Mapping the Startup Ecosystem in India

Anish Tiwari (anishtiwari067@gmail.com) has a PhD in strategy and entrepreneurship from DCU Business School, Dublin City University. He is a Marie Skłodowska-Curie Actions Scholar and did his PhD under the European Training Network—Global India.
14 August 2023

This article examines the major trends in the Indian startup ecosystem based on three key parameters: new venture creation & fundraising, characteristics of the founding teams, and types of entrepreneurial exit, especially exit via acquisitions. It highlights the key developments in these parameters over the past decade (2010–2020) by collating data from leading databases and industry reports. The key data sources are Tracxn, Crunchbase, and Global Entrepreneurship Monitor. Four key findings emerge from the analysis: First, despite dedicated policy interventions, the startup activity in India remains concentrated in three prominent clusters - Delhi NCR, Bengaluru, and Mumbai. Second, the data suggest that the startups outside these clusters create disproportionately more jobs vis-a-vis their share in the total entrepreneurial activity. Third, a handful of universities dominate the founder pool, and women entrepreneurs remain severely underrepresented in the founding teams. Finally, acquisitions are a popular exit route for Indian startups, with a higher proportion of acquired startups coming from outside the three prominent clusters. This article recommends increased targeted policy support towards female founders and entrepreneurial activity outside the three clusters.

1. Introduction

Over the past decade, India has witnessed exponential growth in entrepreneurial activity, transforming it into one of the leading startup ecosystems of the world. The Indian startup ecosystem is ranked 20th in the world according to the Global Startup Ecosystem Index ranking (Startup Genome, 2021). The ranking evaluates ecosystems globally based on three key parameters—quantity of startups, quality of startups, and the overall business environment. Three Indian cities feature in the top 20 city ecosystems of the world— Bengaluru (10th), New Delhi (14th), and Mumbai (16th). In terms of the number of unicorns (startups with a valuation of $1 billion or more) produced, however, India is the third-largest startup ecosystem in the world behind China and the United States (US) (Sarkar, 2021). To strengthen the startup ecosystem further, the Government of India launched the “Startup India” initiative in 2016. Startup India, which celebrated its seventh anniversary in January 2023, intends to catalyse the startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship (Startup India, 2016).  

Despite the COVID-19 pandemic-related economic downturn (Kaul, 2021), the Indian startup ecosystem showcased remarkable resilience. Twenty-four new unicorns were added to the Indian startup ecosystem in 2021 (Inc42, 2021), a 100% growth from 2020 (Figure 1). Additionally, Indian startups raised $13.05 billion in the first half of 2021 (January to June 2021), a 160% increase compared to the $5.2 billion raised in the first half of 2020 (Subramaniam, 2021). Given the importance of startups in the Indian economy, this article uses the available data to highlight the key trends in the Indian startup ecosystem. It examines the ecosystem on three parameters. Firstly, the geographic distribution of startups and the funding activity. Secondly, the composition of founding teams, and finally, the types of entrepreneurial exit, especially exit via acquisition. It also outlines policy interventions based on the findings that emerge from the analysis.

Figure 1: Number of unicorns added year-on-year (2015–21).
*The figure for 2021 is as of 3 September, 2021.
Source: Tracxn, 2021; Inc42, 2021

 

Mapping the Startup Activity

A high rate of startup activity is often associated with clusters. Such clusters exist globally, with the Bay area in San Francisco, California, being one of the most prominent startup clusters in the world. Bay Area’s overall score (328.9) was approximately three times the score of runner-up New York (110.7) in the Global Startup Ecosystem city rankings, 2021 (Startup Genome, 2021). Similarly, India, too, has three main startup clusters—Bengaluru, Delhi National Capital Region (NCR), and Mumbai. As of 13 September 2021, India had 75 unicorns [1], 83% of which (62) were from these three clusters (Figure 2). Delhi NCR topped the list with the highest number of unicorns (35%; 26), followed by Bengaluru (33%; 25) and Mumbai (15%; 11). Four unicorns each (5%) were from Chennai and Pune. The remaining five unicorns (7%) were from Hyderabad (2), Ahmedabad (1), Thane (1), and Kota (1).

