Even with peaks and troughs, India’s startup ecosystem has largely been growing rapidly in recent years and as of June 2024, the country had 67 unicorns valued at over $1 billion.
Over the last one and a half years, funding in Indian startups experienced a slowdown as investors became more cautious and selective, and some unicorns like education-technology startups like Byju’s saw their fortunes turn in a dramatic way for the worse.
However, the first half of 2024 is once again building optimism in the sector with the promise of funding increasing again.
Further, as large risk capital investors continue to tread cautiously, several micro venture capital (VC) firms are rising to plug the gap in early stage investment.
Invezz spoke to Prateek Toshniwal, angel investor and co-founder of IVY Growth Associates, a leading Indian angel network and startup ecosystem enabler.
Toshniwal has led investments in 127 businesses, including 32 in his personal capacity, and made four successful exits with three companies now valued at over $1 billion.
Guiding investments in startups like Zypp Electric, BluSmart and others, Toshniwal provided us with a ringside view of the current startup ecosystem in India. Edited excerpts:
Startup ecosystem showing signs of recovery from funding winter
Invezz: Funding for Indian startups in 2023 was quite low at slightly more than $10 billion. Why do you think that happened and how has the first half of 2024 been?
Yes, 2023 was not a great year for the startup ecosystem as funding flow witnessed a sharp decline of 62% due to global economic turmoil and investors’ doubts.
However, our startup ecosystem is showing signs of recovery from the funding winter.
This shift is becoming clearer, as the Indian startup segment has bagged $7 billion in funding in just the first half of 2024, which is more than the $5.92 billion in funding raised in the first half of 2023.
While there has been a notable increase in deals, this positive growth can be attributed to big-ticket funding rounds and deals by late-stage firms like Flipkart and Zepto.
In my opinion, the numbers could further increase in the second half of this year. Meanwhile, I have been working to guide startups on how to navigate this slump.
Tech is the most popular investment theme in India
Invezz: You announced a Rs 250 crore startup fund earlier this year which would focus on agritech, cleantech, generative AI, fintech, consumer brands, and SaaS. So, is tech the most popular sector for VCs to invest in? What are the other sectors that seem promising from an investment POV?
Yes, technology is currently the most popular theme in our country.
More venture capitalists are parking money in the tech space, especially in artificial intelligence and blockchain-focused companies, online gaming companies, and SaaS.
In the last 6 months, generative AI startup companies have bagged 27 deals worth $237 million, suggesting the growing investor confidence in this tech space.
According to my observation, companies focused on electric vehicles, space technology, cleantech, and robotics seem promising due to their innovation and growth potential.
Their offerings focus on the world’s current needs and can prompt transformational technological advancements in core areas of our lives.
Interestingly, another emerging tech space is the spiritual tech domain, which is gradually generating interest from investors not just in India but abroad.
Invezz: Since Ivy Growth connects angel investors and startups, do you see a positive change already taking place in terms of angel investor interest post the abolition of angel tax in the budget?
Indeed, the move has reduced our tax worries. However, it is still too early to gauge the impact of this change.
That said, the abolishment of the angel tax will make it easier for startups to operate and thrive and definitely simplify their administrative burdens.
On funding accessibility outside cities like Mumbai, Delhi and Bengaluru
Invezz: Within India, do you see a growth in funding accessibility outside cities like Mumbai, Delhi and Bengaluru since that has been a challenge?
Even before the pandemic, funding opportunities were largely concentrated in these three cities.
In such a setting, startups based in other cities often found it challenging to pique the interest of investors. However, I am pleased to see a gradual change in this trend.
Today, cities like Pune, Hyderabad, and Chennai are rapidly becoming the top investment hubs for venture capitalists and investors, in general.
Take for instance, Pune and Chennai are emerging as important IT hubs in India, attracting funding from investors and firms that want to expand beyond Bengaluru.
Tamil Nadu has singlehandedly secured Rs. 7 trillion in investment funds in just the first 5 months of this year.
Similarly, Gujarat has received proposals from investors worth approximately Rs. 26 trillion during this year’s investors’ event.
Besides this, the government-backed Startup India mission, accelerator programs, and venture capital funds are enabling companies beyond traditional metro cities to access funding.
However, I think more focused efforts to improve transportation and infrastructure in other key cities can increase startup culture and attract investors down the road.
Invezz: Internationally, which geographies are showing interest in startups in India? What is their topmost priority before investing?
Industry reports suggest that countries like Mauritius, Singapore, the USA, the Netherlands, Japan, and the UK were among the top geographies that channelled FDI into our country in FY 2023–24.
Most of these countries are keen to capitalize on the growth prospects of the technology, pharmaceutical, renewable energy, and manufacturing segments of India.
Companies considering relocating their domiciles to India
I believe that the ease of investing and setting up a business in India is a solid catalyst along with the growth potential of these spaces, in the country.
This mindset has also been key in prompting several companies to relocate their domiciles to India.
For instance, Indian startups such as Groww, Razorpay, Zepto, Pine Labs, Udaan, and Meesho are considering or in the process of relocating their bases.
Rise of micro VCs in India
Invezz: Micro VCs are seeing a rise in India. What has your experience as a micro VC been like so far?
In the last 2–3 years, I have noticed a rise in the micro-VC culture in India. This year alone, there has been news of over 20 early-stage micro-VC funds raised or announced.
With a rise in the number of micro VC funds, the average corpus size has also increased.
Besides the entry of new micro-VC funds, larger venture capitalists are actively spinning off smaller funds or announcing accelerator programs to capitalize on niche areas.
Invezz: What is your outlook for the startup ecosystem in India for the remaining half of the year and FY25? What, according to you will be a big theme for Indian startups in the short to medium term?
The current policy framework is conducive to the growth of the startup culture in India.
The government’s constant efforts to boost the sector and support entrepreneurship have encouraged more investors to trust the process.
Notably, India is going through a J Curve, and not just the coming year but the entire next decade looks promising for companies and young startups focused on Technology, Artificial Intelligence, Blockchain, sustainability, cleantech including agriculture, and of course Roti Kapda Makan.
We have already seen a positive funding landscape this year compared to last year, and I am optimistic that the remaining months will witness a rapid surge in funding numbers.
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