India's Startup Ecosystem: The Need for More Domestic Funds

Why India's startup ecosystem needs more domestic funds

India's startup ecosystem is growing from strength to strength. Founders are displaying increasing confidence and resilience, while investors are showing greater conviction in their ventures. Supportive GoI policies have also played a significant role, with DPIIT-registered startups nearing 1.5 lakh and tens of thousands more at various stages of their journey. The ₹10,000 cr Sidbi Fund of Funds has backed 129+ domestic VC funds, providing much-needed support to new domestic VC funds. In 2019-23, India's startups have raised over $100 bn. But this success hides a significant weakness: low share of India's domestic capital in funding these startups. In 2023, less than 15% of the capital invested in Indian startups came from domestic sources. For the world's third-largest startup ecosystem and the world's fifth-largest economy, such excessive dependence on foreign capital is striking. This dependency poses several risks: Volatile inflows: Foreign investment flows can be influenced by global economic conditions and geopolitical factors, which often override economic determinants. The two larger startup ecosystems in the world, the US and China, were built on a bedrock of domestic capital, unlike Europe. Hence, they prospered and endured. Further, priorities of foreign capital may not always align with needs of the domestic economy. Security concerns: As Indian startups delve deeper into sensitive sectors like defence, space, cybersecurity and AI, there will be a need to fund these enterprises exclusively with domestic capital to safeguard national interests. Domestically funded startups are more likely to be permitted into sensitive sectors due to their key talent and management being in India, developing and retaining core intellectual property in India, and readiness to follow the law of the land. This is crucial for building a startup sector that can serve all strategic needs without being restricted by its source of capital. Stable source: Domestic capital is a more stable source due to deeper local knowledge, better understanding of context and longer-term commitment from domestic investors. Startup founders, domestic family offices and PE/VC players from the country are also more likely to channel proceeds from startup exits into new startups. There are compelling reasons why India's startups will continue to attract foreign capital: the size and depth of the Indian opportunity, and a relatively more developed PE/VC ecosystem outside India willing to take greater risks. However, in the second decade of India's startup growth, more needs to be done to correct this imbalance. An environment that attracts domestic capital towards Indian startups in a similar way is essential. Domestic investors, including HNIs, family offices, VC firms, corporate treasuries, banks and insurance companies have a crucial role in the evolution of the Indian startup ecosystem. Fortunately, there has been significant progress in recent years. Domestic investors, family offices and public-market investors are participating in the private funding rounds and IPOs of Indian startups. Founders who have made successful exits, or have unlocked the value created, are investing significantly in Indian startups. The number of family offices in India has seen a remarkable increase. In 2018, there were only about 45 family offices actively investing in the country. By 2024, this number surged to 300. According to a June PwC report, these increasingly recognise the potential of Indian startups and are investing more actively. Investments by Indian corporates and family offices provide additional benefits, including access to mentorship, connections to the existing corporate ecosystem and a longer-term perspective on the Indian markets. This growth is a testament to the maturing domestic VC ecosystem, which has become more robust and somewhat immune to global economic waves. We must also scale up the Fund of Funds programme to deploy not ₹10,000 cr over 10 years, but ₹10,000 cr a year, to significantly amplify the capital domestic VC firms can raise. That is the scale of ambition we need domestic capital to exhibit. The 2024 budget has met a key request for reducing LTCG on unlisted equities. This has been met with the tax rate moving down from 20% to 12.5%, albeit with the removal of indexation. While the impact of this is still to be assessed, it does introduce parity between the taxation rates on listed and unlisted securities. However, unlisted securities must still be held for two years to qualify for long-term taxation, while the period is only one year for listed securities. Notwithstanding this, this is a more equitable playing field that will encourage domestic investors to funnel more capital into the startup ecosystem. The growth of India's startup ecosystem is a story of remarkable resilience and opportunity. But to build a truly self-reliant and enduring startup ecosystem, a substantial increase in domestic capital investment is imperative. This will add to India's economic heft, protect the economy from geopolitical pressures, channelise investments towards domestic priorities and ensure that each wave of successful startups unlocks capital for future startups. The writer is co-founder, Snapdeal,and Titan Capital

