Partnering with Indian Startups – New Opportunities for Foreign Investors

Posted by Written by Bradley Dunseith

India is the world’s third largest startup hub; a reported 1,000 new companies were incorporated in 2017.

Since 2015, India’s startup ecosystem has steadily matured. Indian startups are diversifying their focus across a myriad of economic segments and have embraced technological innovation to meet the country’s unique challenges. At the same time, local companies are yet to disrupt the Indian economy – to the extent that some of their foreign counterparts have.

Foreign companies partnering with Indian startups can leverage their own technological expertise to create disruptions in the economy while up-skilling India’s legion of engineering, information technology (IT), and business management professionals.  

In exchange, Indian startups will provide not only access to networks and industry talent, but also critical assistance in localizing products and services for the Indian market while attracting new flows of India-oriented funders.

India’s maturing startup ecosystem

In 2015, Indian startups received an estimated US$9 billion spread over more than 1,000 deals. Funding in 2015 surpassed the total cumulative capital that Indian startups received in the previous four years combined.

This sudden, global interest in Indian startups is part of a larger story – one that sees deepening internet access among India’s 1.3 billion people, which has accelerated through flagship government incentives, such as Digital India and Startup India.

Many of the startups benefiting from such unprecedented funding exposure specialize in business-to-consumer (B2C) services, which replicated the working business models of global online unicorns – Uber and Amazon.

In 2016, however, the euphoria for the Indian startup waned. Funding dipped to US$4 billion, and several startups that took advantage of early funding frenzies faced tougher investor questions about the workability of their business plans and scalability of their operations. Business models lifted from Western companies naturally struggled to succeed outside India’s metro cities and into key tier II and III cities.

If 2016 was a year of growing pains for India’s startups, then 2017 has been the year of maturity. Out of 1,000 new startups that formed in 2017 – over 20 percent are based in tier II and tier III cities. Startups have brought in neighbourhood and ‘mom and pop’ stores onto the digital marketplace and have innovated hyperlocal services. Additionally, many such ventures are targeting regional market shares by making their platforms available in local language interface and modified for mobile consumers with low data access.

In the first half of 2017, Indian startups raised over US$11 billion in funding. Admittedly, the majority of this funding – nearly US$9 billion – went to ten companies, including PayTM, Ola, and Flipkart.

Smaller companies, however, continue to receive millions of dollars in capital. Importantly, a trend has emerged whereby several new digital startups are being led by industry insiders. These individuals are guiding the next generation of startups based on their experiences working in established Indian firms valued at over US$1 billion.   

In 2017, India’s federal government eased compliance requirements and foreign funding restrictions on startups. This is because the government now recognizes the importance of India’s startup ecosystem – to attract FDI, create jobs, and boost India’s industry capabilities.

Digital solutions for Indian problems: Profiling emerging startups 

Out of the estimated 3,000 startups active in India, 60 percent work in B2C sectors, which sell directly to consumers; a growing 40 percent of Indian startups work in business to business (B2B) verticals, which sell to or service other businesses.

The most successful Indian startups in B2C focus on services such as food delivery, e-commerce, financial technology, travel and hospitality.

Successful Indian startups in B2B utilize advanced technologies like cloud computing, AI, and big data to increase operating efficiency, track consumer habits, and minimize costs.

Agricultural technology

Over 58 percent of rural India depends on agriculture for their livelihood. Though India is one of the largest producers of fruits and vegetables, export potential is rarely met due to high levels of food wastage. The agricultural technology (AgriTech) industry in India has a US$200 billion potential in rationalizing supply chains and improving farming efficiency.

There are 250 Indian companies working within AgriTech. In 2016, an approximate US$313 million went to 53 AgriTech startups. These startups have incorporated local languages into their digital applications to work directly with rural farmers. FarmLink, an AgriTech company from Mumbai, directly connects farmers to industrial level food processing – eliminating a long chain of market middlemen who add to cost and waste in the transportation of produce.

Financial technology

There are an approximate 360 active Indian startups in financial technology (FinTech). In the first half of 2017, Indian FinTech startups received over US$200 million in funding. Many of these companies utilize AI and machine learning to create fast and reliable micro-finance and insurance platforms for small and medium enterprises (SMEs).

The 2016 demonetization of high currency notes sparked a proliferation of electronic payment systems for both B2C and B2B throughout India. PayTM, one of the country’s leading FinTech startups to capture India’s post-demonetization e-commerce momentum, received US$1.4 billion in funding in the first half of 2017. 

Healthcare technology

There are at least 320 healthcare technology (HealthTech) based startups currently active in India. In the first half of 2017, HealthTech companies in India received US$160 million in funding. Netmeds, for example, delivers prescription medicines to small towns and villages across India. Practo, which raised US$55 million in 2017, allows users to assess health issues, book medical appointments, and store records on the same platform.

Other HealthTech companies have rolled out affordable medical and fitness devices, which can be linked to smartphones and other devices.

Biological technology

Startups in the biological technology (BioTech) have focused on outsourcing both research and clinical trials from larger institutions and use big data to innovate solutions to public health challenges. For instance, Bangalore based Bugworks received US$2.6 million in 2017 to develop treatments for multidrug-resistant infections. While the active number of Indian startups working in BioTech is currently unconfirmed, the Association of Biotechnology Led Enterprises anticipates an ambitious creation of 2,000 biotech companies by 2020.

Localizing disruption

Indian startups have successfully adapted global business models to the peculiarities of the country. However, as the Indian business tycoon and startup investor Ratan Tata recently remarked, startups in India have yet to prove to be truly disruptive.

While Indian companies have begun to embrace advanced technologies, Indian professionals often lack the necessary skills to activate its full potential. Here, foreign businesses can leverage their own expertise from their markets back home. As foreign companies bring in new technologies, domestic startups can assist in localizing business strategies: forging game-changing products and services that will succeed throughout the subcontinent.

Access to new capital: Benefits of an Indian partnership

Foreign companies looking to partner with Indian startups will not only gain new market access, they will also access new funding opportunities. Recent estimates place unutilized, India-directed startup funding at a massive US$25 billion.

Foreign and local investors are earmarking an increasing amount of funds towards Indian startups with unique, culturally-minded business models that incorporate new technologies. Ratan Tata, for example, recently co-founded a US$300 million venture capital fund for Indian startups in partnership with the University of California.

As Rohit Manchanda of the New South Wales Government explained, “India’s rapid growth coupled with the hunger for innovative solutions to cater to Indian needs, provides opportunities for startups globally to offer their unique solutions in India and also partner with Indian startups for co-development.”

Such participation, collaboration, and partnership will allow businesses to embed themselves as key components of India’s rapidly evolving, technologically-oriented economic growth story.  

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Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout India and the Asian region. We maintain offices in Delhi and Mumbai and throughout China, South-East Asia, India, and Russia. For assistance with India investment issues or into Asia overall, please contact us at india@dezshira.com or visit us at www.dezshira.com.

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