Comment

View from India: Deep tech space attracts venture capital firms

As India leaps forward to become a digitally transformed nation, the Indian technology start-up ecosystem continues to witness a significant growth trajectory on the back of rapid digitalisation and tech adoption.

The digital economy is getting a push thanks to a number of factors that combine to offer a unified set of layers with contactless and presence-less payments. The Unified Payments Interface, for instance, leverages the mobile platform to transfer funds between two bank accounts. Another example, FASTag, relies on radio frequency identification technology to create prepaid rechargeable tags for electronic toll collection; while goods and services tax has conceptualised norms for the online marketplace.

These pillars have reached an inflection point in the wake of Covid-19. Start-ups are not only innovating on top of these layers, but are bringing the unaddressed and under-served tier cities into the larger digital economic inclusion mix. Testimonies include Khatabook, a mobile app for neighbourhood stores to manage their transactions through a digital ledger; and Udaan, a B2B trade platform that happens online or through a mobile app. 

In the face of adversity, start-ups have been able to create a flywheel of sustained innovation that will be instrumental in helping the Indian start-up ecosystem achieve velocity.

Covid-19 has accelerated digital adoption and the shift to online services and transactions in the country. Tech start-ups are capitalising on this opportunity with rapid digital acceleration and a shift to SaaS-based (Software as a Service) solutions.

Deep-tech is imbedded in the DNA of start-ups, with 19 per cent of tech start-ups leveraging deep-tech solutions to build product competencies for market expansion. With over 1,600 tech start-ups and a record 12 additional unicorns (start-ups valued at more than $1bn) added in 2020, the highest ever in a single calendar year, the Indian tech start-up base is witnessing a steady growth at a scale of 8-10 per cent year-on-year. 

“The resilience and fortitude demonstrated by the Indian start-up ecosystem in 2020 was unparalleled and unprecedented," said Pari Natarajan, CEO, Zinnov. "It was about defying the odds with extraordinary innovation and exceptional leadership. 2020 saw start-ups increasingly leveraging and piggybacking on the foundational infrastructure that the government has in place – the India Stack.” 

This has resulted in a significant momentum in the deep-tech space, with venture capital firms and funding agencies investing in deep-tech start-ups much more. To illustrate, 14 per cent of total investments in 2020 were in deep-tech start-ups, up from 11 per cent in 2019, with 87 per cent of all deep-tech investments being in artificial-intelligence machine-learning start-ups.

“The Indian tech start-up ecosystem’s performance in 2020 has demonstrated the resilience and ‘can-do’ spirit of the Indian entrepreneur. The continued innovation, right decision-making and strong investor commitment have positioned the Indian start-up ecosystem as a key contributor in accelerating India’s digital economic growth,” added Debjani Ghosh, president, NASSCOM.

With the continued addition of new start-ups, booming unicorns and increased adoption of deep-tech, the ecosystem shows an even more promising future. “Depending on headwinds, 2021 promises to be a positive year for Indian tech start-ups – marching steadily towards $1tn digital economy goal,” said Ghosh on an optimistic note.

Over 60 unique corporates have invested in start-ups and 55 per cent of open-innovation programmes are operated by global multinational corporations. Despite a lower number of total start-up deals in 2020, seed-stage investments are recovering at a good pace as investor activity at lower ticket sizes has increased. Seed-stage funding in 2020 recovered to more than 90 per cent of 2019 levels. Early- and late-stage investments are also recovering steadily. An increase in median deal size is further underscoring investor confidence and a willingness to take big bets.

Sectors with Covid-19 tailwinds such as EdTech, BFSI (banking, financial services and insurance), AgriTech and gaming are witnessing a steady increase in first time funding. This has gone up from 29 per cent in 2019 to 42 per cent in 2020, garnering a 14 per cent growth in absolute numbers.

In 2020, Indian tech start-ups not only managed to stay afloat amid uncertainties and rapid experimentations, but also strategically strengthened their playbook by converting the crisis into opportunity. As a result, the digital maturity of Indian enterprises has jumped from 34 per cent in 2018 to 55 per cent in 2020.

Remote working continues to see significant adoption among tech start-ups, with around 30-35 per cent offering remote roles and 15-20 per cent of companies having committed to the remote work culture, according to a NASSCOM (National Association of Software and Services Companies) tech start-up survey. With rising digital adoption and remote working reducing geographical disadvantages, tech start-ups are expanding into global markets with 28-30 per cent targeting the overseas market for growth and business expansion.

Cross-border trade restrictions in 2020 accelerated peer-to-peer collaborations and public-private partnerships leading to fast and effective knowledge transmission. In fact, as per the survey, 66 per cent of tech start-up founders are exploring partnerships post-pandemic.

Although cautiously optimistic, 2021 promises a return to normality for the Indian tech start-up ecosystem. Deep-tech and new start-up hubs will continue to grow at 40-45 per cent compounded annual growth rate. While investments in 2020 were significantly lower than in 2019, recovery in deal pace and investments is expected to return to, if not exceed, 2019 levels in 2021. In terms of total unicorns, India is on track to have a 50-plus strong unicorn club in 2021. Mergers and acquisitions deals and initial public offering pipelines are also expected to accelerate in 2021.

However, as normality returns for start-ups, certain proactive measures are required to ensure the continued momentum and growth. These include policy measures as well as investments by the government to build infrastructure. An ecosystem should be in place for market access for early stage start-ups. Corporate participation needs to be accelerated as much as the seed stage investments for tech start-ups. The latter is currently less than 10 per cent of the total investment received each year. An increase in the share of domestic capital and expansion of talent base in the country will help bolster growth.  

In a nutshell, 2021 is projected to be the ‘Decade of Collaboration’, where entrepreneurs will engage more with not just their peers but also with the government, corporates, and the manufacturing ecosystem. This will catapult India’s dreams of becoming a trillion-dollar economy.

All of this is part of the 'Indian Tech Start-up Ecosystem – On the March to Trillion Dollar Digital Economy'. This annual start-up report has been launched by NASSCOM in partnership with global management-strategy consulting firm Zinnov in January 2021.

Sign up to the E&T News e-mail to get great stories like this delivered to your inbox every day.

Recent articles