Demystifying Venture Capital: How It Works and How to Get It

PART I

1. Introduction

1 Introduction

We will answer the following questions in this chapter:

1.1 Why do we need venture capital?

1.2 How did venture capital evolve as an asset class? What are the key definitions associated with venture capital? What is the difference between a Private Equity Firm and a Venture Capital Firm?

1.3 What is a startup Ecosystem? How has the Start-up Ecosystem developed in India in recent years? What factors have influenced its development?

Which are the key sectors and geographies that have contributed to the start-up story in India?

How have unicorns evolved in India?

1.4 How has the venture capital industry in India developed in recent years? What factors have influenced its development?

What are the investment patterns of venture capital investment, in terms of Stage, Sector and Geography of investments in India?

What are the exit trends in venture capital in India?

1.1 Why Do We Need Venture Capital?

One of the fundamental questions that get asked is whether entrepreneurial ventures need a sophisticated set of investors such as venture capital funds. To answer this question, one must understand that entrepreneurial firms seek capital from different internal and external sources, including founder’s equity, retained earnings, banks, suppliers, customers, private individuals, shareholders, and venture capitalists, among other sources. Evidence also suggests that most of the financing needs of entrepreneurial companies are addressed by traditional sources of financing, such as internal finance and bank finance (Vanacker and Manigrat, 2013)¹. So why then do venture capital firms exist as separate financial intermediaries?

Let us look at some anecdotal evidence from history to begin with. Legend has it that Walt Disney was turned down more than 300 times before finally getting financing from one of the bankers for his concept of the now iconic ‘Mickey Mouse’. Walter Isaacson, in his book, Steve Jobs: The Exclusive Biography, mentions that Jobs was turned down for a loan by a bank and a computer parts store declined equity stake in his new venture. Jobs finally got the computer parts on a 30-day credit period from another supplier. Today, the situation of both companies is in stark contrast to their early days. For the fiscal year ending 2019, Disney reported revenues of approximately $70 billion, while Apple is currently valued at more than $1 trillion. In hindsight, the bankers who refused them would have regretted their decision. But that may not be the case, actually.

Typically, entrepreneurial ventures at such an early stage have little or no financial track record and are characterized by high information asymmetry and high uncertainty. In the absence of cash flows, balance sheets, or any hard collateral, raising capital from traditional sources becomes extremely tough for these ventures. In their research, Raphael et al., highlight that the raison d’etre of venture capitalists is their superior ability to reduce the cost of this information asymmetry, compared to banks or public equity investors². Their investment strategy allows them to cope with high uncertainty embedded in high-risk entrepreneurial firms. For instance, banks provide debt finance that involves fixed claims restricted to interest and principal payments. Venture capital investors typically provide equity (or equity-linked instruments) that entails a claim on the company’s residual wealth creation. Consequently, they have a more powerful incentive to monitor their portfolio, minimize overall risks through effective contracting, and create large value to earn high returns³ which are commensurate with the risks taken. Raphael et al., also indicate that venture capital funds have disproportionate representation in industries that have had high levels of informational asymmetry over the years, for instance, technology, biotechnology, software, and other such disruptive industries.

Indeed, this market has globally been a major source of funding and support for many success stories. As of 2019, five out of the top seven global companies by market capitalization have been venture capital funded.

Table 1.1: Success stories in the US⁴

These large outcomes have ensured that venture capitalists tend to dominate the headlines on startup funding. But the fact remains that the percentage of small businesses raising venture capital is still a small fraction of the overall number. A study done in the US suggests that only 0.91% of startups are funded by angel investors, while an even smaller percentage are funded by venture capital funds⁵. So, what is the importance of venture capital? Is its impact more than financing a small niche of companies? The evidence overwhelmingly indicates so!

Several companies backed by venture capitalists have become technology behemoths, contributing to research, development, employment generation, innovation, and economic growth. In the United States, public companies with venture capital backing employ four million people and account for one-fifth of the total market capitalization and 44% of the research and development spending of all public companies (Gornall and Strebulaev, 2015). Kaplan and Lerner (2009) also found in their research that roughly 50% of the ‘entrepreneurial’ IPOs in recent years in the US were venture-backed despite the fact that only 0.2%of all firms receive venture funding.

