Entrepreneurship is embedded in India’s economy and culture. This opinion piece traces the roots of India’s startup ecosystem and where it is headed in the future. The co-authors include Somshubhro Pal Choudhury, a partner at Bharat Innovation Fund, a $100 million venture fund that backs entrepreneurs building deep-tech companies in India; Supriya Sharma, partner – insights at CIIE.CO, a leading entrepreneurship center based at the Indian Institute of Management – Ahmedabad; and Sanjay Jain, a partner at Bharat Innovation Fund.

India’s startup economy has been booming. The last decade has seen significant activity on multiple fronts including the founding of new startups, amount of funding and number of investment rounds, influx of global investors and startups, development of regulatory infrastructure, global mergers and acquisitions, and internationalization. Entrepreneurial success stories abound. At last count, India had 26 unicorns, with eight new entrants joining the club in 2018 alone.

For example, consider Byju’s, one of the newly minted unicorns in the K-12 online education space, which today has a valuation of $5.5 billion. Started in 2011 by a former schoolteacher, Byju’s has gone through more than seven rounds of funding, acquired a customer base of some 35 million subscribers, and is already profitable. The company had revenues of more than $200 million in 2018, with a three-fold jump over the previous year and a target of doubling revenues this year. Byju’s recently acquired Bay Area-based early learning phygital (physical plus digital) platform startup, Osmo, for $120 million. Byju’s also partnered with Walt Disney Inc. for its aggressive global expansion into the early learning space with Disney’s timeless stories and characters.

Amid all this fervor, it is important to take a step back and reflect on how the Indian startup ecosystem has reached its current position. History repeats itself, they say, but our intentions lean more towards understanding the patterns of evolution. That can help us equip ourselves and create interventions to keep the momentum going.

Like most old economies and cultures, entrepreneurship and trade have blossomed in India for centuries. Built on these foundations, India’s current entrepreneurial ecosystem is a result of three waves of entrepreneurial activity with distinct focus areas – Information Technology (IT), consumerism and innovation. In our view, each of these waves is marked by distinct kinds of businesses, predominant activities and ecosystems comprising various social, regulatory, technological, economic and cultural elements. While each wave draws upon the previous one, we find that it is distinct from its predecessor and successor.

We will elaborate upon these waves, but only after touching upon the foundations of entrepreneurship in India. After all, we must begin at the beginning (or as far back as we can go).

Of Oceans, Seas and Risk Takers

Culturally, many communities in India are believed to be entrepreneurial and avid risk takers. Historically, Indian traders are known to have travelled as far as Egypt, Bahrain, Vietnam and Burma (Myanmar), among other countries. Entrepreneurial communities in India own and run many family-owned small- and medium-sized businesses as well as large behemoths such as Reliance and Bajaj. A report published in 2018 notes that 111 of the most popular family-owned businesses had a total market capitalization of some $839 billion. This number does not include the vast number of small and medium-sized family-owned businesses spread across India.

“At last count, India had 26 unicorns, with eight new entrants joining the club in 2018 alone.”

Plenty of data support these entrepreneurial inclinations. The Global Entrepreneurship Monitor estimates some 20% of Indians (aged between 18 and 64 years) intend to start a business in the next three years, while more than 11% are nascent entrepreneurs (against the global average of 12.6%). About 63.7% of people in India consider entrepreneurship to be a desirable career choice, against the global average of 62.4%.

A stroll along the streets of the old cities of Ahmedabad, Kolkata, Mumbai, Delhi, Hyderabad (and many others) or a drive through the industrial clusters spread all over the country reveals the entrepreneurial spirit embedded in the cultural and economic milieu of India. These embedded entrepreneurial inclinations, we believe, have laid the foundations for waves of entrepreneurial activity in India.

Wave 1: IT Matters

The roots of information technology can be seen in the setting up of schools of technology and management and entry of IBM in India in 1950s (only to exit two decades later). In 1968, the corporate giant, Tata Group, set up Tata Consultancy Services and took on several computerization related projects in India. It partnered with a U.S. based mainframe-manufacturing company and thus began the era of offshoring.

However, the wave of IT and IT-enabled services began taking cognizable form with the founding of companies like Patni Systems around the 1980s. Founders of these companies were educated in prestigious schools (mainly in the U.S.) and closely witnessed the market asymmetries to realize the unlocked value in offshoring. They returned home to set up IT businesses to capture this value. These IT companies also became nurturing grounds for entrepreneurs. Early employees of such companies went on to establish giants like Infosys, many of which, in turn, became breeding grounds for the next generation of entrepreneurs.

