The impact of startups has been significant in all walks of life. In recent years, India has emerged as one of the top three countries globally in terms of the number of startups founded. The total venture investment in startups during the period 2005-15 is estimated at ₹1117 billion (using 2015 as the base year). Actual investment could be much higher since details of investment amount are not available for many of the deals. The average annual growth rate in investment flow during the period 2005-15 is about 42 percent. Between the years 2005-15, more than 10,000 startups have received funding.
The average annual growth in the number of startups that have been funded for the period 2005-15 has been 16 percent. In most sectors, there has been an equivalent Indian start-up to that of a foreign start-up. While many foreign startups have also started operations in India, the presence of an Indian start-up meant that the Indian consumer need not have to wait till the foreign company started operations in India.
Global and Indian start-up landscape
Indian start-up landscape is very vibrant as seen by the number of companies founded. In some of the sectors, the number of companies founded in India is close to the number of companies founded globally. The average investment per round in a start-up is higher globally, but the difference is not very large. A major concern would be the low proportion of startups that get funded in India. For example, the percentage of global startups that are able to successfully raise capital in the grocery tech, healthcare and consumer healthcare, and smart home and home improvement are 41 percent, 52 percent, and 36 percent respectively. The corresponding percentage for Indian startups are 5 percent, 10 percent, and 11 percent. There is a time lag in the setting up and funding between global and Indian startups.
The growth and the funding of the Indian startups in different sectors occurs later than what is seen for global startups. In this report, we analyze the key trends in startups and start-up ecosystem in India. Broadly, the report includes the following components: incubation, accelerators, angel investors and angel networks, and venture funds. An important feature of this report is an analysis of the pool of startups that get founded and not just the startups that get funded. A comparative analysis of startups that have been funded and those that have not been funded provides interesting insights.
Incubation facilities for Startups
Pivotal role of universities
About 56 percent of the incubators are located in universities, indicating the important role played by universities in supporting entrepreneurship and startups. One third of the incubators are located in private universities. Incubators in universities supported 58 percent of the total incubatees being supported in different incubators. In addition to the traditional teaching, research, and industrial collaborations, universities are increasing playing a very important role in creating ventures.
Sector focus of startup incubators in India
Technology sector is supported by the largest number of incubators. After technology, the healthcare sector occupies the second position in terms of the number of the incubators supporting it. Telecommunications, industrials, and consumer goods come close, in terms of the third spot. The number of incubators supporting the other sectors are very limited. Incubation is not seen as the preferred approach in commercializing innovations such as in utilities or in the oil and gas sector.
Growth in incubator presence
More than 50 percent of the incubators were set up in the last five years. While the number of incubators in different types of cities were more or less equal till 2010, there has been a dramatic increase in the number of incubators in Tier 1 cities after 2010.
Incubation thesis varies between incubators
Average number of incubatees supported in the different type of incubators vary widely. While the average number of incubatees is around 36 in universities, it is only 13 in the case of private non-universities. This indicates that different type of incubators could have different investment thesis. Independent private sector incubators without any university affiliation might have more stringent criteria because the financial sustainability of the incubators could depend on the success of the incubatees. On the other hand, incubators supported by the government institutions could have the primary objective of encouraging startups rather than just financial success, and thus they are prepared to support more number of incubatees.
Startup Accelerators in India
While incubators are present across different locations in the country, accelerators are essentially an urban phenomenon
Except for a couple, virtually almost all of the accelerators are located in the main cities – Chennai, Bengaluru, Hyderabad, Mumbai, Ahmedabad, and New Delhi. The highest number of accelerators are found in Bengaluru, followed by the NCR region and Mumbai.
Scale of the startup accelerator programs
In our sample, 17 accelerators have supported a total number of 1816 startups. Though some of the accelerators like 500 startups, Kyron, TiE Bootcamp have been associated with a large startups, in general, accelerators are able to guide more number of startups as compared to that of incubators.
Angel Funding in India
Angel investments in Tier 1 and 2 cities
Companies in Tier 1 cities are getting funded earlier and obtaining larger amounts of funding. Average deal sizes for companies in Tier 1 cities are about 62 percent higher than that of deals in Tier 2 cities. Investment rounds are more than 40 percent higher in Tier 1 cities as compared to that of Tier 2 cities.
Growth in angel investments
Angel deals have shown an annual average growth rate of 124 percent during the period 2008 – 15. The estimated investment amount through angel deals has grown at an annual growth rate of 205 percent during 2008-15. The number of angel investors also has grown at an annual average of 107 percent during the above period. While the number of first time angel investors has grown at a rate of 98 percent, the growth rate of investors who are reinvesting has been 105 percent.
Age of startups at the time of receiving angel investment has consistently decreased
There has been a steady decrease in the average age of the start-up at the time of receiving angel investment from 4.77 years in 2008 to 0.54 years in 2015, indicating that age of the start-up at the time of investment has reduced by about 27 percent annually. However, the average investment amount has increased.
Profile of angel investors
Analysis of the angel investor sample indicated a good mix of experienced (i.e., who have made five investments or more) as well as new investors (i.e., who have made less than five investments). The proportion of the former was 48 percent while that of the latter was 52 percent, indicating that the mix of angel investors is well balanced. In terms of their professional background, senior executives from large corporations comprised the largest segment, accounting for more than half of the investors. Entrepreneurs comprise the second highest category, accounting for close to 40 percent of the investors. The traditionally wealthy, i.e., those engaged in family businesses account for less than 9 percent of the investor sample.