Venture capital firms have had significant impact on the global economy through their investments. While the direct investments may be minuscule compared to the GDP of any country, the end impact through the success of their investments is extremely significant. As an example, in the US, while venture investments form around 0.2% of the GDP, they deliver around 21% to the GDP through fructification of their investments⁶. Further, these investments revolutionize the way things work. Examples being Google (of Alphabet) which revolutionized search engines and went on to build an entire ecosystem around the Internet or Facebook which revolutionized social media.

Venture capital has helped entrepreneurs convert their innovative ideas and research into products or services across the globe. Let us now look at how venture capital has evolved as an asset class and some key definitions associated with it.

1.2 The Evolution of Venture Capital as an Asset Class and Definitions

1.2.1 The evolution of Venture Capital as an asset class

The venture capital industry is an important player in the modern-day financial system. It not only acts as a vehicle for fund deployment into early stage companies (companies which are in nascent stages of operation, or have just started operations, or completed the proof of concept of the business idea), it enables them to grow, generate employment, and add to the success story of any nation. This industry comes under the larger category of private equity investment. A private equity firm is a firm which provides equity capital to a private company over a medium-to long-term period to fuel its growth ambitions⁷. This industry has its origins in the United States where the American Research and Development Corporation (ARDC) was founded in 1946 in Boston to fund young enterprises⁸. The industry has since then grown manifold and become an extremely sophisticated participant in the financial systems.

Venture capital falls under the class of equity investments where firms provide money in exchange for a stake in the company and earn returns on the basis of its performance. It is a high-risk investment that does not offer a fixed return. Other equity investment sources for unlisted companies are generally the promoters, their friends and family, angel investors, large corporates, and large institutional investors like insurance companies, pension funds, and endowments, who allocate capital to a wide variety of alternate capital asset classes, including venture capital.

Venture capital typically involves investments in high-growth companies and are traditionally technology-centric or disruptive. They invest their money across a portfolio of companies, all of which are in early stages with high-growth potential. The returns from such investments typically follow the Pareto principle, where 80% of the returns come from 20% of the total investments a fund makes. These investments in investee companies happen across multiple stages on the basis of their capital requirements. The investments are made till a certain business volume is achieved and/or the company achieves certain milestones and starts demanding attractive valuations from the market. These funds sell their stake at this point to earn returns on their investment. Figure 1.1 and figure 1.2 provide highlights of the global venture capital industry.

Figure 1.1: Highlights of the global VC industry⁹

Figure 1.2: VC in key markets—amounts in USD Bn¹⁰

The global venture capital industry has been on an upward trend with both deal size and valuations increasing across all rounds of funding. However, this remains a debatable issue as large amounts of capital, which are chasing fewer deals, come at the expense of more companies being funded. Nonetheless, there is significant interest in technology and technology-oriented innovative solutions globally, while new areas such as Artificial Intelligence (AI), Machine Learning (ML), etc., have been gaining significant traction.

Investments through this route have a gestation period of more than seven years. During this period, companies use the parked money for their operations and the money remains locked until the time an exit is made. Given that the nature of this investment is illiquid (funds parked in an investment for long periods) and risky (in startups), the expected return on investment is also high.

Data shows that for the top quartile of absolute returns, venture capital returns in the long run have exceeded those of other asset classes, as shown in table 1.2.

Table 1.2: Top-quartile returns by asset class¹¹

An example of a more recent success story is Sequoia’s cumulative $60M investment in WhatsApp. In 2011, Sequoia invested $8M in WhatsApp’s Series A (early-stage investment) round as a sole investor, without soliciting support from other potential early-stage investors. WhatsApp chose to cultivate its relationship with Sequoia as well, with the latter being the sole investor in their subsequent Series B (round of fund-raised post Series A—mostly classified as early-stage funding) round. In 2014, Facebook acquired WhatsApp at a valuation of $22 billion, turning Sequoia’s $60M investment (and 18% stake), into a return of $3 billion at a 50X return multiple. The acquisition is the largest ever acquisition of a venture capital-backed company.