The growth of these IT companies and increased offshoring of R&D created a pull on technical education. As a result, engineering became the almost de facto choice for higher education, thus leading to the creation of a large pool of engineers. In 2014, India was estimated to be home to some 25% of the world’s engineering graduates.

With almost a non-existent venture funding industry back then, most of these businesses in the first wave were bootstrapped and they focused on services. Stories are often told of N. R. Narayana Murthy, founder of Infosys, borrowing money from his spouse and being continually broke. Such was the entrepreneurial zeal and the size of the offshoring opportunity that many IT businesses established in the 1990s have now grown into some of the largest and most successful companies founded in India. Today, India’s IT/ITES and BPO firms constitute a $180 billion industry primarily focused on the global market.

The success of Indian IT businesses also brought more prosperity to the country’s middle class. Between the 1960s and 1990s, a typical middle-income household had one primary earner who was either employed by the government or a public sector undertaking or ran a small local business. Children’s education was taken seriously and they were often guided towards engineering or medical schools. Once they had graduated, engineers found immediate employment with IT companies (through campus placement) and brought home salaries that were higher than their parents’ incomes. As IT businesses grew, so did the paychecks of their employees, the effects of which also spilled over to other industries.

Since more money was now available to be spent, the Indian economy opened up to global markets, creating more avenues for consumption and setting in motion the next wave of entrepreneurship.

Wave 2: Rise of Consumerism

The Indian consumer story was sparked by an increase in expendable income. This wave started around the middle of the last decade and created opportunities for a variety of business models.

With the liberalization of policy infrastructure, more capital was now becoming available. The investment thesis — a growing emerging middle class with higher incomes would consume more, use smartphones and access the internet often. Internet usage was expected to become cheaper, therefore improving access. Thus, models around e-commerce, specialized retail, marketplaces, hyper-delivery networks and organizing the unorganized sector were being bet upon.

This was a mammoth wave of entrepreneurial activity in India; the ‘startup’ expectations were also seen to have taken birth around this wave. Substantial investments around the consumer investment thesis first came from the U.S., later followed by China and Japan. Unparalleled opportunities were created; these not only led to the India foray of large consumer brands like Amazon and Uber, but also the emergence of more than 25 home-grown unicorns (like Ola, Zomato, Swiggy, PayTM and many more). Not to forget, Walmart acquired Flipkart at a valuation of $22 billion.

This wave is also marked by many me-too platforms and aggregator models, albeit with business model innovations and adapting processes to India’s unique culture and demands like ‘cash-on-delivery.’ Quite unlike their Chinese counterparts that have enjoyed a near monopolistic luxury, these Indian born ventures are competing strongly in an open market against global, well-funded, and well-matured competitors. Some of the ventures have succumbed but several have succeeded and are now setting their eyes on global expansion.

“India has evolved from being the IT, services and business process outsourcing hub of the world to being a significant R&D center for multinationals and many Silicon Valley startups.”

Wave 3: Up the Innovation Curve

The latest wave in India has two defining characteristics — B2B models and deep-tech, IP-driven innovation.

Over the last two decades, India has evolved from being the IT, services and business process outsourcing hub of the world to being a significant R&D center for multinationals and many Silicon Valley startups. Bangalore, particularly, has emerged to be the capital of GCC or Global Capability Centers, with about half of the global 1200 multinationals having set up their R&D centers in India. Today, we see entire product lines and unique products being designed, developed and delivered entirely from India. A few multinationals including GE, Cisco and Adobe have even shifted the P&L of some of their R&D business units to India.

Some may say that India’s R&D story began with Texas Instruments setting up their R&D center in Bangalore in 1985. However, we find that the R&D activity in the ecosystem accelerated significantly from the late-1990s, perhaps linked to the opening up of the Indian economy and the foundations created by the first wave of IT businesses. While these offshore-R&D development centers started off with basic testing, product maintenance and some rudimentary software development, many of them significantly went up the value curve over the next two decades. This led to many global multinationals setting up their second largest R&D sites beyond their headquarters.

Closely clued into the global ecosystems, Indian startups are moving up the intellectual property ladder, too. We are seeing fewer ‘me-too’ e-commerce models and more startups building unique products and solutions. The target customer is no longer only (or primarily) India and an increasing number of startups in India are now born global. These entrepreneurs are more seasoned, with experience of having worked in large multinationals, and have a global exposure with working in the U.S. or Europe before returning to India. Most importantly, these entrepreneurs have a product mindset unlike their counterparts from the previous generation who were more services focused. These entrepreneurs are building from India, for the world. Playing in the global market also brings home strong IP sensibilities for the ecosystem.

