How India Can Become the World’s Leading Startup Ecosystem
18-01-2025
05:43 AM

Context
- India’s startup ecosystem has experienced a meteoric rise, evolving from a nascent stage to becoming the world’s third-largest hub for innovation and entrepreneurship.
- With over 1,30,000 recognised startups today, up from a mere 400 in 2015-16, this remarkable growth underscores the country’s vibrant entrepreneurial spirit.
- Central to this transformation is India’s robust digital public infrastructure, addressing global challenges such as financial inclusion, sustainable development, and agricultural productivity.
An Assessment of Technological Opportunities and Government Initiatives
- Strategic Government Missions
- The government has been proactive in creating this growth through several strategic initiatives.
- The National Quantum Mission aims to position India as a global leader in quantum computing by driving advancements in quantum communication, encryption, and computation.
- This initiative will enable breakthroughs in sectors like healthcare, cybersecurity, and finance.
- Similarly, the India AI Mission focuses on leveraging artificial intelligence to solve real-world problems, such as improving healthcare accessibility, optimizing supply chains, and enhancing urban planning.
- The Semiconductor Mission, aimed at boosting domestic semiconductor manufacturing, addresses the critical need for self-reliance in this vital technology sector, especially in light of global supply chain vulnerabilities.
- Commitment to Research and Development
- The government has allocated a substantial ₹1 lakh crore for research and development (R&D), reflecting its commitment to fostering innovation.
- This funding not only supports academic research but also enables startups to explore pioneering technologies, bridging the gap between conceptual research and market-ready solutions.
- Progressive Policies
- The liberalisation of space exploration and geospatial technology has encouraged private players to contribute to satellite launches, remote sensing, and space research.
- This has allowed startups like Skyroot Aerospace and Pixxel to emerge as key contributors to India’s space ambitions.
- Similarly, the government’s focus on drones, electric vehicles, and clean energy aligns with global trends toward sustainability and energy efficiency.
Key Features of Indian Start-Up Ecosystem
- Innovation, Intellectual Property
- India produces approximately 24,000 PhD graduates annually, driving advancements in science and engineering.
- However, the country paid $14.3 billion in intellectual property (IP) royalties in 2024 while earning only $1.5 billion, highlighting a significant innovation gap.
- Strengthening the intellectual property ecosystem is crucial for fostering innovation and establishing India as a global hub.
- Startups must lead this effort by contributing to advancements in technology and intellectual property.
- Expansion to Smaller Cities
- The growth of India’s startup ecosystem is no longer confined to metro cities like Bengaluru, Mumbai, and Delhi.
- Nearly 50% of startups now emerge from Tier II and Tier III cities, including Indore, Jaipur, and Ahmedabad. With half of India’s urban population living in smaller cities, these regions hold immense potential.
- Supporting these hubs with infrastructure, educational opportunities, and inclusivity — particularly by increasing women’s representation in leadership roles — can unlock untapped talent and drive innovation.
An Analysis of Funding Challenges for Start-Ups
- Access to Patient Capital in Deep Tech
- While Indian startups have achieved remarkable growth, those operating in deep tech sectors face a significant hurdle: access to patient capital.
- Deep tech startups, which focus on highly technical and research-intensive fields like quantum computing, AI, robotics, and biotech, require long-term investments due to the prolonged development cycles of their products and solutions.
- Traditional venture capitalists and private equity investors often hesitate to fund these ventures, as the returns are not immediate.
- The Fund of Funds for Startups (FFS), launched in 2016, has been instrumental in addressing this issue to some extent.
- By committing ₹11,688 crore across 151 Alternative Investment Funds (AIFs), the FFS has catalysed a pool of ₹81,000 crore, demonstrating a multiplier effect in the funding ecosystem.
- Over-Reliance on Foreign Capital
- One of the key challenges facing India’s startup ecosystem is its heavy reliance on foreign funding.
- In 2024, Indian startups raised over $12 billion, but approximately 75% of this came from international sources.
- While foreign capital has played a pivotal role in driving the growth of the ecosystem, over-reliance on it poses risks, including vulnerability to global economic fluctuations and potential misalignment of long-term strategic goals.
The Way Forward to Address these Challenges
- Incorporation of Ethical Practices and Self Regulations
- India’s startup ecosystem thrives on minimal regulatory interference, creating innovation and flexibility.
- However, recent incidents of corporate mismanagement in prominent startups like Byju’s and BharatPe have raised concerns.
- To address these issues, startups must adopt self-regulation frameworks emphasizing accountability, transparency, and ethical conduct.
- Mentorship, professional boards, and sound financial management are essential for long-term stability.
- Investors, particularly venture capitalists and angel investors, also play a crucial role in ensuring governance and guiding startups toward sustainable growth.
- Leveraging Domestic Institutional Capital
- To address this over-reliance, India must bolster its domestic funding ecosystem.
- Large domestic institutions such as insurance companies, pension funds, and mutual funds hold significant untapped potential.
- By allocating a portion of their surpluses to startups, these institutions can provide the long-term capital needed to support innovation and growth.
- This approach also aligns with the broader national interest, ensuring that the wealth generated from India’s burgeoning startup ecosystem benefits domestic stakeholders.
- Creating a Resilient Domestic Funding Ecosystem
- To ensure the sustainability of India’s startup ecosystem, a resilient and diversified funding environment is essential.
- Increasing domestic capital participation, establishing specialized funds for high-risk ventures, and developing a culture of long-term investment will create a robust financial backbone for startups.
- This will enable India to maintain its trajectory as a global innovation leader, driving economic growth and technological advancement.
- Need for a Dedicated Fund for Deep Tech
- Despite the FFS's success, there is a critical need for a specialized fund of funds exclusively for deep tech startups.
- These startups operate in domains that are high-risk yet high-reward, often requiring extended periods of development before achieving profitability.
- A dedicated fund would provide the patient capital necessary for these ventures to innovate without the immediate pressure of financial returns.
Conclusion
- India is well-positioned to become the world’s leading startup ecosystem.
- Favourable policies, a thriving culture of innovation, and collaborative efforts across sectors provide the foundation for scaling startups into global enterprises.
- As India works towards its vision of Viksit Bharat by 2047, startups will play a pivotal role in driving economic growth, creating jobs, and positioning the country as a leader in innovation.
Q) What is the primary funding challenge faced by deep tech startups in India, and how can it be addressed?
Deep tech startups in India struggle with accessing patient capital due to the long development cycles of their innovations. This can be addressed by creating a specialized fund of funds dedicated to deep tech ventures, which would provide the long-term investments necessary for these startups to innovate without immediate pressure for financial returns.
Q) Why is reducing reliance on foreign capital important for Indian startups, and what measures can enhance domestic funding?
Over-reliance on foreign capital makes Indian startups vulnerable to global economic fluctuations and may misalign long-term strategic goals. Enhancing domestic funding can be achieved by leveraging untapped resources from institutions like insurance companies and pension funds, encouraging family offices and angel investors to invest more actively, and fostering a culture of long-term value creation through domestic private equity and venture capital funds.
Source: The Indian Express