Figure 2: Distribution of Indian unicorns across cities (n = 75).
Source: Tracxn, 2021

The geographic distribution of startup activity registered a marginal improvement upon expanding the filtering criterion. However, the dominance of the three clusters highlighted above – Delhi NCR, Bengaluru, and Mumbai, remained. The three clusters combined accounted for 78% (108) of all Indian startups valued at/over $500 million (135). Bengaluru and Delhi NCR accounted for 30% (42) each, followed by Mumbai (17%; 24). Notably, the share of other cities registered an increase of 57%. From a 7% share in unicorns to an 11% share in startups valued at/over $500 million (Figure 3).

Figure 3: Distribution of Indian startups valued at or over $500 million across cities (n = 135).
Source: Tracxn, 2021

The share of other cities improved further when the distribution of minicorns (startups valued at/over $1 million) was analysed (Figure 4). As of 17 September 2021, India had 3,989 minicorns. The trio of Bengaluru, Delhi NCR, and Mumbai accounted for 74% of the minicorns, with Bengaluru accounting for the highest 29% (1154), followed by Delhi NCR (25%; 995) and Mumbai (20%; 794). Chennai accounted for 5% (200) and Pune 4% (167) of the minicorns. The other cities accounted for 17% of all minicorns (679), 6% higher than their share in startups valued at/over $500 million (11%). As per the 2011 census, India had 465 Class I cities (cities with a population of over 1,00,000) (Shaban et al., 2020). The data suggest that, as of 2021, Mumbai alone (794) had more minicorns than the rest of the 458 class I cities in India combined, thus underlining the degree of concentration of startup activity in India.

Figure 4: Distribution of Minicorns (startups valued at or over $1 million).
Source: Tracxn, 2021

Despite the low representation of other cities in mini corns and unicorns, their share in startups with large workforces was proportionately higher. For instance, Bengaluru, Delhi NCR, and Mumbai combined had a share of 83% of the unicorns and 74% of minicorns but accounted for only 62% of startups with over 500 employees. In startups with over a thousand employees, their share was even lower (60%) (Figure 5). Chennai performed exceedingly well on this metric. It had a share of 5% each in unicorns and minicorns but accounted for 10% of the startups with over a thousand employees and 9% with over 500 employees.

Similarly, other cities had a share of only 7% in unicorns and 17% in minicorns, but they accounted for 26% of startups with over 500 employees. Their share was marginally higher in startups with over a thousand employees (27%) (Figure 5). These data points further indicate that, on average, startups outside the three major Indian startup clusters seem to be creating more employment opportunities. The proportionate share of other cities is 9% higher in startups with over 500 employees and 10% higher in startups with over a thousand employees vis-à-vis their share in minicorns (Figure 6). However, the proportionate share of notable clusters like Bengaluru is 12% lower in startups with over 500 employees and 13% in startups with over a thousand employees vis-à-vis its share in minicorns. As discussed in the following section, this is despite the continued concentration of funding activity, which remains focused on the three clusters.

Figure 5: Distribution of startups with over 1,000 and 500 employees in India.
Source: Tracxn, 2021

Figure 6: Distribution of minicorns, startups with 500+ and 1,000+ employees in India.
Source: Tracxn, 2021

Alleviating the concerns related to the geographic concentration of the startup activity in India was one of the key objectives of the Startup India policy. Page 2 of the Startup India action plan reads:

With this Action Plan, the Government hopes to accelerate spreading of the Startup movement from existing tier 1 cities to tier 2 and tier 3 cities including semi-urban and rural areas.

As of 2021, five years after the launch of Startup India, startups from across 623 districts in India have received recognition from the Department for Promotion of Industry and Internal Trade (DPIIT) (Ministry of Commerce & Industry, 2021a). However, the major startup clusters continue to dominate the startup activity in India. The share of other cities (outside of the major startup clusters) in the overall funding raised and the number of startups founded has remained constant between 2015–17 and 2018–20 (Figures 7 and 8). Bengaluru, Delhi NCR, and Mumbai combined accounted for 83% of all the startups founded in India during the three years from 2018 to 2020 (Figure 7).