The venture capital market in India has also been extremely active. Venture capital funds started entering India in the late 1990s, with most large players entering by 2006. The industry has cumulatively raised over $31 billion in over 3,500 deals between 2006 and 2018. Several venture capital-backed startups have also gone on to attain unicorn status, including Flipkart, Swiggy, Ola, and Byju’s.

Figure 1.3: VC market in India¹²

A notable Indian success story would be the investment by Accel Partners in Flipkart. Accel Partners had set up a $65M seed fund (funds which typically invest at ideation stage or early-revenue stage) in 2008 and were looking at backing ‘unconventional and audacious businesses’. They invested $800,000 in early seed capital in Flipkart, early on in 2008, at a time when the company had no backers and when ecommerce was still in its nascent phase in India. Accel has stated on record that it took this investment decision partly because of ‘the founders’ penchant for constant innovation, experimentation, and ability to look at every obstacle as an opportunity. Accel’s cumulative investment of $100M yielded a return of around $1.1 billion when Flipkart was acquired by Walmart for $16 billion.

Like their global counterparts, venture capital funds in India have played a significant role in bringing new technologies and revolutionizing the way things work in various fields, including logistics, food delivery, ecommerce, and fintech, among others. Importantly, the advent and growth of the startup ecosystem have democratized wealth creation in a manner with quite a few entrepreneurs becoming wealthy. Additionally, with capital no longer being a constraint for good ideas, a number of professionals with good track records and risk appetites are now taking the ‘entrepreneurial plunge’, leaving behind safe and well-paying jobs to start businesses that can help solve key challenges using technology as an enabler. This new culture of accepting entrepreneurship beyond family-run businesses is also creating a thriving startup ecosystem in India.

As clearly stated above, the market for venture capital funds in India as well as globally is extremely vibrant. We will understand this market in further detail and nuance along with the various types of funds or ecosystem members that inhabit it and the factors that lead to their success and failure. However, before we do that, it is important that we spend some time to understand venture capital as an asset class and how it differs from its superset—private equity.

1.2.2 Key definitions

At the start, we need to understand the concept of a Limited Partner or LP and a General Partner or GP as these terms will be used throughout the book. A venture fund consists of two types of partners: Limited Partner or an LP and a General Partner or a GP. To put it simply, an LP is an entity that provides money to the venture fund while a GP manages the money on behalf of the LP. The GP is responsible for investing the money into various companies to earn a return for the LP as well as the day-to-day management of the fund. Both kinds of partners need to invest in the fund to make it a true partnership.

1.2.3 Difference between a private equity and venture capital firm

A private equity and a venture capital firm use similar considerations for structuring, fund raising, and operations. The key differences between the two lies in their investment thesis and the type of companies they invest in.

Private equity firms can invest in a company at various stages of their lifecycle with the objective of garnering supernormal profits. Venture capital is technically a subset of private equity, both of which are alternative investment assets. Let’s view both through the investment lens:

Table 1.3: Company lifecycle-based investment and type of fund¹³

As demonstrated in table 1.3, the nature of risk taken and the stage of the investee company at the time of investment are the major differences between a PE and venture capital fund. Both PE and venture capital funds draw their capital from Limited Partners (LPs) which are typically pension funds, endowments, fund of funds, sovereign funds, family offices or high net worth individuals. Both have a clearly defined investment thesis that lays out their focus, the stake they would acquire, as well as the returns promised to their LPs. They have similar nature of operations, with the GP being responsible for all investment decisions and subsequent exits, as well as similar ‘carried interest’ structures which lay out the percentage of profit to be paid to the fund management. It is also important to note that within PE funds, other asset classes like Infrastructure and Real Estate are looked at from a separate perspective. Table 1.4 explains the key differences and similarities between the types of funds:

Table 1.4: Differences between PE and VC¹⁴

1.3 Evolution of the Startup Ecosystem

1.3.1 Startup ecosystem: Imperative for the success of startups and Venture Capitals

A startup ecosystem comprises of startups at various stages along with entities like accelerators and incubators, mentors, and service providers like legal and financial services, among others. All these entities act as a cohesive group in the interest of the startup companies.