The other characterizing feature of the current wave is the salience of B2B models. The growth of the IT businesses from the first wave and the consumer-driven startups from the second wave along with the drive for traditional businesses to compete on a global playing field has created opportunities for business (as against consumer) products and solutions. The demand for B2B solutions from the global markets is a few times over. Many of us would have heard startups shying away from B2B models often citing the difficult working relationships. This is beginning to change with businesses that were themselves struggling startups in the recent past, now creating a more encouraging market for other young B2B startups.

The mass consumer segment from the second wave appears to be hyper-invested now with winners already picked, but there are several niche opportunities that are getting capitalized. Beyond the current unicorns, the next wave of 100 startups in India are much more diverse, going beyond consumer to B2B marketplaces, healthtech, enterprise-tech, robotics, fintech and many more. Some of these startups include Grey Orange Robotics, Medgenome, Blackbuck, Bankbazaar, Uniphore, etc.

The startup ecosystem is now shifting to more B2B models that have deep-tech and IP-driven innovation at their core. Examples include some of the startups in our Bharat Innovation Fund portfolio including Entropik Technologies (platform for Emotion AI, mapping EEG brainwave signals, facial expression and eye tracking), Detect Technologies (high temperature magneto-resistive sensor and signal processing for leakage and corrosion detection in oil refineries) and even a number of new-age Space-tech startups building affordable connectivity solutions, nano-satellite platforms and 3D printed modular rocket engines, taking a cue on the affordable Space-tech success from Indian Space and Research Organization (ISRO). There are now multiple success stories with Zoho and Freshworks leading the unicorn SaaS space from the southern city of Chennai. We now see over 500 AI startups in India leveraging the affordable talent and easier access to large pools of data and as well as a number of in-house and outsourced data science teams offering services to global customers.

While a plethora of challenges remain, most startups in the current wave seem to be adopting the Israeli way of establishing a global connect and customer base for scaling-up, after development, piloting and achieving product-market fit, done affordably in India in comparison to their global counterparts.

“These entrepreneurs are building from India, for the world.”

The Digital India Push

Digital India has been a big initiative by the Indian Government over the past decade across political party lines. The push towards this started with the development of public goods digital infrastructure known as ‘IndiaStack’ in 2009 and issuance of biometric IDs to Indians. IndiaStack is a presence-less, cashless, paperless, consent-based scalable architecture that promises to revolutionize and accelerate India’s digital push. It promises to enable the country leapfrog from being a digital infrastructure poor country to being a leader. In the last eight years, over 1.2 billion Indians have received their biometric IDs — Aadhaar — and onboarded on the Universal IDentification (UiD) project. This was the fastest ever rate of reaching a billion users, surpassing the growth of giants like Facebook, WhatsApp or even mobile phones!

The IndiaStack infrastructure seems to have enabled a more efficient opening of over 500 million bank accounts for citizens who never had one earlier. These bank accounts were opened with an aim to ease citizens’ access to formal credit and direct transfer of government benefits and subsidies. This IndiaStack infrastructure has also made its presence felt in the private sector with the country moving fast from largely an all-cash economy to cashless digital transactions.

Additional infrastructure layers are being built on IndiaStack. For instance, ‘HealthStack’ aims to enable India’s flagship healthcare scheme of insurance to 300 million citizens and ‘Digital Sky’ focuses on drone and small aeroplane flight plan authorization. A uniform single taxation scheme, launched recently, for the entire country has increased the tax net significantly and simplified the age-old taxation norms that have plagued the growth rate for decades. Infrastructure is ready for every citizen to have a Digital Locker for e-signed documents like driving license and certifications. India’s digital infrastructure is also attracting considerable interest from countries that are on the path of deeper digitization.

What Next?

Riding on the above three waves and the government’s push for digitization, India’s startup ecosystem now stands firmly with over 300 incubators and accelerators, about 30,000 active startups. In 2018, institutional venture funding of over $4 billion channeled towards tech startups only speaks of the growing size of this ecosystem. With over 50 central and state government policies for supporting startups, the rails of policy and regulation are also getting stronger in India. The recent thrust on building technological infrastructure and enhancing the ease of business is further fuelling the growth of the ecosystem. While economic challenges remain, we are positive about the strong political will and the promise of bold reforms for the long run to get the economy to $5 trillion.

As 2019 flies by, we are closely witnessing the evolution of the third wave. We are seeing startups apply Artificial Intelligence and Machine Learning to create solutions across sectors. Novel use cases of IoT, blockchain and the IndiaStack are also emerging. We are seeing startups that are born global, creating solutions for the world as well as those that are applying next-gen technology to address deep and complex challenges of inclusion and livelihoods in India. The future holds immense promise and we are humbly contributing to its creation.