India has all the right marks, which have made its start-up investment ecosystem in India explode in recent years. We have seen India emerge as one of the top three countries globally regarding the number of start-ups founded. An Indian start-up investment ecosystem did exceptionally well in 2021. The impact that start-ups have made on all walks of life has been immense. It has a huge pool of talented creative young individuals seeking to be entrepreneurs, willing to risk it all, along with having a government that supports such initiatives by fostering the development of incubation centers for its large student community to support and encourage innovation and entrepreneurial mindset through academic institutions.
The Indian start-up landscape is very vibrant, as seen by the number of companies founded. In some sectors, the number of companies founded in India is close to the number of companies founded globally.
Role of government
The Indian government has supported start-up initiatives by providing increasing support to entrepreneurs through creating a regulatory environment and implementing progressive policies, and creating helpful infrastructure. They also launched the Startup India initiative in 2016, which aimed to simplify complex legal, financial, and knowledge requirements in an effort to encourage the participation of early-stage potential start-ups.
They also came up with reforms such as opening up sectors like space-tech for private participation, tax holidays for start-ups fulfilling certain eligibility criteria such as annual turnover and year of incorporation to help with working capital requirements, and the creation of state-run incubators, among many, are increasing the chances of establishing successful start-ups and helping them grow in India. and also promoting idea stage funding India.
Such interventions are being picked up by aspiring entrepreneurs and are leading to a boom in the start-up ecosystem in the country.
Currently, India is witnessing rapid growth in the number of start-ups. The incidences of the next round of funding by the start-ups have been on the rise; this showcases a matured investment phase in the Indian startup investment ecosystem.
With the availability of innovative talent, promising markets marked with favorable government policies, and capital, this early-stage cycle of investment in the start-up ecosystem has become enticing for domestic and global investors. It is raising the quality of start-ups being founded as well as the risks being taken by investors.
The pivotal role of various investors
1. Angel funding in India
Angel funding refers to the funding raised in the early stages of a start-up. It is usually led by individuals, angel investors, or funds to provide financial backing to an early-stage start-up in exchange for equity in the company.
It can be a one-time investment, or it can be in the form of continuous support. Though angels can invest money at any stage of the business, this often happens at the early stages — seed round and pre-seed funding rounds.
Angel investors take higher risks and expect higher returns than traditional investment options. Many angel investors are actively involved with the business on a daily basis. They may help the business in funding, networking, setting up business processes, and providing guidance.
As a start-up, you should seek out angel funding after you have already approached your family and friends and raised a seed round but before you look to raise Series A funding.
- Benefits of angel funding
- The money doesn’t have to be returned as the angel investors are your partners in profit and loss.
- Since most angel investors are seasoned investors, they are in it for the long term.
- One of the additional advantages as a start-up founder is that in addition to the financial backing, you get the advantage of their network and expertise. This is quite helpful in scaling your business.
- How to get angel funding in India?
You could directly approach an angel investor if you believe your idea is good enough. There are numerous investment firms in India to connect to angel investors easily, which makes networking with them so convenient. Before reaching out to an angel investor, you should know what an angel investor looks for in a start-up as well.
2. Incubators in India
Incubators help start-ups solve technical and design issues when building the product, and learn how to run and build a successful team. Incubators also help start-ups who don’t have experience operating a venture-backed start-up or are facing legal and operational issues related to company structure, etc.
Incubators usually don’t require equity or put as much pressure on success as accelerators, but also don’t offer capital. Incubators can run anywhere from 6 months to a couple of years, which gives teams a lot more time to work with the problem their business is solving.
The application process for incubators is not as competitive as for accelerators. They often focus on improving the area’s business ecosystem. This often means including companies that aren’t showing signs of rapid growth or scalability and are less rigid with applications.
They don’t offer capital but instead offer office space, mentorship, and partner opportunities. Since incubators are longer-term arrangements, there’s more room for learning and growth as the program goes on, so incubators are more forgiving towards companies that have less experience.
About 56 percent of the incubators are located in universities, indicating the important role played by universities in supporting entrepreneurship and start-ups. One-third of the incubators are located in private universities. In addition to the traditional teaching, research, and industrial collaborations, universities are increasingly playing a very important role in creating ventures.
