Made By India: Unleashing Domestic Taps for Startup Funding

As India aspires to be the third-largest economy globally, a well-formulated strategy for mobilizing domestic funding is imperative. With over 85 percent of investments in the Indian startup ecosystem originating from foreign sources, there exists an alarming overreliance on foreign capital.

Notably, the first half of this calendar year saw no emergence of new unicorns, a stark contrast to the preceding year's notable creation of 14 unicorns. 

The deceleration in startup growth is attributed to diverse factors stemming from geopolitical tensions and economic uncertainties. Given this scenario, it becomes imperative for India to tap into its domestic resources to reignite the momentum and foster sustained growth in the startup landscape.

Indian resources must flow into our Startup movement in a big way. At present, almost 75 -80% of the funds flowing into India’s start-up movement are coming from foreign investors. This needs to radically change. We need Indian insurance companies, pension funds and Indian…

— Amitabh Kant (@amitabhk87) November 28, 2023

How Can Domestic Capital Be Nurtured for India's Startups?

By nurturing homegrown innovation and leveraging domestic capital, India can propel its startups to make a significant contribution, potentially adding 4-5% to the nation’s GDP within the next three to five years. It's time to transform the winter into a spring season for Indian startups, fostering an era of sustained growth and innovation.

Amitabh Kant, G20 Sherpa for India and Former CEO of NITI Aayog, emphasizes the critical need for Indian resources to fuel the country's burgeoning startup movement.

Through a post on X, Kant states, “Indian resources must flow into our Startup movement in a big way. At present, almost 75 -80% of the funds flowing into India’s start-up movement are coming from foreign investors. This needs to radically change. We need Indian insurance companies, pension funds and Indian family businesses to fund and support India’s start-ups. All of them have vast investible surpluses. They need to commit resources in the Indian startup movement. If India has to become the leading startup nation with focus on innovation and deep tech, India must provide resources to its own innovators. We must convert the winter into a spring season for Indian Startups.”

How Much Is The FDI in Indian Startups?

In 2022, Indian startups witnessed a funding influx of $26.8 billion, with a staggering $26 billion originating from foreign investors. However, a significant downturn was seen in 2023, as foreign investments plummeted by 72% to $4.58 billion. With over 95,000 startups, India now boasts the third-largest startup ecosystem globally, but it faces a critical challenge – over 85% of investments come from foreign sources, creating an alarming dependency.

Parliament's Call to Action

A 2020 report by the Standing Committee on Finance, led by Jayant Sinha, shed light on the overreliance of unicorns on foreign funding. The report urged a recalibration, emphasizing the need to tap into domestic institutional funds in non-traditional sectors. Recommendations included loosening restrictions on pension funds, granting banks the ability to invest in Alternative Investment Funds (AIFs), and expanding funds like Small Industries Development Bank of India’s Fund-of-Funds.

Untapped Potential: Capitalizing on AIFs

Alternative Investment Funds (AIFs) hold vast potential if they can access broader capital pools like pension and insurance funds. Global success stories in the US, the Netherlands, Canada, and Norway underscore the pivotal role played by pension and endowment funds in nurturing startups.

Incentives for Domestic Resources

Diversifying portfolios to include venture capital investments, domestic financial instruments such as pension and insurance funds can contribute significantly to startup growth. High-net-worth individuals and family offices are increasingly recognizing startups as an attractive asset class, fostering innovation while reaping potential financial rewards.

Reasons Behind the Funding Crisis

A confluence of global factors, including high interest rates, inflation, a banking crisis, geo-political tensions and a looming global economic slowdown, has triggered apprehension among foreign investors. The anticipated recession in Western countries, including the US, Germany, and the UK, is amplifying the funding crisis for Indian startups.

Domestic Challenges: Consumption Slowdown and Valuation Realities

Domestic factors contribute to the funding crunch as well. Faltering consumption growth in India, particularly outside a small superuser set, has shrunk the target market for startups. Additionally, a realization among global investors that earlier-funded Indian startups were overvalued has led to cautious re-evaluation, impacting valuations of companies like Byju's and Swiggy.

Encouraging Domestic Investments: Creating Investor Confidence

To spur domestic investment, a range of incentives and tax breaks is crucial. Lowering capital gains tax on startup investments, exempting angel investors, family offices, and high-net-worth individuals from angel tax, and implementing investor-friendly regulatory reforms are necessary measures.

The Power of Domestic Investments

Balancing foreign investments with domestic capital can bring stability and sustainability to the startup ecosystem. Domestic investors offer a nuanced understanding of local dynamics, providing mentorship and industry expertise. By tapping into pension funds, insurance funds, family offices, and high-net-worth individuals, the government can not only infuse capital but also cultivate a culture of entrepreneurship and innovation.

A Strategic Roadmap for Growth

As India aspires to be the third-largest economy globally, a well-formulated strategy for mobilizing domestic funding is imperative. By nurturing homegrown innovation and leveraging domestic capital, India can propel its startups to make a significant contribution, potentially adding 4-5% to the nation’s GDP within the next three to five years. It's time to transform the winter into a spring season for Indian startups, fostering an era of sustained growth and innovation.

Join Our Thriving Entrepreneurial Community

Follow TICE News on Social Media and create a strong community of Talent, Ideas, Capital, and Entrepreneurship. YouTube  | Linkedin | X (Twittrer) | Facebook | News Letters