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ALL ABOUT THE MONEY

There’s a serious problem with how Indian startups are being funded

By Ananya Bhattacharya & Durba Ghosh

After a brief slowdown, investors are once again flocking to Indian startups—but only to the big boys.

In the 12 months ended September 2018, investments into Indian startups more than doubled from a year ago to $4.2 billion (Rs30,805 crore), according to a report released by IT industry body Nasscom with Bengaluru-based consultancy firm Zinnov. This shows global investors’ renewed hope in the Indian startup ecosystem, which had a tough 2016-17 amid a global funding crunch.

However, the good news is limited to large companies while young startups are still struggling.

Late-stage (series C and after) funding deals—such as in the case of Flipkart and Oyo—tripled to $3 billion between September 2017 and September 2018 from $847 million a year ago.

But seed funding (the first stage of venture capital financing) took a 21% hit, declining to $151 million. “We are seeing a continuous decline in seed-stage funding of startup companies,” Nasscom president Debjani Ghosh said. “We need to find alternate ways to boost seed-stage funding because if that doesn’t happen, it will kill innovation.”

But the lack of funding is not stopping Indian techies from hopping on to the startup bandwagon. The country added over 1,200 startups in the year till September 2018, bringing the total up to over 7,200, helping India retain its position as the third-largest startup ecosystem worldwide after the US and the UK.

A new wave of growth

Most of the growth in funding has come from advanced technology startups working in areas like data analytics and artificial intelligence. “While the overall base is growing at 12%-15%, the deep tech is growing at a healthy 50%,” Ghosh said.

Advanced Tech5-year CAGR (number of startups) (2013-18)
Data Analytics18-20%
IoT15-17%
AI54-58%
AR/VR26-28%
Blockchain>100%

These sectors have “witnessed a momentous rise in 2018, driven by factors such as (the) increase in internet penetration, better infrastructure for digital transactions, government push on financial inclusion and innovative tech accelerating the pace of payments, lending, and digital banking,” Nasscom said in its report.

Innovation is no longer just coming from the big cities. Now, four in 10 startups operate outside of Bengaluru, Delhi NCR, and Mumbai.

Even gender parity is on the rise, with more women founders entering the fray.