Recently ‘What Drives Startup Fundraising in India?’ An article titled Published as a part of the January 2023 issue of the Monthly Bulletin of the Reserve Bank of India. This shows that more startups are becoming unicorns in India in recent years. The article also pointed out that the number of months taken by startups in India to climb the funding ladder has come down drastically in recent years.
As of January 12 this year, there were 87,988 startups in India recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). This makes the country the third largest startup ecosystem in the world. Only those entities that work towards innovation or have a scalable business model are recognized as Startups for 10 years from the time of their incorporation in India and whose turnover did not exceed Rs. 100 crores in any given year.
According to DPIIT, startups have created around 7.6 lakh jobs in India till June 30, 2022. Also, India’s average age of startup founders was reported to be 32 years (as of 2019) and 14% of startups had at least one female founder (as of 2022).
In the post-pandemic period, startups are booming in India. In 2021, the average time it took for a startup to become a unicorn dropped from 9.9 years in 2020 to 7.8 years. Unicorn is a private limited company with a valuation of over $1 billion. chart 1 Shows the number of unicorns manufactured in India each year. The number of unicorns has increased in the post-pandemic period, with the total number rising to 107 as of September 2022.
chart 1
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Most of the unicorns in India were fintech platforms, software-as-a-service companies and e-commerce firms. But interestingly, many of the newcomers joining the unicorn club in 2021 were from non-traditional sectors (cloud kitchen, gaming, data management and analytics, and content). as shown in chart 2As on January 11 this year, around 40% of startups in India were based in Bengaluru, followed by Gurugram (16%) and Mumbai (15%).
chart 2
Typically, startup money goes through several rounds of funding from successive pitches or rounds (seed, series A, B, C and so on) from high net-worth individuals and other businesses. Initially, seed money comes from the founders, friends and family who are called angel investors. The early rounds can be used to gain a foothold in the market, while the later rounds can be used for expansion. Later, when the startup gets acquired, becomes a listed company, or merges with another firm, it no longer needs funding.
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Notably, the average number of months required to raise funding stages has decreased for established startups in recent years. chart 3 Shows the average months taken for startups founded in 2014 and 2021 to raise funding stages. Startups founded in 2014 took an average of 50 months to transition from seed stage to Series A, while startups founded in 2021 took only 28 months. Similarly, for those founded in 2014, the progression from Series A to B was 36 months, compared to 12 months for those founded in 2021.
chart 3
Indian tech startups raised $17.4 billion in 2019 over 2,531 rounds. In 2020, it was around $6.9 billion. In 2021, it has increased by 2,900 rounds to $45.4 billion. The share of late-stage startups (Series C and beyond) in total funding and number of funding rounds has increased over the past few years, as shown in the figure. chart 4,
chart 4
This indicates that investors are favoring established companies that have proven themselves over the years, which is typically risk-averse behavior.
Source: “What Drives Startup Fundraising in India?”, a paper published by the RBI as part of its January Bulletin
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