Their share was even higher in the total funding raised in the same period. The three clusters accounted for 92% of all the funds raised between 2018 and 2020 (Figure 8), 1% higher than their share in 2015–18. This data point indicates that funding activity in the Indian startup ecosystem remains heavily concentrated. Overall, the trends highlighted above suggest that despite the active policy interventions by the government, startup activity in India, to date, continues to be clustered. The data suggests that startups outside the main clusters create more employment opportunities (an apt proxy for growth) despite raising less capital, thus signalling better quality. This aspect of the Indian startup ecosystem demands further exploration from researchers, venture capitalists and policymakers alike.

Figure 7: Distribution of the total number of startups founded in India between 2015–17 and 2018–20.
Source: Tracxn, 2021

Figure 8: Distribution of the total equity funding raised by Indian startups between 2015–17 and 2018–20.
Source: Tracxn, 2021

2. Mapping the Startup Teams

The success of a startup is often attributed to its founding team (Gaskell, 2015). The institutional background of the founding team members is a crucial determinant of a startup's success. The higher the heterogeneity of experience within the founding team, the higher the chances of success (Muñoz-Bullon et al., 2015). The alma mater of the founding team members also plays an important role in determining startup success. For instance, in the US, founders from a handful of universities account for a disproportionately higher share of founders (Belanger, 2016). Ten universities in the US produced 2,109 startup founders who had raised at least $1 million in funding between 1 January 2020 and 18 March 2021 (Figure 9). Seventy-three per cent of these founders came from just the top five universities: Stanford University, Massachusetts Institute of Technology, Harvard University, University of California (UC), Berkeley, and Cornell University. Stanford University is the world leader in this area and has produced 170 unicorn executives, higher than any other university (Cotton, 2021).

Figure 9: University affiliation of founders in the US who raised $1 million or more (1 January 2020 – 18 March 2021).
Source: Crunchbase, 2021

The dominance of a handful of universities can also be observed in the Indian startup ecosystem (Rault & Mathew, 2009). As of 13 September 2021, India had 465 startups valued at/over $100 million. The founding team data were available for 201 of these startups. Out of the 374 founding members, 45% (169) belonged to the Indian Institutes of Technology (IITs), followed by the Indian Institutes of Management ([IIMs] 22%; 83) (Figure 9). Universities based in the US accounted for 19% of all founders. These three cohorts collectively accounted for 86% (323) of all the founders (Figure 10).

 

Interesting patterns emerged from dissecting these cohorts further. As of December 2020, there were 23 IITs in India. However, all 169 IIT-based founders came from just seven IITs (Figure 11). IIT Roorkee alone accounted for 29% (49) of the founders from the IIT cohort, followed by IIT Madras (20%; 33), IIT Delhi (17%; 28), IIT Guwahati (15%; 25), and IIT Kharagpur (9%; 16). The top five IITs collectively accounted for 90% (151) of all founders from IITs and 40% of all founders of Indian startups valued at/over $100 million (Figure 11).

Similarly, although there were 20 IIMs in India, as of 2021, all 83 IIM-based founders came from just three IIMs. IIM Ahmedabad alone accounted for 48% (40) of all founders from the IIM cohort, followed by IIM Calcutta (28%; 23) and IIM Bangalore (24%; 20). Two other notable Indian academic institutions with a significant share in the overall founder pool were the Indian School of Business ([ISB] 5%; 19) and the Birla Institute of Technology and Science, Pilani ([BITS Pilani] 5%; 19). These data points highlight that all Indian founders of startups valued at/over $100 million who studied in India (302) came from just 12 institutions (seven IITs, three IIMs, ISB, and BITS Pilani). That is an average of approximately 25 founders per institute.

Figure 10: University affiliation of Indian founders (startups valued at/over $100 million as of 13 September 2021; n = 374).
Source: Tracxn, 2021

Figure 11: Share of individual IITs in founders from the IIT cohort (n = 169).
Source: Tracxn, 2021

Similarly, a small set of universities dominated the pool of founders from the US and European universities cohort. Twelve US-based universities produced 71 Indian founders of startups valued at/over $100 million (Figure 12). Sixty-eight per cent of these founders (48) came from just five universities (Figure 12). Stanford University was the leader and accounted for 23% (16) of the cohort, followed by Harvard University (14%;10), The University of Pennsylvania (13%; 9), UC Berkeley (10%; 7), and Columbia University (8%; 6). The same universities also dominated the founder pool of US-based startups (Figure 9).

