perks in Silicon Valley and beyond.
But 2021 was a pivotal year for India's startup ecosystem. Last year, a record $49 billion was poured into Indian startups as the region attracted cash from investing giants like SoftBank, Tiger Global, and Accel.
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A tech crackdown in its regional competitor China has also pushed more investors into the subcontinent as an alternative center of gravity for Asia's tech ecosystem.
There are still key challenges that investors will have to overcome as they increasingly pivot to this region. The regulatory landscape isn't always conducive to startups' growth, said Rajiv Srivatsa, partner at Antler VC. He pointed to the Web3 ecosystem as a key example of this, which is gridlocked by a lack of clear regulatory frameworks.
There's also a dearth of founder-led venture funds, with "very few people in venture that have had founder backgrounds," said Brendan Rogers, cofounder and general partner of India-focused early-stage fund 2am VC.
Despite this, Rogers tipped India as a hotbed for international investors, who piled into the region in 2021 — driving around 70% of the investments into the region in the same year, per Dealroom data.
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Insider spoke to investors and analysts about India's future as a tech hub. They put forward five reasons why it's set to take off.
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India's huge Gen Z population can double up as a talent pool
With a population of over 375 million Gen Zs — those born between 1996 to 2010 — India is the epicenter of a future generation of tech talent.
Its young demographic not only gives the country a fertile supply of workers for technical industries but has also driven a rise in young founders in the region.
For Brendan Rogers, founder of investment firm 2am VC which backs startups in India, the country's large Gen Z population is the catalyst for expanding its tech ecosystem.
"The Gen Z population is so large," he told Insider. "From a macro perspective, Indians migrated to the US to get a job there." Now, he sees more Indians going to the US and then migrating back to India to build startups — a step towards reversing the country's brain drain from the early 2000s.
Rajiv Srivatsa, partner at VC firm Antler's India operations, also noticed a "reduction in the number of people going abroad after college".
"Five or six years back, the number almost reversed. More people are staying back in India after college," he added.
India is also on track to have the largest population of tech developers in the world, per CNBC, bolstering its outlook as a tech hub for the next generation of workers.
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China's tech crackdown is pushing more investors toward India
China's tech ecosystem is valued at $6 trillion — drastically overshadowing India's $800.4 billion.
But as China's president Xi Jinping escalated a crackdown on the country's biggest tech companies, with tech juggernauts such as Alibaba and Tencent falling victim to hefty government fines,tech stocks and venture flow into the country have taken a tumble.
This has been a boon for Indian startups, however, as investors backed fewer VC rounds in China.
Over the past three years, Indian startups have raised more VC funding rounds than their Chinese counterparts, according to Dealroom data. However, India remains considerably behind in value terms.
India could also act as a viable alternative investment market to China due to its expanding digital economy, driven in part by the COVID-19 pandemic through the adoption of digital payments and mobile apps, Fortune reported.
In May this year, private equity firm General Atlantic announced it would plug $2 billion into startups in India and Southeast Asia, as it moves away from investing heavily in China, while Sequoia India launched a $2 billion fund dedicated to Indian startups the following month.
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India has a strong macroeconomic environment that will help sustain startups' growth in the coming years
While India has not been exempt from the effects of the global tech downturn – it has been relatively shielded from a macroeconomic slump.
Morgan Stanley expects the region to "offer the green shoots for growth" that its Western counterparts cannot with the country's GDP tipped to grow by 6.2% in 2023.
"India's tech ecosystem has been growing faster than mature ecosystems such as Europe and USA," said Ivan Draganov, an analyst at Dealroom. "VC investment in India grew 7.5x since 2016, while Europe and USA grew 5.3x and 4.1x, respectively."
It also boasts a promising landscape for internet users, a demographic that's expected to grow to 1.3 billion by 2030, Draganov added.
The cost of living and operations is much lower in India, which makes it more economically tenable to run a startup there — especially during a downturn, according to Rogers.
"A lot of funds have a lot of dry powder in Series A onwards," Rogers said. "In India, $500,000 can go a much longer way than the UK or US — you can really get into cockroach mode."
The caveat is that tech talent is becoming more expensive, said Mayank Banerjee, cofounder of Bangalore-based healthtech startup Even, who added that talent in India was much cheaper a decade ago — but "it's less and less relevant today."
Per data analyzed by Inc42, VCs in India have $16 billion in dry powder, based on the funds raised in 2022. Much of this capital has yet to be deployed to startups in the region, which could make for a more promising funding environment in 2023.
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The government has created initiatives to bolster the country's early-stage ecosystem
In contrast to Xi Jinping's clampdown on private tech companies, India's government has created policies to fuel the growth of its early-stage upstarts.
"The government has been pro-digital and driving policy towards investing in startups," Sanjay Mehta, cofounder of India's largest startup accelerator 100x.VC.
In 2016, the Indian government launched the Startup India Initiative, which aimed to drive funding opportunities, partnerships with academic institutions, and incubation efforts for early-stage startups.
The government has cited the potential of startups in bolstering the economy as a reason to channel support toward them. Startups have played an integral role in creating employment, and driving the country's economic growth, with smaller Tier 2 and 3 cities offering job opportunities outside of cities like Mumbai and Bangalore.
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India is gaining traction from foreign investors
An uptick in foreign investments is helping Indian startups to enter a maturing cycle that will better prepare them for IPOs, as reported in Fortune.
Since 2016, the likes of US and European investing juggernauts such as Tiger Global, Accel, Sequoia, and Lightrock have piled cash into Indian startups, backing its biggest unicorns such as Byju's and Paytm — and it's a trend that's set to grow.
For Draganov, the region is expected to "remain quite attractive for international VCs because of itspositive macroeconomic environment and market demographics."
In 2021, the region secured a record $45 billion in VC funds. Of this, nearly $20 billion of VC money was from investors based in Europe and the US, per Dealroom data. It's a sign that India's ecosystem is poised to gain more attention from international investors in the coming years.
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