The startup ecosystem is the most crucial component in the operation of any venture capital fund as investing in startups, nurturing them through the initial phases, stabilizing their operations, and ultimately exiting the venture is key to a fund’s profitability and sustainability.

Figure 1.4: Elements of a successful Startup Ecosystem

Startups generally thrive in an ecosystem such as the Silicon Valley which provides an environment for exchange of ideas and a ready pool of talent. It is estimated that going forward, the Silicon Valley model of the US will be replicated in 30 destinations, globally.

Figure 1.5: Top startup hubs globally in 2018¹⁵

As figure 1.5 indicates, such ecosystems have thrived in the US, Europe, and Israel. This has been enabled by the availability of talent, favorable policies, and adequate funding. Deep-tech areas such as Blockchain, Advanced Manufacturing, and AI promises to bring the next wave of startup growth and the West is expected to usher it in. In India, Bengaluru is often tagged as India’s Silicon Valley and is the preferred location for startups.

Figure 1.6: Pillars of Global Competitiveness Index

Some of the elements of a successful startup ecosystem are also reflected in the Global Competitiveness Index published by the World Economic Forum. For 2019, the Index ranked India 68thamong 141 economies. Singapore is listed at the top of the Index while China is in 28th position. As seen in Figure 1.6, while India ranks moderately on innovation capability (# 35/141), it needs to cover significant ground in terms of skilled talent, ICT adoption, and product market. USA remains an innovation powerhouse, ranking 2nd on innovation capability and 1st on skilled talent. This may also explain why the US has 12 cities in the top 30 hubs for startups, globally. Innovation leads to a virtuous network effect that strengthens a startup ecosystem. High-quality technology universities that are the harbinger of innovation leads to top tech talent gathering there. This, in turn, leads to companies being set up there, which in turn leads to migration of senior tech talent to them. The circle gets complete when these companies contribute back to university research. Enabling policies in the form of tax exemptions and the presence of an ecosystem also drives growth. However, IP protection and development of original ideas are the key to success.

1.3.2 Indian startup ecosystem: A diverse and rapidly expanding universe

The startup ecosystem in India has evolved considerably since the liberalization of the economy in 1991. During the initial period, a few companies were set up, most of them in the IT space. It is important to note that during this period, broadband penetration was low, Internet connectivity was slow and unreliable, and infrastructure support was largely absent. It was only during the late 1990s, during the dotcom boom, that many notable startups such as BookMyShow, Zoho, and IndiaMart were established. In the early 2000s, online travel players like MakeMyTrip, and later Yatra.com, were amongst the first consumer Internet startups in India.

The number of startups has increased significantly from around 7,000 in 2008 to around 50,000 in 2018. Notably, the Indian startup ecosystem started to take off with the advent of cheaper Internet connectivity and increasing smartphone penetration. As of 2018, approximately 13-16% of the total startups were tech-based startups leveraging the Internet and smartphone boom in India.

At its peak in 2016, three to four startups were being set up in India every single day. Technology and advanced technology-based startups proliferated in India, fueled by infrastructure support, increased availability of growth-stage funding, and an enabling ecosystem. Technology-based startups typically focus on solving consumer problems across enterprise software, fintech, marketplaces, and healthcare. Advanced technology leverages the use of data analytics, Internet of Things (IoT), Artificial Intelligence (AI), augmented reality (AR), and blockchain. The role of technology and tech-based startups will be discussed in greater detail in a later section.

1.3.3 Key drivers of the startup ecosystem in India

Multiple factors have contributed to the growth of the startup space in India. We look at some of the key drivers in further detail, below:

1. Demographic factors

a) India’s demographic dividend: Armed with over 60% of its population under 35 and 50% under 25 ¹⁸, India is a young and thriving entrepreneurial country.

b) Availability of talent: India has one of the largest pools of high-quality engineering and managerial talent that has spurred not only ‘Make in India’ for India but also ‘Make in India’ for the world.

