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Archana Jahagirdar, Rukam Capital
Archana Jahagirdar, Rukam Capital

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Venture capital opportunities in India’s startup ecosystem

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Archana Jahagirdar, Founder, Rukam Capital, writes that India’s elections have generated significant international interest, with extensive analysis of what it means for one of the world’s biggest economies and for investment opportunities in India’s future.

As one of the leading Indian venture capital firms, we would make the following points to global investors looking at India, without getting into party political analysis.

Firstly and fundamentally, India’s economic prospects remain extremely robust. India is on track to become the third largest economy in the world by 2030. It is expected by the IMF to be the fastest growing major economy in the world this year at 6.8 per cent, and to continue at 6.5 per cent in 2025.

This growth is being powered by compelling long-term trends. India’s working age population to population ratio will be the highest of any largest economy by the end of this decade, and consumer spending is set to double in size in the same period.

Even better, India’s growth is digital-led. Between 2018 and 2023 the number of internet users in the country increased from 398 million to 907 million, growing from 29 per cent of the total population to 64 per cent. There are now nearly a billion mobile phone users in India, more than two-thirds of the total population.

Secondly, one of the best ways to access India’s highly attractive growth is via investing in startups.

India now has the third largest startup ecosystem in the world. There was a period of extraordinary growth between 2020 and 2022, when the number of unicorns trebled to over 100 and the number of startups increased by over 50 per cent to 57,000 with a combined valuation of over USD450 billion.

The picture became more complex in 2023 which was a difficult year for a number of reasons including a global economic slowdown and post-Covid market corrections. There was a sharp decline in deal volume and fundraising, which fell 50 per cent overall.

Now, however, there are clear indicators that growth is returning. The number of startups in India rose from 57,000 to 68,000 last year. The number of unicorns has also continued to grow, to 115, with 112 “soonicorns” in the pipeline.

Thirdly, the Indian government has been very supportive of the Indian startup ecosystem and this is very likely to continue.

Previous initiatives include the Fund of Funds for Startups (FFS) scheme, the Startup India Seed Fund Scheme (SISFS), and the Credit Guarantee Scheme for Startups (CGSS). These were implemented under the Startup India initiative to provide capital at various stages of a startup’s business cycle. The government also previously announced several new measures including tax concessions for startups and customs duty exemptions for EV-related capital goods and machinery.

Fourthly, there are other strong factors which could drive future growth. Last year, it was reported that Indian investors have lined up about USD20 billion in dry powder–capital waiting to be deployed in startups. India retained its position as the second-largest destination for venture capital and growth funding in the Asia Pacific region.

The exits that VC funds were able to secure in 2023 in India amounted to USD3.46 billion across 79 deals. That number is likely to rise significantly in the years to come as the Indian startup ecosystem resumes its growth trajectory.

Fifthly and finally, this positive outlook is further supported by the growing focus on high-innovation sectors such as BioTech, Speciality Chemicals, HealthTech, and DeepTech. All of this is being driven by venture capital investment and demonstrates the growing maturity and sophistication of the VC industry in India.

The result of these positive tailwinds for the Indian startup ecosystem is that there is likely to be increased international investment deployed into the space via Indian VC funds as global allocators increasingly recognise the highly attractive opportunities available.

These investors will be likely to recognise that they cannot allocate capital without having the right partner on the ground that can guide them through the complexities and nuances of the Indian market. Indian VC funds that can demonstrate both a strong track record and a distinctive investment philosophy and that have sophisticated international quality operational infrastructure will be best-placed to be those partners.

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