Emerging geopolitical equations and the strength of the start-up ecosystem in the country have made venture funds bullish on India. Their optimism may not be unfounded
The year 2021 turned out to be the most spectacular year for the Indian start-up ecosystem, helping it attract billions of dollars in investment and churning out a record 42 unicorns in the process. Not to forget the staggering number of IPOs that we saw in the year. Experts worry that with hot money arriving in India from the US—42 Indian unicorns received around $32.8 billion in 2021—this sector cannot ignore global economic issues, like a US Fed policy on securities or a Russia-Ukraine war.
The 2021 Euphoria
It was a defining moment for India when inMobi became the country’s first unicorn—a company with $1 billion valuation—in 2011. A decade later, India is home to 79 unicorns with a valuation of close to $260.5 billion, 42 of which were born in 2021 alone. Undeniably, 2021 emerged as the golden year for the Indian start-up ecosystem with a slew of investments coming from across the board. But the question that everyone is asking is why this fund rush last year? And, more importantly, is it sustainable?
Rajan Anandan, MD, Sequoia India, throws some light. He credits India’s deep talent pool, rapid adoption of technology and Covid-19 for generating tailwinds behind more and more Indian businesses that are making a mark on the global economy. For the country’s 50,000-odd start-ups, the investment boom is a huge encouragement. While the reasons behind the boom are far too many, the $3-trillion booster dose by the US government to strengthen its economy saw a ripple effect in India as well.
The US Federal Reserve had announced that it would begin tapering its massive asset purchase programme which means that it will gradually withdraw the monetary stimulus it had introduced to help the US economy survive the impact of Covid-19. It had been buying $120 billion worth of treasury bonds and securities every month since March 2020. This totals to over $4 trillion and is also known as quantitative easing (QE). The Fed then announced reduction in the purchase of treasury and securities. Back in 2013, when the Fed had opted for tapering, it had made global markets jittery and led to a rush of funds out of emerging economies. At that time, some experts had expressed concerns over a similar phenomenon hitting countries like India.
Cautious Optimism
However, despite periodic fears from a Fed taper, experts continue to keep faith in the Indian start-up sector for many reasons. Investment firms like Tiger Global and Sequoia Capital have started showing a renewed interest in Indian start-ups. Tiger Global has invested in at least six of last year’s unicorns, including healthtech start-up Innovaccer, B2B construction platform Infra.Market, fintech start-up Groww, messaging tech start-up Gupshup, Indian language social media platform ShareChat and software-as-a-service (SaaS) start-up Chargebee.
However, the influx of funds is not just the result of quantitative easing. A rise in high-quality start-ups, increased technological efficiency, buoyant public markets and rising local investors have all contributed to the positive sentiment. And, that is precisely why the boom is also sustainable, believes Sid Talwar, co-founder and partner, Lightbox.
“There are all kinds of pools of capital coming in from around the world. And, it is not just because of any kind of QE. There are a multitude of factors responsible for it. First, there is a lot of money that may have gone to China but did not. Second, Indian technology stocks have now started going public, and American funds have been using that entry point to understand India better. And third, our ability to get noticed globally has increased,” he says. Lightbox, too, has made quite a few investments this year, taking his fund’s total number of investments to 43, the most recent one being WayCool Foods, which raised Rs 853 million in November.
Confident investors, better business models, favourable demography and futuristic policies are sure to further consolidate India’s position in the global start-up arena. Ankur Pahwa, EY’s India e-commerce and consumer internet leader, supports the thought. “The diversification of capital pools, a maturing start-up ecosystem, exit momentum both through listings and M&A and the current geopolitical conditions will continue to see India attract more capital. As emerging sectors like manufacturing and industrial supply chain get more digitised and go global along with SaaS companies, the capital influx should continue to be high,” he says.