The technology sector is supported by the largest number of incubators. After technology, the healthcare sector occupies the second position in terms of the number of incubators supporting it. Telecommunications, industrials, and consumer goods come close in terms of the third spot. The number of incubators supporting the other sectors is minimal.
Independent private sector incubators without any university affiliation might have more stringent criteria because the financial sustainability of the incubators could depend on their success of the incubators. On the other hand, incubators supported by government institutions could have the primary objective of encouraging start-ups rather than just financial success, and thus they are prepared to support more incubators.
3. Start-up accelerators in India
A start-up accelerator is an organization that offers mentorship, capital, and connections to investors and business partners. It’s designed for particular start-ups with promising potential as a way to rapidly scale growth.
Accelerators often take a cut of equity in exchange for program placement. While incubators are present across different locations in the country, accelerators are essentially an urban phenomenon. Except for a couple, virtually almost all of the accelerators are located in the main cities – Chennai, Bengaluru, Hyderabad, Mumbai, Ahmedabad, and New Delhi.
Accelerators are right for start-ups that are ready to scale. Accelerators are able to guide more start-ups compared to that incubators.
Accelerators are intense and fast-paced, taking 3-6 months to get an early-stage start-up ready for the market. Typically, start-ups have done a lot of the work to prove their product before going into an accelerator program; start-ups should be able to attract marquee investors after just a few months of mentorship and growth.
How do accelerators accept start-ups?
Accelerator programs accept start-ups cyclically –this means there are between 45 and 90 slots every year. At most accelerators, the application process is done in stages of application, assessment, interview, evaluation, and acceptance.
Capital is a big part of why start-ups seek out accelerators. There’s only so far expert guidance and an extended network that can help you; sometimes, cash is an absolute necessity to support a growing team and product.
Almost every accelerator out there provides capital in exchange for a percentage of the company’s equity.
- Benefits of an accelerator
- Unique networking opportunities and access to opportunities with well-established companies and influencers.
- Accelerators work with angels, VCs, and seasoned founders — they may even end up investing in accelerated start-ups at the program’s end.
- Collaboration and partnerships with innovative start-ups.
- Venture funding in India
What is venture capital funding?
Venture Capital is a form of funding or capital invested in a company or a start-up at various stages of business in exchange for the company’s equity capital. The funds provided by the venture capital firms are used by the start-ups for expansion, scaling up, product development, etc., depending on the business’s stage.
Companies like Paytm and Ola in India were able to reach large scale with the support of venture capital investments.
Venture capital firms or VC firms are investment firms that provide financing and guidance to early-stage to late-stage businesses and start-ups. They raise funds from limited partners and invest in promising private companies. VC Firms typically take a stake in the company for a limited time.
This comes in the second stage when the innovative idea of the start-up founders needs support to grow, upscale, and become commercially viable. The start-ups are finally sold to a big corporation or listed on a public exchange as an equity IPO.
They invest only for a short time. The investor then exits with the help of an investment banker, getting a good return.
- Benefits of VC funding
- Start-ups can utilize the funds received from a VC to help expand to other markets and aid in the diversification of product lines depending on the current stage of the business.
- Most venture capital firms provide funding and do a lot of hand-holding for the start-ups, which may be very useful to the founders.
- The founders can benefit from the vast network of VC investors after funding.
However, the start-up seeking VC funding also has to bear the weight of increased scrutiny, loss of control, and added stress. They have stages including pre-seed, seed stage, Series A, Series B, and Series C.
How to get venture capital funding in India?
Striking a good deal with the right VC investor requires the entrepreneur to have sound knowledge, proper market study, and the right ways to attract the investor to their business potential.
The entrepreneur needs to shortlist a VC fund whose expertise lies in the company’s sector and identify the right VC firm for them. The founder needs to convince the Venture Capitalist about the business’s potential with a sound business plan detailing the idea, potential, and strategy. After pitching, the next step is to approach the analysts and associates of the venture capital firm and present their business plans and projections to secure funding.
An increasing number of investors along with a steady inclination of young people towards starting their own ventures, is also propelling the entrepreneurship and early-stage start-up ecosystem in India. This availability of young talent with the right mix of passion and expertise definitely puts India’s early-stage start-up and investor ecosystem at an advantage.