Similarly, 12 Indian founders studied at European universities, 75% (9) of which came from only one institution—INSEAD. The other universities were Cambridge University (17%; 2) and London Business School (8%; 1). One founder studied at the National University of Singapore. All the data points taken together indicate that all the 374 founders of the Indian startups valued at/over $100 million, for which we have data (201) studied in just 28 universities, an average of approximately 13 founders per institute.

Figure 12: Share of individual universities in founders from US university cohort (n = 71).
Source: Tracxn, 2021

Women’s representation in the founding teams and the overall startup ecosystem is another area that has received increased attention both from researchers and policymakers in the past few years. A recent article in the Harvard Business Review highlighted that women-led startups raised just 2.3% of the overall venture capital funding in 2020 (Bittner & Lau, 2021). The article also highlighted that only 12% of the decision-makers in venture capital firms were women. The lack of representation of women in venture capital firms is also a reality in India. Only three of the top 20 Indian venture capital firms had a woman partner as of February 2020  (Dalal & Sriram, 2020). The three venture capital firms were India Quotient, Lightspeed India, and Kalaari Capital. In addition, a pilot survey by the Reserve Bank of India of Indian startups found that 55.5% of the surveyed startups had no women representation in the founding team (Reserve Bank of India, 2019).

Encouraging women entrepreneurship is a stated objective of the Startup India policy. Page 30 of the “Startup India: The Way Ahead” report (Ministry of Commerce & Industry, 2021b) reads:

Startup India is committed to strengthening the women entrepreneurship ecosystem, through policies and initiatives, and creation of enabling networks.

As a result of this focus, 45% of startups recognised by the DPIIT (48,903) under Startup India, as of June 2021, had at least one woman member in the founding team (Ministry of Commerce & Industry, 2021a). However, the representation of women is still very low in the overall Indian startup ecosystem. Women founders accounted for less than 4% (7) of the total founder pool of Indian unicorns (182) (Figure 13). Similarly, 92% of the unicorns (69) had no woman member in the founding team (Figure 14). As per a recent report by Innoven Capital, less than 50% of the surveyed startups had more than 10% women in leadership positions (InnoVen Captial India, 2020).

The lack of representation of women in the Indian startup ecosystem reflects in the international rankings. India was ranked 49th out of the 58 surveyed countries in the Mastercard Index for Women Entrepreneurs, 2020 (Mastercard, 2020). Lower than its other Asian counterparts such as Thailand (11), Chinese Taipei (12), Hong Kong Special Administrative Region (15), Philippines (16), Indonesia (17), Mainland China (21), Singapore (24), Vietnam (25), Malaysia (26), South Korea (38), and Japan (47). Similarly, India was ranked 41st out of the 50 surveyed countries on female Total early-stage Entrepreneurial Activity by the Global Entrepreneurship Monitor (2021). These data points highlight the need for increased policy support targeted towards women entrepreneurs.

Figure 13: Founders of Indian unicorns, split gender-wise (n = 182).
Source: Tracxn, 2021; Techcrunch, 2021, Yourstory, 2021

Figure 14: Women representation in founding teams of Indian unicorns (n = 75).
Source: Tracxn, 2021, Techcrunch, 2021, Yourstory, 2021

 

3. Mapping the Startup Exits

Entrepreneurial exits broadly refer to the phenomenon through which founders part ways from their respective startups. DeTienne (2010) defines it as

The process by which the founders of privately held firms leave the firm they helped to create; thereby removing themselves, in varying degree, from the primary ownership and decision-making structure of the firm.

Entrepreneurial exits can take different forms, the most prominent being initial public offerings (IPO), acquisitions, and liquidation (Wennberg et al., 2010). This article emphasises exit through trade sales as acquisitions have emerged as one of the most popular exit routes for Indian startups. Fifty-seven per cent of the Indian founders indicated that acquisitions would be their most likely exit route in 2020 (InnoVen Captial India, 2020). In the last ten years, exits through acquisition have increased by over 500% in India, from 49 in 2010 to 246 in 2020 (Figure 15). The activity peaked in 2018 with 330 acquisitions with a total deal value of $50 billion. In May 2018, Walmart announced the acquisition of a majority stake (77%) in Flipkart for $16 billion (Lunden, 2018), thus contributing to the all-time time deal value.

