Over last decade, India has developed a comprehensive startup ecosystem comprising of innovative entrepreneurs, venture capital firms, incubators and accelerators along with a high number of engineering graduates and increasing internet penetration. As a result, by end of 2020, India has 37 unicorns, which placed it at third spot in the world after USA and China.
A recent report published by Bain and Company, indicated that between 2012 and 2020, the number of startups in India increased by 17 percent each year to a cumulative number of around 112K CAGR. Till now, venture capital investments have been the primary source of funding as the number of funded start-ups has also grown at a near same CAGR of 16 percent.
The IPO-bility of startups is also a critical part of any startup ecosystem, which was hitherto untested in India. The extremely successful IPO of Zomato has added this missing element in Indian startup ecosystem which will increase the confidence of both investors and entrepreneurs. This is critical because the returns earned by investors circles back to fund new startups and it creates a virtuous cycle. It also fuels the dream and ambition of not only existing entrepreneurs but also budding entrepreneurs. In this context, the successful IPO of Zomato can be seen as a watershed event. The upcoming IPO of PayTM is expected to further provide an impetus and given the fact that India has 37 unicorns, it may very well be the start of technology IPO boom in India.
Successful IPOs are critical but it can't replace the funding from private equity and venture capital. Both, IPOs and funding from private equity/venture capital, are integral part of the startup ecosystem as they feed on the success of each other. It is difficult for a startup to become IPO-able without getting funded by a private equity/venture capital firm in the initial phase of its life.
Also, given the experience of private equity/venture capital investors, to assist and guide a startup in its most critical initial phase, can be the difference between success and failure, since only a small percentage of startups are able to break into the elite club of successful and sustainable companies.
The risk appetite of private equity/venture capital investors are much greater than the public markets and therefore innovations and disruptions will continue to be funded by the private equity/venture capital investors. Also, the quantum of investment that the private equity/venture capital investors can pour into the Indian startup ecosystem is huge. Even in the Covid-19 year, they invested more than $10 billion in Indian startups. In the last three years, the private equity/venture capital investors have put more than $27 billion into Indian startups. An encouraging IPO scenario is expected to further increase the risk-taking capabilities of private equity/venture capital investors driving them to increase investment allocation to Indian startups.
Even prior to the Zomato IPO, India's startup ecosystem was growing extremely well. The Zomato IPO has given it a booster shot and the future looks unprecedently bright.
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