Why India's startup ecosystem needs more domestic funds - The Economic Times

India's startup ecosystem is growing from strength to strength. Founders are displaying increasing confidence and resilience, while investors are showing greater conviction in their ventures. Supportive GoI policies have also played a significant role, with DPIIT-registered startups nearing 1.5 lakh and tens of thousands more at various stages of their journey. The ₹10,000 cr Sidbi Fund of Funds has backed 129+ domestic VC funds, providing much-needed support to new domestic VC funds. In 2019-23, India's startups have raised over $100 bn. But this success hides a significant weakness: low share of India's domestic capital in funding these startups. In 2023, less than 15% of the capital invested in Indian startups came from domestic sources. For the world's third-largest startup ecosystem and the world's fifth-largest economy, such excessive dependence on foreign capital is striking. This dependency poses several risks: Volatile inflows: Foreign investment flows can be influenced by global economic conditions and geopolitical factors, which often override economic determinants. The two larger startup ecosystems in the world, the US and China, were built on a bedrock of domestic capital, unlike Europe. Hence, they prospered and endured. Further, priorities of foreign capital may not always align with needs of the domestic economy. Security concerns: As Indian startups delve deeper into sensitive sectors like defence, space, cybersecurity and AI, there will be a need to fund these enterprises exclusively with domestic capital to safeguard national interests. Domestically funded startups are more likely to be permitted into sensitive sectors due to their key talent and management being in India, developing and retaining core intellectual property in India, and readiness to follow the law of the land. This is crucial for building a startup sector that can serve all strategic needs without being restricted by its source of capital. Stable source: Domestic capital is a more stable source due to deeper local knowledge, better understanding of context and longer-term commitment from domestic investors. Startup founders, domestic family offices and PE/VC players from the country are also more likely to channel proceeds from startup exits into new startups. There are compelling reasons why India's startups will continue to attract foreign capital: the size and depth of the Indian opportunity, and a relatively more developed PE/VC ecosystem outside India willing to take greater risks. However, in the second decade of India's startup growth, more needs to be done to correct this imbalance. An environment that attracts domestic capital towards Indian startups in a similar way is essential. Domestic investors, including HNIs, family offices, VC firms, corporate treasuries, banks and insurance companies have a crucial role in the evolution of the Indian startup ecosystem. Fortunately, there has been significant progress in recent years. Domestic investors, family offices and public-market investors are participating in the private funding rounds and IPOs of Indian startups. Founders who have made successful exits, or have unlocked the value created, are investing significantly in Indian startups. The number of family offices in India has seen a remarkable increase. In 2018, there were only about 45 family offices actively investing in the country. By 2024, this number surged to 300. According to a June PwC report, these increasingly recognise the potential of Indian startups and are investing more actively. Investments by Indian corporates and family offices provide additional benefits, including access to mentorship, connections to the existing corporate ecosystem and a longer-term perspective on the Indian markets. This growth is a testament to the maturing domestic VC ecosystem, which has become more robust and somewhat immune to global economic waves. We must also scale up the Fund of Funds programme to deploy not ₹10,000 cr over 10 years, but ₹10,000 cr a year, to significantly amplify the capital domestic VC firms can raise. That is the scale of ambition we need domestic capital to exhibit. The 2024 budget has met a key request for reducing LTCG on unlisted equities. This has been met with the tax rate moving down from 20% to 12.5%, albeit with the removal of indexation. While the impact of this is still to be assessed, it does introduce parity between the taxation rates on listed and unlisted securities. However, unlisted securities must still be held for two years to qualify for long-term taxation, while the period is only one year for listed securities. Notwithstanding this, this is a more equitable playing field that will encourage domestic investors to funnel more capital into the startup ecosystem. The growth of India's startup ecosystem is a story of remarkable resilience and opportunity. But to build a truly self-reliant and enduring startup ecosystem, a substantial increase in domestic capital investment is imperative. This will add to India's economic heft, protect the economy from geopolitical pressures, channelise investments towards domestic priorities and ensure that each wave of successful startups unlocks capital for future startups. The writer is co-founder, Snapdeal,and Titan Capital