Figure 15: Acquisition trends in the Indian startup ecosystem, 2010–20.
Source: Tracxn, 2021

Analysing the geographic distribution of acquisitions, Delhi NCR, Bengaluru, and Mumbai emerged as the major hubs of acquired firms, collectively accounting for 69% of all the acquisitions (Figure 16), 5% lower than their share of minicorns (74%) (see Figure 4). However, the share of other cities in the total acquisitions was 3% higher than their share of minicorns (see Figure 4). This data point indicates that a proportionately higher number of startups based outside the three prominent clusters are getting acquired.

Examining the city-wise acquisition trends for a ten-year period between 2010 and 2020, we learn that the number of acquisitions in other cities has increased by 30% in the last decade (Figure 17), from 20% in 2010 to 26% in 2020. The most noticeable decline has been in the share of Bengaluru. In 2010 Bengaluru accounted for 37% of all acquisitions, which reduced to 23% by 2020, a 38% decline over a decade. Delhi NCR, on the other hand, registered an increase of 163% in its share of acquisitions, from 8% in 2010 to 21% in 2020. 

Figure 16: Cluster-wise distribution of the total acquisitions in the Indian startup ecosystem (2010–20).
Source: Tracxn, 2021

Figure 17: Year- and cluster-wise distribution trend of acquisitions in the Indian startup ecosystem (2010–20).
Source: Tracxn, 2021

 

A variety of factors are known to drive startup exits. The lack of availability of funds is often the leading factor (Graebner et al., 2017). Seventeen per cent of the startups surveyed by Innoven Capital in 2020 reported fundraising as their top business challenge, 2% higher than in 2019 (15%) (InnoVen Captial India, 2020). Similarly, 27% of the startups indicated that fundraising was their top immediate priority, 4% higher than in 2019 (23%). We also know that prominent startup clusters account for most of the funds raised in the Indian startup ecosystem (Figure 8).

It is possible that lack of access to capital is resulting in the acquisition of a higher number of startups outside the three prominent clusters. If true, this is concerning, as these startups seem to generate higher employment opportunities (Figure 6). Alternatively, the acquisition of these startups could also be motivated by the growth objectives of the acquirer (Mawson & Brown, 2017), which would then signal better quality. Either way, startups outside the main clusters demand increased attention.

4. Conclusions

The Indian startup ecosystem has emerged as one of the most prominent startup ecosystems in the world. Its potential to contribute to the Indian economy has attracted the attention of policymakers, which, in turn, has led to crucial policy interventions. However, despite the interventions, startup activity in India remains concentrated in the three prominent clusters of Delhi NCR, Bengaluru, and Mumbai. Women entrepreneurs remain severely underrepresented in the Indian startup ecosystem, and a handful of leading academic institutions continue to produce most of the successful founders.

Though more startups have started emerging from other parts of the country, they continue to face fundraising challenges, given the geographic concentration of venture capital firms and funding activity in India. The lack of funds is causing the startups outside the three main clusters to exit via an acquisition, which is undesirable in the Indian context, given the job creation ability of these startups.        

Therefore, we must strive for increased policy support targeting this cohort. Special policy provisions to encourage and support women entrepreneurs must continue to be introduced at the union and the state government level while attempting to replicate the entrepreneurial success of the select Indian institutions at scale. Most importantly, startups and entrepreneurs outside the three main clusters must be actively examined, researched, and supported.

    

 

This paper is part of the research conducted for the Global India European Training Network, funded by the European Commission’s Horizon 2020 programme (Grant number 722446). The author would like to thank the European Commission for its support.

Anish Tiwari (anishtiwari067@gmail.com) has a PhD in strategy and entrepreneurship from DCU Business School, Dublin City University. He is a Marie Skłodowska-Curie Actions Scholar and did his PhD under the European Training Network—Global India.
14 August 2023