Location of angel investors
Analysis of registered angel investors in Lets Venture platform shows that 88 percent of those are from Tier 1 cities. The number of angels in Tier 2 and 3 cities are 11 percent and one percent respectively. Among the six tier 1 cities. Delhi (i.e., the National Capital region that comprises of adjacent cities to Delhi such as Gurgaon, Noida, and Okhla) has the largest number of angel investors, followed by Mumbai and Bangalore. Taken together, these 3 cities account for 88 percent of the total angel investors in Tier 1 cities. The remaining cities of Chennai, Hyderabad, and Kolkata account for only 12 percent of the total investors in Tier 1 cities.
The active as well as the occasional angel investors have a part to play in the growth of angel investing
Angel investors were classified into two separate quartiles based on the number of deals and the amount of investment. Based on the number of deals it was found that top quartile investors have a higher degree of sector concentration with most investments in technology whereas the bottom quartile investors exhibit a higher degree of diversity in terms of the number of deals in different sectors. Based on the investment amount, it was found that the active angels invest lower amounts per deal, but make more number of investments whereas occasional angels on an average invest higher amounts per deal. As a group, the aggregate investment made by occasional angels are also higher than that of active investors.
The rise of angel networks
A noteworthy development in the last few years has been the evolution of the angel networks. While many of the angel networks are organized around cities (such as The Chennai Angels, Mumbai Angels, and so on), there are other forms of networks as well. The annual growth rate of the number of investments by angel networks made during the 2009-15 period has been about 75 percent. In a span of 7 years, the number of networks have increased 20 times.
Average investment amounts made by angels have consistently increased
The average investment received from an angel round by a start-up has increased from ₹10.63 million in 2009 to ₹46.76 million in 2015 indicating an annual growth rate of 27 percent. The average investment made by an individual angel investor has increased from ₹2.16 million in 2009 to ₹16.95 million in 2015, indicating an annual growth rate of 34 percent. Individual investments made by angels in a networking platform are lower. For example, data from Lets Venture indicates that the average investment per investor was about ₹11 million. The number of investors is the highest for the average commitment amount of ₹500,000, followed by ₹1 million. Beyond that, there is a sharp fall in the number of investors, indicating that the sweet spot for investors in an angel networking platform is between ₹0.5 – 1 million.
Venture Funding in India
Contours of start-up founding differ from that of SME’s
The geographical spread of SMEs and startups show interesting variations. Tamil Nadu and Gujarat has the highest number of SMEs, but they are not the top states in terms of venture funded startups. On the other hand, Karnataka and Maharashtra, which account for the highest number of venture funded startups do not occupy the top slot in terms of number of SMEs. This indicates that the ecosystem for development of SMEs and startups could be different.
Venture funding is concentrated in Tier1 cities
The 6 Tier 1 cities of India received the largest chunk of investment of ₹661.29 billion, accounting for about two-thirds of the angel and venture funding. Tier 2 cities received 31% of the total investment (about ₹306 billion) and startups in Tier 3 cities accounted for only ₹19.74 billion, which is about 2 percent of the total investment. There exists a big gulf in investment flow between startups in Tier 1 cities and the other two tiers.
Comparison of funded and non-funded startups Maturity index of startups that have received funding are higher
Maturity index of startups were calculated based on the lifecycle stage of the start-up. The average maturity index of startups that have received funding was 3.54 whereas those that did not get any funding was 3.00. Startups that were a part of incubation or accelerators also had a higher maturity index (3.4) as compared to those that did not receive any incubation or acceleration support (3.0).
Incubators and accelerators can increase the probability of getting funding
In the overall sample, only 8.3 of the startups are successful in getting external funding. But among those who have been a part of an incubator or accelerator, 24 percent have been able to get external funding. Thus incubators and accelerators have been able to increase the chance of getting funded by about three times. Similarly, 5 percent of those who have been with an incubator or accelerator have been able to get funding on the LetsVenture platform, while the proportion of those getting funded on the platform for the overall sample is only 1.1 percent. Incubators and accelerators have thus been able to increase the chances of getting funded on the LetsVenture platform by five times.
Odds of success for getting funded continue to be low
In our estimate, for every 875 startups that get founded, only one is able to successfully raise 4 or more rounds of funding. Out of the total startups that get founded, about 6 percent take part in an accelerator or incubation program. 75 of the 875 are able to get first round of funding, out of which only 15 are able to get the second round of funding, and only 5 are able to secure the third round of funding.
The line of separation that distinguishes the funded and non-funded startups can often be very thin
The case study of Keiretsu Forum, Chennai Chapter, indicates that the average number of positives (or concerns) is just higher by a count of 2 (or lower by a count of 2) for the invested companies as compared to that of non-invested companies. Similarly, the average prior investment made by companies as seen from Chennai Angels is not very different between the invested and applicant companies (₹7.98 vs ₹6.88 million respectively).
However, the case studies also provide various pointers on increasing the probability of success. The most common causes of rejection of proposals has been limited interest among the angel network members, low traction, and scalability issues. Data from Keiretsu Forum indicates that the strengths of the business model, the value proposition, and market size are significant factors that influence the investment decision.
The count of concerns for companies that were not successful in receiving investment was considerably higher for the following parameters: business model, customer traction, margins and profitability and market size.
Approaching the funders through a reference can improve the odds of funding
Increasingly, investors are relying on developing a proprietary deal flow network. For one of the venture firms interviewed for this report, 37 percent of the deal flow was through personal contacts. In terms of the importance of references, the finding from The Chennai Angels case study provides an important perspective. Ninety two percent of the investments made by The Chennai Angels were sourced through or had a reference from angel investors or members of the angel network. None of the deals that were received directly without any reference were successful in getting funding.
The article is written by Dr. Thillai Rajan A., Professor, IIT Madras and International Research Affiliate, Coller Institute of Venture, Tel Aviv University for FICCI’s Economy Watch.