Start-up Ecosystem: Fostering Innovation and Entrepreneurship in India's Tech Industry

In recent years, India has rapidly risen as a global powerhouse within the startup ecosystem, indicating a remarkable surge in innovation and technological advancements. Central to this rise is the encouragement from the government, recognising startups as a driving force for economic growth and job creation. The Government of India has laid a robust foundation through strategic initiatives, providing startups with an environment that enables them to flourish. These initiatives have streamlined processes, and facilitated fast-track registrations and access to funding, encouraging the growth trajectory of startups. This flourishing landscape has propelled India to become the world's third-largest startup ecosystem, highlighting the nation's prowess in promoting entrepreneurial talent and groundbreaking ventures.

Source: Nasscom

Moreover, growing investor confidence has significantly transformed India's startup landscape, with domestic and international investors demonstrating keen interest in backing innovative ventures across sectors. This has not only fuelled the growth ambitions of startups but has cemented India's position as a breeding ground of innovation and entrepreneurship globally. As India continues its journey towards technological excellence and economic prosperity, the startup ecosystem is driving forward a culture of innovation, paving way for a brighter future for the country's tech industry.

Importance of innovation and entrepreneurship in India's tech industry

Businesses worldwide are increasingly adopting technology and India stands ready to emerge as a leading technology and innovation hub. India's status as one of the largest exporters of Information Technology and Business Process Outsourcing services globally showcases its expertise in delivering technological solutions to diverse industries. Moreover, with global corporations leveraging Indian technology talent through their global capability centres (GCCs) in the country, which collectively employ over five million people, India possesses a significant pool of skilled professionals capable of driving innovation and fuelling technological advancements. There's an opportunity for India to tap into skill-based and digitised sectors such as healthcare, education, finance, and biotech, and leverage its large and youthful workforce.

India's digital revolution has opened unprecedented opportunities for startups, facilitated by widespread smartphone adoption, affordable internet access, and the rise of digital payment platforms. The focused efforts at promoting innovation and entrepreneurship will ensure an extraordinary wave of long-deserved growth and prosperity that can serve the interests of the rest of the world as well as India, by creating a nation of job-creators vital for sustainable growth

Current scenario in India’s tech startup landscape

India has witnessed an exceptional surge in the creation and funding of startups as the country has solidified its position as a major global centre for innovation and businesses. However, securing adequate funding remains a significant task for startups, often leading to survival challenges. To avoid these hurdles, startups must demonstrate creativity in securing investments and developing relationships within the ever-evolving startup ecosystem.

In 2023, the funding scenario for tech startups turned bleak amid the global uncertainty, witnessing a 67% YoY plunge in total funding to US$ 6.0 billion. This decline came after the peak funding levels observed in 2021 (US$ 24.1 billion) and 2022 (US$ 18.2 billion), where investors displayed confidence in Indian tech startups. In 2023, the number of new tech unicorns fell to two from the previous year's 23. However, the decline appears to be cyclical than a long-term trend.

Despite the funding challenges, several positive trends emerged in India's tech startup landscape as there was a notable shift towards prioritising business fundamentals among tech startups. Approximately 60% of the founders reported growth in revenue and profitability. Additionally, new startups increasingly started adopting DeepTech, with 25% leveraging this advanced technology compared to around 12% in the previous year. Furthermore, tech startups in emerging hubs (cities with less than 1,000 tech start-ups founded between 2013 and 2023) increased to 40%, highlighting the breadth of India's startup ecosystem. Going forward, nearly 46% of the tech startup founders are optimistic about favourable funding environment in 2024 and the trend of investments in DeepTech is expected to persist, with more than two-third of the startups allocating resources towards AI to bolster product capabilities and internal operations.

Government initiatives and policies to nurture the startup ecosystem

Emergence of the startup ecosystem has been key to innovation and entrepreneurship within India's dynamic business landscape, and initiatives like 'Make in India' and 'Startup India' spearhead the efforts to cultivate a business-friendly environment, attract investors and nurture domestic growth. Targeted programmes such as the National Initiative for Developing and Harnessing Innovations (NIDHI) and the Atal Innovation Mission (AIM) provide essential support to aspiring entrepreneurs, offering efficient compliance procedures, access to tax incentives and funding avenues. AIM is an initiative that promotes the establishment of Atal Incubation Centres (AlCs) and Established Incubation Centres (EICs) to nurture innovative startups in their pursuit to become sustainable entities. It offers grants of up to US$ 1.2 million (Rs.10 crore) over 3–5 years to cover the capital and operational expenditures for both the schemes.

The NIDHI programme aims to foster innovation through support for incubators, seed funds, accelerators, and Proof of Concept grants. Within NIDHI, the Promoting and Accelerating Young and Aspiring Innovators and Startups (PRAYAS) programme aids established Technology Business Incubators (TBI) by providing grants for Proof of Concept and prototype development. TBIs receive up to US$ 265 thousand (Rs. 2.20 crore), including US$ 120 thousand (Rs. 1 crore) for PRAYAS SHALA; US$ 24 thousand (Rs. 20 lakh) for operational costs; and a maximum of US$ 12 thousand (Rs. 10 lakh) per innovator for prototype development, supporting 10 innovators annually. By promoting a culture of experimentation, collaboration, and risk-taking, the startup ecosystem has become a catalyst for innovation, driving India into the global spotlight as a hub of creativity and entrepreneurship.

Source: Startupindia, PIB

The Startup India Hub, initiated by the Department for Promotion of Industry and Internal Trade (DPIIT), is a pivotal platform to promote engagement among stakeholders within the startup ecosystem. The Hub has emerged as a single point of contact to facilitate knowledge exchange and enhance access to funding opportunities for entrepreneurs seeking support and guidance. The Hub provides entrepreneurs with a multitude of resources, including connections to 1,140 incubators and 202 accelerators to scale-up initiatives, access to a pool of 87 investors for funding support, and links to 69 government entities offering startup-friendly benefits. Through its comprehensive offerings and collaborative approach, the Startup India Hub has played a pivotal role in empowering entrepreneurs and catalysing growth of the startup ecosystem in India.

Source: Open Government Data Platform; * - Data only for January and February 2023)

The Government of India established a Fund of Funds for Startups (FFS) of US$ 1.2 billion (Rs. 10,000 crore) in June 2016, to boost capital availability and stimulate private investments, thereby promoting growth of the Indian startup ecosystem. Approved by the Cabinet, this initiative is overseen by DPIIT. The FFS channels funds to SEBI-registered Alternate Investment Funds (AIFs), also known as daughter funds, rather than directly investing in startups, which subsequently invest in promising Indian startups. The FFS facilitates downstream investments in venture capital and alternative investment funds, benefiting startups across various stages of development.

The transition of Indian tech services from mere outsourcing destinations to valued business partners for global firms has solidified India's position as a powerhouse in tech services worldwide. This is evident from the fact that the cumulative number of tech startups has grown 15x over the last decade. DeepTech startups, specialising in technologies such as AI, big data, Internet of Things (IoT), and Blockchain have secured 14% of the total cumulative funding in the past five years. Moreover, there is a notable shift underway to position India as a central hub for semiconductor and electronic manufacturing on the global stage, promising substantial growth opportunities within this sector in the years ahead. Acknowledging the substantial growth prospects within the DeepTech sector, the government introduced a DeepTech policy in 2023, containing several critical proposals. India's technology sector is poised for significant growth in the coming decade, bolstered by a robust technology talent pool, a thriving startup ecosystem, and government emphasis on digitalisation, artificial intelligence, and electronics and semiconductor manufacturing.