Investing in Startups: Supporting Tomorrow’s Success Stories

Are you aware about the wider evolution of the Startup ecosystem that we all are experiencing today? As of June 2024 DPIIT has recognized more than 1.4 lakh startups. From around 300 startups in 2016, the number has increased or expanded to more than 1.4 Lakh in the FY24 with more than 12,000 patents filed up to date.  

The startup landscape and panorama in FY24 presented significant progress and development across various sectors. To gain a clearer quantitative understanding, let’s examine some key highlights of the startup ecosystem in India for the year – 

• Agriculture and allied sectors always contribute significantly to the GDP and FY24 saw agri-start-ups registrations of a whopping 554, including 387 women-led start-ups.
• One of the most hyped-up sectors, artificial intelligence, has over 13,000 DPIIT-recognized start-ups by the end of FY24  in the Internet of things, robotics, and nanotechnology.
• More than 45 % of the recognized start-ups are emerging out of Tier 2 and tier 3 cities.
• Start-ups filed more than 12,000 patent applications from 2016 to March 2024.
• FY24 saw an increase in deal sizes with 13 startups raising to $100 million. Under the Fund of Funds for Start-ups, more than ₹10,500 Crore has been committed to more than 135 Alternative Investment Funds, which invested more than ₹18,000 Crore in start-ups by the end of FY24. 

Strategy of investing

Strategizing investment is imperative for achieving financial success and stability. A clear plan enables investors to maximize returns while managing risks, ensuring that investments align with their goals and risk tolerance ability. A well-thought-out strategy helps maintain discipline and adapt to market changes. Let’s look at how investors can strategize their investments – 

• Investing in problem-solving products

Businesses that deliver impactful solutions and demonstrate significant global influence are widespread, and investing in such startups has historically yielded tremendous returns.

For instance, today, many startups are leveraging technology to create solutions that address environmental challenges. Investors can strategize by being part of such innovative ideas at an early stage and profit from their rapid growth.
Nikhil Kamath, co-founder and CEO of Zerodha has invested 400Cr in around 80 startups since 2016 in ventures with unique ideas addressing a significant problem and creating an impact. His recent investment in SundayGrid, a startup focused on solving solar power harvesting challenges is a testament to his strategy.

• Sustainable investing 

In this era of the startup boom, many startups go out of business by falling into debt traps. Startups raising capital recklessly without structured future growth and capEx plans present a significant risk to their investors. Adopting a strategy that filters out internally unstable companies ensures long-term viability.

One prominent example of a startup that has fallen into debt trap is Byju’s, India’s largest ed-tech company. In 2022, Byju defaulted on a $40 million interest payment. This default highlighted the company’s precarious financial situation and the risks associated with its heavy reliance on debt financing.

• Monitor Industry Trends
  
  Continuously monitoring industry trends to identify sectors poised for growth is a rewarding strategy. For example, in FY24, FinTech, SaaS, and AI saw the highest number of unicorns, with tier I and II cities emerging as innovation hubs, accounting for 40% of tech startups, and poised to grow tremendously in coming years.
  Along with the ongoing following trend, Accel, a venture capital firm known for its early investment in Meta, Slack, Dropbox, and Flipkart is also about to commit big capital in the sector.
  
  Another sector is the renewable energy sector which has also seen substantial investment as governments and consumers shift towards cleaner energy sources.
  Thus, a clever strategy will be to invest in these sectors that are experiencing positive growth trends.

The Indian startup economy marked and crossed a major milestone in 2022 as it added the 100th Indian startup and entered the unicorn club. India today has over 116 unicorns and over the years, these unicorns have raised over $100 billion in funding along with a combined valuation of $350 Bn. Below is a chart showcasing month on month rises in startup funding. If we see the last four consecutive half-yearly data, H12024 has earned the highest deals. The growth can be attributed to the funding round of late-stage firms such as Zepto, Flipkart, PharmEasy, and Lenskart.

August 2024 saw 121 deals amounting to $1.78 billion which was 67% higher than the funds raised in July 2024. June 2024 saw 114 deals worth nearly $2 billion, this was double the amount it invested in the previous month May 2024. Just like this India has seen an increase in deal quality with high-value funding. 

Let’s look at some early-stage startup success stories in H1 of 2024.

 Cumulatively more than 30 early-stage startups have raised over $10 million each. Here are top 4 startups that were most supported by funding from prominent investors.

• SCOPE – an invite-only network platform to connect founders, investors, and experts raised a significant amount of $6 million from prominent investor SCG, Partner value fund, and HNIs. With this capital influx, the company is ready to expand its footprint and increase its user base. Scope which claims to have a network of 20,000 angel investors, 5,000+ VCs, and 400 family offices since 2021 is poised to enter the market with lead platforms like Let’s Venture, AngelList, and others.
  
• Avail – A blockchain technology startup that saw the support of well-known investors Peter Thiel’s Founders Fund and Dragonfly Capital. Avail is a place where developers can flexibly create blockchain and blockchain-based applications and tailor it to fulfill numerous features thus eliminating the problem of traditional blockchain technology. The new funding acquired in 2024 will help the company in its product development, marketing, and hiring.
  
• Krutrim – Recently joined the unicorn club, it  has become the first Indian AI startup to value at $1billion and raised $50 million from matrix partner India, which has also backed Ola and EV startup ola electric.
  
• Indkal – Raised its first funding round in 2020. Indkal is a trademark licensing operation organisation which manufactures consumer electronics and large appliances for worldwide brands like Acer and Black & Decker.

Conclusion

Investing in startups is about more than just financial gain; it is really beyond this mere gain. It’s related to fueling innovation, shaping industries, and being part of the journey that turns ideas into success stories. The startup ecosystem, especially in India, has shown demonstrate  remarkable growth, from the 1.4 lakh DPIIT-recognized startups 

As we move forward, investing in startups is not just about backing companies; it’s about supporting the future of innovation, growth, and success. The potential is boundless, and with the right approach, today’s investments will help create tomorrow’s leaders in this landscape.