The development of the venture capital industry in India: key players and factors

India’s startup ecosystem is the third largest in the world after the United States and the United Kingdom, according to NASSCOM.

Over the past 10 years, net business creation has been consistently positive in India, and Bangalore, the capital of the southern Indian state of Karnataka, the center of the country’s high-tech industry, has ranked among The top 20 startup ecosystems in the world in the last five years.

The Indian Computer and Information Services (CISEE) Business Ecosystem has nurtured the emergence of several notable Indian unicorns such as Flipkart, OYO, Ola Cabs, Swiggy, Rivigo and Zomato since the 2000s. All these facts have led to the Government India to consider entrepreneurship as a political objective and to create the “Fund of Funds for Startups” (FFS), endowed with about 1.5 billion USD in 2016.

VC funds in India have grown from fewer than 10 in the early 1990s to more than 500 today, and the amount of total investment by VC funds has been rising steadily since the 1990s. of 2000.

In the past decade, several US, Chinese and Japanese venture capital funds have gained a foothold in India, and several national venture capital funds have been created.

Some experts point to the institutional and regulatory liberalization after the 1990s and the improvement of the business environment as the main drivers of the startup and venture capital boom in India.

However, other processes, actors and drivers are also relevant, such as the role of diasporas, geopolitical alignments, global offshoring trends and STI policies.

The rise of the computer industry and state technology funding

During the 1970s, India experienced restrictions on the import of computers and other electronic equipment due to conflicts with the United States and Pakistan. As a result, the Indian government created a computer division in the Electronic Corporation of India (ECIL) and forced IBM to reduce its ownership percentage to 40%, leading to the consolidation of the Computer Maintenance Corporation (CMC) and the rise of various hardware and software spin-offs created by former IBM employees.

During the 1980s, the Indian ICT industry was mainly focused on software offshoring opportunities from the US and different Indian private groups set up shop in Bangalore. In addition, the New Software Policy of 1984 promoted the export of IT services and stimulated entrepreneurship through tax incentives and infrastructure facilities.

As for technological financing, pioneering efforts were initiated to develop it. The first public agency to finance venture/high-tech projects, the “Risk Capital Foundation”, was created in 1975 by the Industrial Finance Corporation of India (IFCI), and in 1988 the first Indian government guidelines were published to give official recognition. to venture capital operations.

With the arrival of the new millennium, the growth of the Indian computer software and services industry in India did not stop growing and there was an increase in the amount of venture capital funds and the amount invested.

CIS became one of the fastest growing industries in India accounting for around 5% of GDP in 2016. Public policies such as the Technopreneur Promotion Program (TePP) and the Startup India initiative contributed to this growth .

Multinationals like Microsoft, Apple, Google, Amazon and Cisco, were also actively involved in promoting the Indian startup ecosystem with different open innovation programs.

Various business and national assets emerged and acquired technological capabilities to compete on a global scale. Various initiatives have focused on different cities such as Pune, Mumbai, Delhi, Bangalore and Chennai, including the Great Indian Startup Carnival, which is part of the 10,000 Startups Program led by NASSCOM and supported by Google, Microsoft, Kotak, Intel and Verisign

Venture capital financing has emerged and established itself in India in a process that has spanned five decades. During the 1970s and 1980s, state financial institutions, institutional entrepreneurs, and the World Bank played a key role in the awareness phase.

Indian government efforts related to the indigenization of hardware and initial steps in the software industry were the main drivers of this period which ended with the first venture capital funded companies.

Consolidation of venture capital in India: actors and factors

After a period in which the national and provincial states made initial attempts at venture financing, during the 1990s, the American Indian Argonauts played a key role in the US relocation process to India, introducing the American venture capital model and practices.

the center of the country’s high-tech industry, has ranked among the top 20 startup ecosystems in the world in the past five years

In the last decade, institutional support for the Indian entrepreneurial ecosystem has been consolidated: different entrepreneurship programs have been launched by both public and private organizations, new incubation and acceleration programs have been created, NASSCOM has become more involved with startups, new financing schemes such as the Fund of Funds, transnational companies became involved in open innovation programs, etc.

In summary, the institutional and technological capacities accumulated by the Indian National Innovation System (NIS) and the Indian CISEE since independence, the role of the State and institutional entrepreneurs, the Indian diaspora, the domestic credit boom, the consolidation of India as a global hotspot for finance capital and the Indian domestic market are some of the vital elements that have driven the evolution of the Indian venture capital industry.

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India VC Investing Landscape: Numbers and Trends

According to the SDI Dynamic Entrepreneurship Index6, finance is a prominent aspect of the Indian entrepreneurial ecosystem in 2019. Furthermore, demand conditions are a strong point of the contemporary Indian entrepreneurial ecosystem.

On the other hand, entrepreneurial human capital, the CTI platform and education are the main weaknesses.

According to Venture Intelligence, the amount of total VC investment in India has grown by around 7 times in more than ten years, from $2.8 billion in 2006 to $20 billion in 2017. VC funds operating in India, including foreign and local funds, have grown significantly, from less than 10 in the 1990s to around 450 in 2019, two-thirds of them foreign venture capital funds.

Regarding the distribution of venture capital operations among the different industries, the IT and ITES industries concentrated 69% of the operations in 2019, in line with the growth mode of the Indian economy led by services.

Fast-moving consumer goods and healthcare registered 5% and 4% of operations, respectively. In recent years, banking, financial services and insurance, including real estate and fintech companies, saw the largest investments.

In summary, VC investment in India has seen exponential growth in recent years, especially in the IT and ITES industries, as well as in financial and insurance services.

According to the SDI Dynamic Entrepreneurship Index6, finance is a prominent aspect of the Indian entrepreneurial ecosystem in 2019

Despite weaknesses in entrepreneurial human capital, STI platform and education, demand conditions continue to be a strength of the Indian entrepreneurial ecosystem. It is clear that venture capital investment will continue to be an important factor in the future of the ever-evolving Indian economy.

Summary by Reporte Asia based on the work of Manuel Gonzalo & Kantis, Hugo (2021) entitled: The Indian venture capital emergence, development, and boom: A southern contextualization. Growth and Change. 10.1111/grow.12495.

He has a degree in economics from the University of Buenos Aires (UBA), a Master’s in economics and industrial development from the National University of General Sarmiento (UNGS) and a PhD in economics from the Federal University of Rio de Janeiro (UFRJ). He is a researcher and adjunct professor at the National University of Quilmes (UNQUI) and an associate at the National University of Chilecito (UNDEC) and Co-Coordinator of the CARI (Argentine Council for International Relations) working group on South Asia. His areas of specialization are productive development, STI and international cooperation. He was a visiting fellow at the Center for Development Studies (CDS), JNU, Kerala, India. He provides technical assistance to governments, universities, companies and international organizations.