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India has become the third largest startup ecosystem in the world after the US and China. According to the Economic Survey 2022 the government has recognised more than 14,000 new startups in 2021-22 against 733 in 2016-17. The total number of recognised startups in the country is now estimated at a huge 61,400. And not only in number of units, the startup ecosystem has expanded geographically too covering a vast area – as many as 555 districts had at least one new startup in 2021 against 121 districts in 2016-17, the survey claims.

In fact, 2021 was a breakthrough year for the Indian startup ecosystem coming through in the middle of a widespread deceleration in economic activities amidst Covid-19 pandemic. The startup sector has not only grown in numbers but has paved the way for a huge wealth creation opportunity. A report by Nasscom, conducted in coordination with research firm Zinnov, said that the start-up ecosystem witnessed a 2X gain in cumulative valuation in 2021 over 2020, with an estimate of $320 - $330 billion, demonstrating the sector's development and recovery throughout the pandemic.

The sharp increase in the valuation of the startup economy was reflected in the number of startups turning into unicorns last year. A record 44 Indian startups achieved unicorn status in 2021, taking the overall tally of startup unicorns in India to 85, with most in the services sector. The year also saw a spectacular rise in capital infusion in the sector.

What is a startup?

What is a startup? As the term suggests startup refers to a company in the first stage of operations. A startup venture could be defined as a new business that is in the initial stages of operation, beginning to grow and is typically financed by an individual or small group of individuals of friends or relatives. It is a young entrepreneurial, scalable business model built on technology and innovation wherein the founders develop a product or service for which they foresee demand through disruption of existing business or by creating entirely new markets. Startups are basically ideas which manifest into innovative and unique commercial ventures.

Ingrained in innovative mindset, a startup aims to remedy deficiencies of existing products and or create entirely new goods or services, disrupting existing ways of thinking and doing business. That’s why many startups are known within their respective industries as “disruptors.”

There’s another key factor that differentiates startups from other existing companies — speed and growth. Startups aim to build on ideas very quickly. They often do this through a process called iteration in which they continuously improve products through feedback and usage data.

Realising the scope and far-reaching impact of startup ventures in the economy the government has announced 'Startup India' initiative launched in 2016 for creating a conducive environment for startups in India. It has defined startup as a business entity incorporated as a private limited company or registered as a partnership firm or a limited liability partnership. Its turnover should be less than Rs 100 crore in any of the previous financial years of its incorporation. An entity shall be considered as a startup up to 10 years from the date of its incorporation.

Expanding startup ecosystem

The basic transformation that has emerged in India’s startup landscape, especially with the beginning of the Covid-19 pandemic, has been digital acceleration, fuelled by smartphone penetration, expanding internet networks and the growing importance of technology as an enabler across sectors and business models.

Indian startups developed indigenous, tech-enabled solutions to combat emerging challenges from testing kits and ventilators to remote monitoring and preventive technologies during the Covid-19 pandemic. They also brought in innovations in supply chain management, logistics, and online education. In fact, one of the paradigm shifts brought about through technology during the pandemic has been systemic shift to online education and remote learning. Solutions built by Indian startups saw widespread adoption not just domestically but also on a global space, firmly establishing the country as a cornerstone of technology and innovation in the world.

The steady rise of Indian technology companies, a large talent pool of a skilled workforce, increased disposable income and rising capital inflows have contributed to this expansion of the startup ecosystem. The steady rise of Indian software companies and rising capital inflows have collectively contributed to the fast changing transformation of the startup ecosystem. Today, India is home to more than 60,000 startups and is building a robust tech and internet infrastructure. Moreover, the ability of the young generation to take risks, to move fast and disrupt existing business models without fear has become India’s biggest advantage today. The fact that Indian startups are becoming global entities by creating products and solutions for world markets is a testimony to this approach.

To add to the impact of innovative technology the startup ecosystem was helped by a remarkable confluence of significantly increased risk capital funding as well as changes in regulatory and business environment to assist the sector.

Growth of the startup economy

The explosion of the startup economy has brought with it new business opportunities, innovation, tech-centric approaches and job creation across sectors. While the flow of investments from traditional industries into tech-focused sectors has been instrumental for entrepreneurs, India’s own growing tech prowess has had a positive impact on its journey.

In 2021 more than 2,250 startups were added – an increase of over 600 compared to 2020 – raising a cumulative amount of $ 24.1 billion in 2021, which is an almost two-fold increase over pre-pandemic levels, as per a report by Nasscom and Zinnov. The startup ecosystem also doubled in cumulative valuation from 2020 to 2021 amounted to approximately $ 320-330 billion, establishing the sector’s development and recovery throughout the pandemic. In addition, at least one-woman founder/co-founder is present in 12-15% of start-ups and 10 unicorns, as per the report.

The report titled ‘Indian Tech Start-up Ecosystem: Year of The Titans’ claims that rising investor confidence, usage of deep-tech, and utilizing unexplored talent pool has resulted in the Indian tech startup ecosystem witnessing steady growth. Compared to 2020, there has been a three-fold increase in the number of deals worth more than $ 100 million, indicating investor confidence with a stable of more than 2,400 active angel investors and a willingness to take significant risks.

