An infrastructural substrate was formed that has become the bedrock for the Indian startup story over the past decade
But this foundation has largely been built on the foreign capital with minimal involvement of domestic capital
As Indian startups stand at the cusp of another pivotal moment after the past decade of growth, domestic capital will have a big role to play in the next phase
India’s startup ecosystem has seen over $150 Bn in funding in the past decade. That is a phenomenal number by itself, and it’s something a lot of the ecosystem stakeholders seem to forget when talking about why India is such a major destination for tech investors.
But it perhaps might not surprise anyone to know that almost 90% of this funding has come from overseas investors — sovereign wealth funds, large private equity players, crossover funds and venture capital giants that began their journey in Silicon Valley.
As the Indian market matured and evolved, an infrastructural substrate was formed that has become the bedrock for the Indian startup story. So far, the story has been about finding the customers and the consumers. Over the past 10 years, startups have gone from novelty to must-haves in many cases. And that has led to this moment in time — where the maturity and the patience of the past decade are translating into profits, consistent revenue growth, clarity on monetisation and exits.
In fact, the experience of the past two years has also put to rest some of the grave concerns around FOMO investing, spray-and-pray approach and governance lapses. The value erosion seen in the past year is being called a blessing in disguise.
So naturally, many VCs and investors believe that now is the time for domestic wealth to capitalise on this maturity. It’s by no means a new call-to-action.
Domestic Funds Stepping Up
When we launched MoneyX last year, this was a trend just about to start bubbling. But now, 14 months later, as we sit on the cusp of another edition of MoneyX, there’s little doubt that many Indian HNIs, family offices and institutional funds are finally alive to the startup opportunity.
The Department for Promotion of Industry and Internal Trade (DPIIT) currently houses more than 1.5 lakh startups, up from a few thousand startups just a decade ago, which also highlights the pipeline of entrepreneurial activity in the country. And many of these entrepreneurs are now turning to solve problems that are closer to Indian investors than global funds.
These founders — from Tier 2 and 3 towns — are turning to HNIs and family offices led by small and large industrialists and entrepreneurs for funds.
This trend has already played out in other geographies, where startups have dominated the tech discourse. When we look at the United States or China, tech giants in these countries built their foundations on a strong base of domestic capital.
“Take Apple, for instance, where Sequoia Capital was an early backer. The very same Sequoia came into India in the mid-2000s and created a massive portfolio of Indian startups. But now the times are changing, which is why they are sharper on the India thesis and have created an India-specific identity with Peak XV,” a general partner at SEBI-registered alternative investment fund told Inc42.
The GP added that there is a clear need for a domestic base of investors because we are no longer in the moment where Indian startups need the deep pockets of foreign funds for customer acquisition. Many of these playbooks that have been fuelled by foreign capital are now mature enough to be used without the need for that massive capital infusion.
“Of course, there are unicorns like Zepto or Rapido which have courted US-based funds in 2024, but by and large, the needs of the early-stage and growth-stage market are being funded by domestic investors. Even large pre-IPO rounds such as Swiggy’s are seeing a lot of Indian HNIs which will have a halo effect on the market,” the same partner added.
Startup IPO Boom Attracts Domestic Investors
Indeed, one cannot understate the significance of IPOs and the public markets in swaying the domestic LPs and investor base towards the startup ecosystem. In particular, the massive gains for stocks such as Zomato, TBO Tek, Policybazaar, Honasa, RateGain, Awfis, Zaggle and others highlight the variety in the size and scale of companies that have listed and made gains.
It also shows that it’s not just about the large brand names but also smaller IPOs which are showing promise. No surprise then that there is a queue of celebrities and HNIs backing Swiggy in its pre-IPO rounds at the moment.
For domestic HNIs and family office investors, who are more habituated to the dynamics of public markets, IPO-led exits and the promise of large IPOs mark a significant turnaround point. Exits create a virtuous cycle where each wave of successful listing brings in gains that help fund emerging startups.
A new wave of domestic investors is great, but a revival in overall startup funding will truly crown this moment. According to WaterBridge Ventures founder and managing partner Manish Kheterpal, Despite the rise in funding raised by India-focussed funds over the last few years, domestic capital accounts for around 15% of all funding for Indian startups.
He added that today, family offices and their investment managers have plenty of options and they can diversify their investments based on their liquidity needs. “From a point of view of financial risk diversification, family offices have access to experienced fund managers that have a good track record in India. On the other hand, those with higher risk appetite can go for direct investing and more granularly control their exposure,” Kheterpal said.
Government policy has looked to encourage more domestic investments in the venture capital and startup ecosystem. The INR 10K Cr SIDBI Fund of Funds is the biggest signal. Launched in 2016, the FoF was aimed at providing a boost to the Indian startup ecosystem and increasing capital inflows into the space.
As of November 2023, it has facilitated investments worth INR 17,534 Cr in 938 startups, according to a CRISIL report. And in recent years, there has been an effort to focus on particular sectors to back this holistic fund.
For instance, following the privatisation of the space sector in 2020, and after introducing 100% foreign direct investments (FDI) for spacetech in February this year, the Indian government announced an INR 1,000 Cr state-backed venture fund for the space economy.
This underlines an ambition on the part of the government that needs backing from domestic investors. The 2024 union budget also included a key reform to reduce the long-term capital gains (LTCG) tax on unlisted equities, bringing the tax rate down from 20% to 12.5%, which is another major boost that domestic investors have waited for.
These developments are a great way to encourage more domestic investors to participate in the startup ecosystem. Mobilising more domestic resources is key to helping startups grow without the pressure that usually comes with such large foreign investors.
It’s going to be many years before foreign capital becomes less relevant for startups. The globalised nature of many emerging sectors such as semiconductors or AI means that foreign capital will continue to dictate the course of startups.
These are areas where Indian startups are competing in a high-pressure environment.
In contrast, Indian investors and family offices tend to have a more patient approach to exits and growth targets since they realise how challenging it is to scale businesses up in the Indian context. This understanding of the constraints on Indian founders is another key advantage of domestic capital and will play a role in the growth of consumer tech, fintech and other areas that address uniquely Indian problems.
Having said that, the Indian ecosystem needs a better balance of both overseas investors and a domestic pool. It would be folly to overlook the role of foreign investors in the Indian startup story, but perhaps, the next few chapters need Indian investors as the lead authors.
