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From 9,000 to 15,000 a year: The changing paradigm of Indian startups

From 9,000 to 15,000 a year: The changing paradigm of Indian startups

Focus - in terms of choice of customer segments and go-to-market will be key for these brands, especially in the era of Amazons and Flipkarts

The year 2021 has been an unprecedented year - 15 unicorns being announced in six months, of which 6 were announced in a single week in April The year 2021 has been an unprecedented year - 15 unicorns being announced in six months, of which 6 were announced in a single week in April

Startups today are fuelling the next wave of growth journey for India, bringing forth an era of unprecedented change and innovation. 

Today, India is already the third-largest start-up ecosystem in the world in terms of number of start-ups, according to NASSCOM - with more than 15,000 start-ups opening shop in 2020, up from 9,000 in 2014. 

Fuelling this rise has been rapid funding growth - as per data processed from Tracxn, funding increased from $5.5 billion in 2014 to $15.6 billion in 2019 and $12.2 billion in 2020. This trend is continuing in 2021 with $10 billion funding coming in the first six months of the year alone.
 
As the start-up ecosystem matures, we see three key trends impacting the paradigm: 1) Funding consolidation; 2) Emergence of new unicorn hotbeds and, 3) COVID-induced behavioural shifts leading to the next wave of innovation.

Also Read: Indian startups raised $6.5 bn in April-June period, 11 entered unicorn club
 
Today, bulk of the funding has moved to later stages, pointing towards a maturing ecosystem. Series D rounds and onwards attracted 57% in 2020, as compared to 39% in 2016. 

As a corollary, India is now a unicorn hub and home to nearly 55 unicorns, 45 of which made the list in the last 3 years. 2021 itself has been an unprecedented year - 15 unicorns being announced in six months, of which 6 were announced in a single week in April.

While funding is consolidating, the breadth of investor participation has increased - the number of institutional investors has increased 2.5X times from nearly 450 in 2014 to around 1100 in 2019. 

Tiger Global, Steadview, and Falcon Edge have been the most active large-ticket investors in 2020-21, participating in 25, 12 and eight rounds respectively out of nearly 100 mega rounds (>$100M).  

The other key theme playing out is the emergence of sectoral breadth. Till 2020, retail used to be the unicorn hotbed, however, 2021 marked a shift with SaaS taking the lead at 12 unicorns, followed by fintech and retail at 11 and 10 respectively. 

Of the 14 unicorns announced this year, SaaS and fintech have contributed four each. Further, both the sectors have a healthy pipeline: out of nearly 50 soonicorns ($500 million-1 billion valuation), nearly 40% are from these sectors. 

Led by the likes of Freshworks, Druva, and Zoho, Indian-origin SaaS companies are making their presence felt globally. Ample availability of tech talent, focus on borderless or digital sales, building for small and medium enterprises at an attractive price point, has driven the Indian SaaS story. 

Similarly, the Indian fintech sector has seen an exhilarating growth trajectory - raising nearly $10 billion from investors across the globe over the last five years, buoyed by the open API infrastructure enabled by IndiaStack. 

While payments have dominated most of this trajectory, we are now seeing alternate lending, InsurTech, WealthTech and Neobanks rise to the occasion. 

 
Furthermore, COVID-induced behavioural shifts, such as the shift to online education, digital health-related services, and online commerce have led to significant tailwinds for sectors such as health tech, edtech and D2C - which is likely to sustain in the post COVID world as well. 

For EdTech, while the ecosystem today seems to be dominated by the likes of Byju's, Vedantu and Unacademy, there are more than 3,500 active startups in this space. 

The focus so far has been centred around supplemental learning (online tutoring and courses) and test-prep. 

However, there still are many challenges to be overcome - from delivering content at scale in low bandwidth conditions, to ensuring classroom-like engagement levels and personalising the learning journey for individualised needs.

Also Read: India saw three new unicorns every month last year; Sequoia top-most investor: Hurun

While the future is leaning towards a hybrid online-offline model, it would require significant user training, change management and product advancements to ensure a smooth transition.  
 
The health-tech ecosystem has also not been far behind - in light of COVID, not just teleconsultation, but e-pharmacy home diagnostics and home ICU services saw rapid growth - as ecosystem players recorded unprecedented growth in user traffic. 

With easing regulations and the announcement of a public digital health infrastructure under the hood of NDHM - the market looks ripe for new innovation. 

Newer players such as Driefcase are capitalising on this by helping build the new age digital infrastructure for providers. 

The larger players such as Practo, 1mg and Pharmeasy, seem to be moving towards expanding their portfolio of services to offer one-stop solutions.  
 
Rising income, increase in first-time internet users and change in buyer persona have led to a spurt in D2C brands with more than 700 of them active in the market. 

While players like boAt, MamaEarth, Bombay Shaving Company are soon becoming urban household names - there is still much to be explored in the hinterlands. 

Focus - in terms of choice of customer segments and go-to-market will be key for these brands, especially in the era of Amazons and Flipkarts.  
 
As a whole, we are seeing innovation and disruption take place across the spectrum. These changes are a healthy sign for the start-up ecosystem and economy overall. 

We are excited about the impact many of these players will have on our daily habits and ways of working in the years to come.
 
(Vikash Jain is a Managing Director and Senior Partner with BCG, and leads the Tech, Media, & Telecom (TMT) practice in India. Shaleen Sinha is Head of Growth Tech India at BCG. BCG Growth Tech works with leading digital disruptors and start-ups. Vaibhav Malhotra is a Principal with BCG, and a core member of the Growth Tech and TMT practice. Ujwal Kalra and Pranay Boobna helped conduct the supporting research.)