Indian startups and Slowdown in Indian economy

Business Advantage in India released by WTO
Image source: India Brand Equity Foundation

The Indian startups ecosystem is growing with a healthy CAGR. Indian startups are getting enough funding inside Indian investors as well as from abroad.

The fear of a slowdown in Indian economy and the problems of funding is wide-spreading in many sectors.
The question is,
Will slowdown in the Indian economy impact on the Indian startups ecosystem in India or not? 

It needs a deep understanding of the startup’s society and the contribution of startup activities in the manufacturing and overall GDP numbers. Most sectors are growing with good numbers like eCommerce, service sector, Space, Agriculture, Telecommunication, etc.

The slowdown is mostly seen in some sectors, not in every sector of the economy. The problem arises in sectors including automobile, real estate, financial services – non-banking finance companies (NBFCs) in particular, and manufacturing has shown signs of impact from this economic slowdown.

Funding in Indian Startups

Funding is an essential factor for the startup ecosystem in India. Sectors that are facing problems are getting funded by loans from banks and NBFCs. But most of the funding in startups comes from HNI and venture funding. The startups are getting funding easily from these sources.

Early-stage Indian startups – no effect

Early-stage startups not contributing much to the Indian economy. The funding requirement of Indian startups is fulfilled by venture funding easily.

Many venture funds are supporting the early-stage startups and also HNI money inflow supporting the startups.

Early-stage startups concentrate on the problem-solving of the consumer in innovative ways, and to get a robust return venture funds supporting technology-based startup ideas.Globally only 10% of early-stage startups are successful. So, venture funds are always aware of the risk.

Late-stage Indian startups- may be slow down

The late-stage startups may face problems at this level to get funds. Most early-stage investors want to book their profit and exit from startups. The demand for business growth by venture investors, low demand due to slowdown, and necessary of the fund are much higher for late-stage startups.

So, late-stage startups may face difficulties to borrow funds. At this level, the fund requirement is high, plus the venture investor requires more clarification on business plans, model and growth possibilities.

Lower demand will impact negatively on the growth and problems of maintaining market share is also occurring at this level.

HNI inflow in Indian startups

The HNI inflow of money will be diverted from the equity market to startup funding due to the slowdown in the equity market.

The slowdown in the economy will create pressure on the Equity market, and short to medium-term growth potential is very minimum in equity market investment.

Many HNI (High Net-worth Individuals) diverted their money from the stock market to Startup funding to get high returns. These HNI money inflows will push up the startup’s activities. Now, many HNIs are participating in the funding rounds led by Venture capital funds.

Indian startups Entrepreneur become Investor

Many Indian startups entrepreneurs are operating organized successful startups and now taking the exit. These entrepreneurs are now on surplus money.

These entrepreneurs are now become venture investors and investing these amounts in the early stage startups. These newly established venture funds now supporting early-stage startups. This new group of technocrat-cum-investor is now supporting the innovative technology startups concentrating on AI-centric, deep learning, Robotic, etc.

Ultra-high net worth individuals (UHNIs) are investing directly in startups rather than funneling money through private equity funds that invest in such unlisted firms.

“It’s the first time that we are witnessing a trend where Indian UHNI investors are investing directly in Indian startups,”

Srikanth Subramanian, senior executive director, Kotak Wealth Management

The fear of a slowdown in the Indian economy will not impact the Indian startup funding requirement. The funding is not a big concern for the Indian startups ecosystem. The AI-driven innovative solutions used in the Indian market is at the early stage and has more scope of growth.

Sector Choice and Indian startups success

The industry sector choice is the success key to a successful startup. Some sectors are facing problems, but many sectors are doing well, and startups supporting and belonging to these sectors are more successful.

Sector-specific focused startups are doing well. Entrepreneurs who are familiar with the Indian economy and know the consumer’s mindset is comparably more successful.

Weak Sectors:

The most slowdown observed in some sectors like automobiles, real estate, and financial services belongs to non-banking finance companies (NBFCs). Manufacturing has also presented signs of bearing from this economic slowdown.
Slow credit growth impacted these sectors. The banks need to provide enough liquidity to stable NBFCs.

NBFCs were funded 40% of the incremental consumer financing in 2018. 25 – 30% of the NBFCs money was coming through funding or Mutual Fund spots. This short term funding to NBFCs must repay to mutual fund within a short time.

NBFCs loosened credit in the financial sector, the funds from mutual funds to these NBFCs was decreased dramatically. The repayment pressure also was increased on NBFCs. NBFCs are now repaying payments to their lenders, instead of granting loans to the consumer. 

Reliance Capital itself paid back Rs 40,000 crore and DHFL also paid back Rs 40,000 crore to their lender. This paid back amount has not come back in the system for the credit. All these moves created a liquidity squeeze in the market. To solve these complex problems, banks need to provide sufficient credit to stable NBFCs.

Potential Sectors:

Sectors like the service sector, insurance, eCommerce, space, retail have maintained a sustainable growth rate.

The service sector has contributed 54% of India’s Gross Value Added at the current price in 2018-19. Services sector GVA at current basic prices has grown at a CAGR of 6.25% in 2012-19 to reach US$ 1,294.41 billion.

The service sector includes a wide variety of activities such as trade, hotels and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services, and services associated with construction.

The Government spending on telecommunications infrastructure and services increase six times from Rs 9,900 crores ($ 1.41 billion) during 2009-14 to Rs 60,000 crores ($ 8.55 billion) during 2014-19.

As per the report, India’s earnings from medical tourism could exceed US$ 9 billion by 2020. Indian Startups belong to these growing sectors will do well in the near term.

Sectors that suffer problems due to industrial slowdown, the startups belong that sector may face some problems. Most sectors doing well and startups belong that group also performs well.

The lending is not a long term problem and addressed soon. The startup mostly working with a 3 to 5 years growth plan, not affected by the slowdown.

GST convenient to fintech startups

Execution of Goods and Services Tax (GST) has designed a common national tax system, and this is beneficial to Indian fintech startups which provides countrywide products and services.

The Fintech startups work on the startup ideas and technology to solve the complex problems, these startups nevermore affected by the slow down.

The success of a startup depends upon the problem-solving capacity and choice of the sector. Startups focusing on the limited scope sector have limited growth potential, but startups covering the wider sector possess a huge potential for success.

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