The Rise of the start-ups in India and their success

The ‘Golden Age’ for start-ups in India has well and truly arrived, and India is witnessing its age old talent for entrepreneurship being unleashed like never before. New ideas are exploding into business models and investors are all lining up to provide the requisite finance and mentoring, to take the start-up to the next round of funding and higher valuations. India today is replete with examples of successful start-ups that have seen valuations ballooning within first five years of operation. Names like Make My Trip, Naukri.com, Shaadi.com, Just Dial, are all success stories that have survived and grown from the last internet boom, at the beginning of the Millennium. Success stories of businesses that have grown over the last 5-8 years in India are Flipkart, Snapdeal and Myntra – all e-commerce companies, Paytm in payment processing, Red Bus in travel, Olacabs in taxi aggregation, Book My Show in entertainment, and Housing.com in real estate. The list is long with more companies being launched each month. Indian start-ups are witnessing unprecedented valuations unheard of earlier, but then the potential for business expansion within India alone is so significant that any serious investor cannot afford to ignore the India growth story. The start-up boom is not unique to India alone. China too is fast emerging as a place for innovation, especially in technology, and will continue to attract investments over the next decade. Several countries and cities that were never on the investor radar earlier have now started to attract attention with some serious innovation. Countries like Singapore, Philippines, Poland, Brazil, South Africa, Russia, Estonia and Turkey are beginning to attract big capital. In fact, individual cities are emerging as favoured destinations for early stage companies. While Silicon Valley in California has been the traditional favourite, cities like New York, Los Angeles, Boston, Tel Aviv, Berlin and Sao Paulo are fast emerging as new hotspots for start-ups. In India, Bangalore has earned itself a 15th place ranking, up four spots from its earlier rank, as per the latest report on Global Start-up Ecosystem released by Compass. What is interesting to note is that while Bangalore continues to remain a favourite for start-ups, especially tech related, other cities too are beginning to emerge as exciting places for innovation. Mumbai, Delhi, Pune, Ahmedabad, Jaipur, Hyderabad and Kochi, is now home to several exciting new age companies. Organisations like NASSCOM have set up a target to support 10,000 start-ups over the next few years. Companies like SIDBI are now stepping into the start-up funding space and platforms like SEBI are now easing norms for early stage companies to raise funds through the IPO route. That signals India is now on its way towards establishing itself as a country which has a flourishing ecosystem to encourage and support innovation and new ideas.

Look at some of the start-ups/early stage companies in India to receive major funding in the last four months.

In April 2015, there were 63 companies that received major funding and include Olacabs ($400 million), Quikr ($150 million), Freshdesk ($50 million), and PolicyBazaar ($40 million). In May 2015 there were 89 companies. These include Foodpanda ($100 million), Delhivery ($85 million), Fintellix ($15 million), and Swiggy ($15 million). In June 2015 – 86 companies, and include Ecomm Express ($137 million), Flipkart ($50 million), Applied Solar Technologies ($40 million), and Saama ($35 million). In July 2015 – 83 companies, and include Flipkart ($700 million), Oyo Rooms ($100 million), Saavn ($100 million), and Quikr ($60 million).

So what is a start-up and how is it different from any other traditional small business being started?

A newly formed traditional company takes years to build its business, in terms of assets, manpower and valuation, and relies on traditional sources of funding like loans from banks and other sources like friends and family. The business in this case is less risky and has a greater chance of success but is slow on building its company valuation. On the other hand, a start-up is high risk business with a high probability of failure in its early stage. The upside is that if it survives the early stage with a robust business model, the company valuation tends to sky rocket in a relatively short time span. Sources of finance for start-ups vary from venture capital companies, angel investors, early stage investors, accelerators and crowd funding, all looking for the next big idea that can enable them exit in a few years, with a handsome return on investment.

So what is really behind the success of the start-up ecosystem in India?

All factors that contribute in the success of a start-up are now abundantly available in India. Let’s take a look at some of the major factors.

a). Potential entrepreneurs with innovative ideas

Thanks to our IITs, IIMs and now emerging private universities, India today has a steady flow of educated youth that is aware of developments around the world and is willing to dream big and take the risk to convert that dream into a business plan, and finally, plunge into the high risk high reward new age business. Same is true for established corporate executives who are now willing to give up their well paid jobs to join the start-up army and let fly their entrepreneurial spirit. It’s the mindset that has changed, and now there seems to be no limit for an Indian who is more than open to convert his big idea into the next big opportunity.

b). Sources of funding

Several funding options are now available. There are angel investors who are willing to back an idea with no capital input from the entrepreneur. Then there are the early stage investors ($100,000 to $1 million) along with established venture capital firms that are willing to back a new idea. Once the initial round of funding graduates to the next level, there are private equity firms and venture capital companies who are more than willing to extend large amounts ($1 million to $10 million), and then there are companies that focus on the 3rd round of funding for even higher amounts. In many cases, if the business model demonstrates a hockey stick growth curve, very serious capital becomes easily available by the second round of funding. And now, the latest trend to emerge is crowd funding. Here, ideas get advertised over social media, with request for fund support, and investors the world over contribute small sums for a small equity in the business. The investor in this case has the advantage of hedging his bets with a small amount and therefore minimizing his risk, whereas the entrepreneur gets a collective amount that enables him to kick start his business and hopes to scale up to the next round of funding, where venture capital firms begin look at investing in the company. In India today, all types of investors as mentioned above are now looking for investment opportunities. In fact, a significant source of funding is actually coming from entrepreneurs from previously successful start-ups, who have now reached a serious level of valuation in their own businesses. This new breed of entrepreneur is willing to invest a part of his newly created wealth into other start-ups to hedge their bets on the next big idea. All of these together are contributing to the ecosystem for supporting start-ups.

c). Technology

Access to suitable technology has become easy and low cost, unlike in previous years. Today, building an application in-house is easy, as there are plenty of tools and applications to write code and there are enough technically qualified persons available to undertake any software development or hardware integration. These, along with rapid growth of broadband and mobile technology, are enabling factors that drive the start-up ecosystem.

d). Start-up incubators

The government, institutions and private companies, all recognise the need to encourage and support innovative ideas and have now set up technology and innovation parks that have been designed to offer complete infrastructure required by start-ups to launch their businesses. Even educational institutions like the IITs have established technology incubators within their campuses. Technology incubators provide space between 500 sq ft to 1500 sq ft or as required by the business. These come with complete office furniture and broadband connectivity to enable entrepreneurs to get started from day one. Several IT Parks in smaller towns, like those in Kochi, Jaipur and Ahmedabad, are fast emerging as nestling grounds for young entrepreneurs to launch their business.

Will India incubate the next big idea?

The ecosystem to support start-ups is already in place and is evolving further. As more companies get launched, there will be some that will fail, while some will do well enough to grow to the second and perhaps the third round of funding. In coming time, there will be a lot of M&A activity taking place in India amongst those that survive long enough with robust business models. Some may emerge as global companies and it remains to be seen which of these proves to be the next big idea. That’s what all investors are now trying to discover.