6 Facts That Demonstrate India's VC Ecosystem Is Thriving Many Silicon Valley-based funds have been looking at Indian companies as a hub of innovation

The dawn of India's startup ecosystem happened many years after it was established in developed nations. However, less than a decade after the launch of the first few startups, India became the third largest ecosystem in the world. The primary reason behind this, besides innovation, digital adoption and internet penetration, has been the ease of access to capital.

Not only did venture capitalists (VCs) bet on innovative ideas, but they have shown remarkable resilience, especially in the last two years, adapting well to changing market conditions. "While macroeconomic factors drove the slowdown in funding globally, India continues to be attractive for investors globally given strong fundamentals. Low leverage, tech adoption, and favorable demographics create a long runway for growth. We see limited impact, especially in early-stage rounds, and continue to invest across sectors," Elevation Capital was quoted as saying in Bain & Company's India Venture Capital Report 2023.

Many Silicon Valley-based funds started looking at Indian companies as a hub of innovation. And, investing in them became a sure-shot way to grow fast. "We were originally thinking of being a US-only fund. However, we are an outbound first fund, a fund that uses algorithms to find the best companies in the world. And we have petabytes of data. So, the data that popped up on our screens in 2015 said a different story. It was all India. That pushed us to invest in Indian startups," said Madhu Shalini Iyer, partner, Rocketship.vc, a Silicon Valley-based fund investing globally. She was talking at Entrepreneur India's flagship event Entrepreneur 2023 on August 7th and 8th in Delhi.

The firm's first fund thus invested in Indian startups such as NoBroker, Moglix, Mad Street Den and there has been no looking back since then. Apna, Locus, Khatabook, Uravu Labs and Agnikul are some of the other prominent startups in its portfolio.

Here are six facts that demonstrate India's VC ecosystem is thriving.

Growth at the back of strong macroeconomic environment

India's $3.39 trillion GDP overtook UK in the fiscal year ending March 31, 2022. This has made India the fifth-largest economy in the world behind the US, China, Japan and Germany. This macroeconomic boost has trickled down to the Indian VC ecosystem as well. "The macroeconomic environment in India is very strong. It has not really shown any signs of a slowdown, unlike the rest of the world. There's continued stability and the demographics are ripe for disruption. So, we can't really find a better set of circumstances to invest, along with talent and great educational systems on the horizon," said Iyer.

The number of family offices and micro VCs that have been created in the last few years in India has been phenomenal. For instance, VC firms are seeing a huge percentage of capital coming from Indian family offices in their recent funds. The second-generation entrepreneurs of these offices have become more active as limited partners (LPs). MicroVCs are also on the rise. According to Praxis report, India had 89 micro VCs in India in 2020, up from 29 in 2014. During 2014-2020, these micro VC funds infused $346 Mn in 574 startups through 741 deals.

Betting on a secular ecosystem

The funding winter has rewired the way both entrepreneurs and investors think and function. In this new normal, the criteria that investors look at before making an investment have also changed. Today, startups perceived as having a stronger team and business model continue to attract investors. "People just don't want to throw money at the problem. They want founders to build, but they also want founders to build with a strong unit economics in place. And that has come about and we think that it's a secular trend. These are growing pains of a much of a maturing ecosystem and that's a really good sign according to a lot of us," said Iyer.

Increased interest in out-of-the-box sectors

We are also seeing a rise in many interesting sectors and VCs are showing tremendous interest in the potential of these sectors. Some of these include Generative AI, predictive AI, cleantech and sustainability. "There are a lot of very good companies in India, which we have personally spoken to and we are excited about. This includes EVs and adjacent sectors like batteries, charging, deeptech that encompasses space, defense, robotics and sustainability and clean tech. A look at the average deal sizes will tell you that investors have put their money where their mouth is, and it's gone from a mind share to wallet share," she added.

Motivated by changing founder profiles

VCs have always believed that investing in a founder with deep knowledge and passion for the business will determine the performance of the company. And, today the founder profiles are so phenomenal that they are attracting global investors. "There is something magical about Indian founders. And, they can now be found across India, beyond hubs like Delhi and Bangalore. Then, there are repeat founders and mafias of companies, such as people coming out of Flipkart, like the PayPal mafia in the valley. People are coming out of great companies and founding other startups," she said.

Increased emphasis on corporate governance

Over the years, startup success has become a game of chasing investors' attention, even if that sometimes meant an exaggerated projection of numbers. While early-stage startups have to convince the investors about their business model by demonstrating certain traction, late-stage companies have to showcase solid revenue growth and profitability in terms of numbers. Certain investors' growth-at-all-costs ideology would also feed into a vicious circle of whitewashing for supposed value creation earlier. However, that has changed completely today.

Investors have dropped the growth-at-all-cost mindset. In fact, detailed pre-investment diligence has become critical for investors. Investors are mindful of their role and the expectation setting as well. "As I said earlier, these are the growth pains. Let's not get our hopes down. We just need to go through this and get out of it," she said.

Reaping the benefits of a changing regulatory environment

The Union Minister of Commerce and Industry, Consumer Affairs, Food and Public Distribution and Textiles, Piyush Goyal, urged startups some months ago to consider putting in place some standards, "maybe for self-regulation", to bring in greater transparency in the way they conduct their businesses and report their financial status. He mentioned how startups should develop corporate governance standards on the basis of which financial auditors can scrutinize accounts and report any wrongdoings. "Any such standards will also make life easier for even auditors, who can then declare to the world the transparent governance and ethics system that is driving the Indian start-ups," the minister said.

Many in the ecosystem agree with the minister and feel that good governance is very important for keeping the confidence of all the stakeholders in the ecosystem. Besides, the government regulatory environment is helping with better exits for investors. "We are cleaning up our ecosystem so that we can get much better when we have many more startups that are flush. There's a great digital infrastructure for the public good, a large aspirational consumer base, great software companies that are world-class and a more formal economy that alludes to the regulatory landscape and there is attention to detail about the IPO market," said Iyer.