Despite the US continuing as the leading source of foreign direct investment in startups, global involvement has also increased with about 50% of the deals having at least one India-domiciled investor. More than $ 6 billion has been raised via public markets with 11 startup IPOs in 2021.

In the last decade, the startup ecosystem was the key provider of direct and indirect job opportunities. Startups registered with the central government have yielded employment to around 6.5 lakh people, claims Anurag Jain, Secretary of the Department for Promotion of Industry and Internal Trade, the nodal agency for the ‘Startup’ initiative launched by the government. In addition to direct employment, these start-ups have generated more than 34 lakh indirect jobs. DPIIT is now strategising to generate 20 lakh new jobs in the sector by officially registering 50,000 new startups in the upcoming four years, that is, by 2025.

A number of factors including increasing supply of right skill sets and knowledge, investments, availability of required talent, and ecosystem support are resulting in entrepreneurs developing solutions with a focus on core requirements, localisation, and the promise of providing equality. Established startup centres such as Delhi-NCR, Bangalore, Chennai, Pune, Hyderabad, and Mumbai account for 71% of all startups. The developing centres like Jaipur, Kochi, Kolkata, Chandigarh, and others accounted for the other 29% of all startups.  As per Nasscom’s revised 2025 prediction, the Indian startup ecosystem is expected to account for 37,000 tech startups, with 180-200 unicorns with a cumulative valuation of $600-700 billion.

Growing number of unicorns

The Indian startup ecosystem is not just growing horizontally but is also growing vertically suggesting the success of existing ones. This is reflected in the increasing number of unicorns. The Indian Unicorns are flourishing in the fast-paced and dynamic economy that has begun recovering after witnessing rapid deceleration following the coronavirus pandemic.

The term ‘unicorn’ – a privately held technology startup with a valuation equal to or over $1 billion – was coined by Aileen Lee, an American angel investor and founder of Cowboy Ventures, a venture capital firm, in 2013. India did not have a single unicorn then.

Till 2016-17 about one unicorn was added every year. Over the past four years, since 2017-18, this number has been increasing exponentially, with a whopping 66% year-on-year growth in the number of additional unicorns being added every year.  As of February 9, 2022, India had 88 unicorns with a total valuation of $ 295.99 billion. Out of the total number of unicorns, 44 unicorns with a total valuation of $ 94.37 billion were born in 2021 and 7 unicorns with a total valuation of $ 9.12 billion were born in 2022.  

There were eight unicorns in 2018, nine in 2019 and eleven in 2020. Last year  44 new unicorns were born. According to Inc42.com, Indian startups raised more than $42 billion across 1,583 deals in 2021 – which was more than the total funding raised by them in the last three years combined. In terms of the number of deals, FinTech and e-commerce companies bagged first and second places, followed by SaaS (software-as-a-service). The country has received $77.8 billion in start-up funding from the year 2018 till the fourth quarter of 2021.

Government initiatives

India needs a huge number of new jobs every year to meet the needs of the ever- increasing job seekers. The existing industries have failed to meet this demand so far. Startup entrepreneurships may prove a crucial player in creating more jobs because it brings new innovations, new jobs and competitive dynamics into the business environment and enterprises. The role of startups in economic prosperity is enhancing in today's world. One of the main advantages of a startup is that it creates new jobs at a comparatively lower capital investment and creates them fast. Global data shows that startups are creating more jobs in our nation than the large companies or enterprises.

Recognising the importance of the startup the government launched the ‘Startup India’ program way back in 2016 with a stated objective to build a strong ecosystem for nurturing innovation and startups in the country that would drive sustainable economic growth and generate large scale employment opportunities.

Under the provisions of this plan, startups were entitled to a number of benefits such as tax incentives including capital gains tax exemption, governments’ assistance in funding, prioritisation of startups in public procurement, etc. The Fund of Funds (FFS) scheme for startups was established to provide funding support for development and growth of innovation driven enterprises as well as to address one of the key challenges faced by start-ups, that is, access to risk capital

Encouraged by the success of the startup sector the government has allocated Rs 283.5 crore for the Startup India Seed Fund Scheme in the Budget 2022-23, which is higher than the revised estimates of about Rs 100 crore of 2021-22. The budgetary allocations for the FFS for Startups stood at Rs 1,000 crore. The government has set up a FFS for startup with a corpus of Rs 10,000 crore. The Small Industries Development Bank of India (SIDBI) is the operating agency for the FFS.
Last April, the government rolled out the Startup India Seed Fund Scheme (SISFS), which aims to provide financial assistance to start-ups for proof of concept, prototype development, product trials, market-entry, and commercialisation.

The world is embracing knowledge economy-led growth. On this path, one of the strongest force-multipliers of India is technology-based innovation and the startup economy. IT services paved the way in the 1990s - taking advantage of the internet boom and liberalisation - and has grown steadily for 30 years. The next step is to identify and strengthen industries with similar value propositions. Now is the turn of the startups to focus on developing solutions that would allow businesses in key sectors to challenge the global competition.