2. Macroeconomic factors

India’s macroeconomic and demographic factors have already been touched upon in the previous section, but it would be useful to summarize this from a startup perspective:

a) Ease of doing business in India: The central government has taken targeted steps in order to improve ease of doing business in India. This is evidenced by a sharp improvement in rankings from 100 in 2018 to 63 in 2019 ¹⁹. India’s ranking has improved across several parameters, including starting a business, getting credit, and getting electricity.

b) Large domestic market: India’s vast population with over 129 million urban mass consumers and a burgeoning middle class has created a huge base of potential consumers, each with specific needs and requirements. This wide base has provided startups with the opportunity to innovate both in terms of developing unique products as well as business models and rolling out mass customizable solutions.

c) Large base of consumers with Internet access & increasing digitization: India had over 400 million Internet users in 2017 and is estimated to have more than 627 million users by end of 2019 ²⁰. This has also provided a means for startups to provide differentiated delivery of their products and services to a wider base of consumers.

d) India’s macroeconomic growth story: The Indian economy has grown at an average of over 7% and is projected to grow at ~ 6% ²¹ going forward. This coupled with rising per capita incomes has contributed to the consumption story of the economy.

3. Ecosystem enablers: Accelerators and Incubators

Incubators and accelerators have also played a key role in developing the startup ecosystem in India. Startup incubators are companies that help startups during their initial phase of growth by providing mentorship and knowledge support as well as infrastructure support in the form of office space and research labs. Accelerators support startups by providing overall mentorship as well as by facilitating development of prototypes, enabling fund raising, and brand building.

Both accelerators and incubators are present across India, but are especially concentrated in Bengaluru, Delhi NCR, Mumbai, and Hyderabad. Approximately 38% of these accelerators and incubators are located in tier 2/3 cities.

The number of startup accelerators and incubators have increased by 36% between 2016-17 and by 11% between 2017–18. There are currently over 210 accelerators and incubators in India across four segments: Corporate, Private, Academic, and Government-supported.

Figure 1.9: Start-up accelerators & incubators in India²²

Under the Startup India Action Plan, the Atal Innovation Mission (AIM) has also set up the Atal Tinkering Lab (ATL), with the objective of fostering curiosity, creativity, and imagination, and inculcating skills in young minds. Over 2,441 schools have already been chosen for ATL grants²³.

Figure 1.10: Incubators and Accelerators by Type²⁴

Some of the features of incubators and accelerators are provided below:

a) Corporate incubators

Corporate incubators are incubation/ideation hubs which are promoted by large corporates. They are generally aligned to the business goals, business model, and the sector focus of the concerned corporate. For example, an incubator hub run by CISCO will focus on network technology. Typically, these incubators will provide an ecosystem within the corporate set up in the form of grants, co-working spaces, and access to their ecosystem. Their objective will be to enable development of the idea as well as provide access to their business network for creating a sustainable business model.

b) Private incubators

Private incubators, unlike corporate incubators, are promoted by investor groups with the purpose of developing new-age ideas with the ultimate objective of profit generation. The focus of these incubation programs is technology driven and more broad-based than corporate incubators. Facilities provided include seed funding, mentoring, infrastructure, and business facilitation. The range of fields vary from consumer to fintech and industrial.

c) Academic incubators

Academic incubators are promoted by academic institutes with an objective of promoting research into new areas and development of new technologies. A typical example is the incubator program run by IIT Madras. Facilities provided include access to R and D infrastructure, access to alumni network as well as early-stage funding. Focus areas include areas such as biotech and healthtech.

d) Government-supported incubators

Government-supported incubators typically have an overarching objective of employment generation and ideas centered around social and developmental impact, and social welfare. Facilities provided include access to partner networks to enable innovation, access to seminars, facilitation of funding, etc. Typical example would be Lab32 in Hyderabad which has success stories such as AnytimeLoan.in, Meep, Neurotech, and Banyan Nation.

4. Government initiatives

On January 16, 2016, the government of India launched the Startup India Action Plan with the intention of building a strong ecosystem for nurturing innovation and startups in the country. Since its inception, over 14,000 start-ups have been recognized by the Department of Industrial Policy and Promotion (DIPP).

An overview of the salient features of the action plan are as under:

a) Infrastructure support

Under this initiative, the government has set up incubation centers in educational institutions and the private sector. NITI Aayog has thus far approved 22 institutes to set up incubators and provided grants to the tune of ₹54 crore.

Research parks are being set up with a view to boost research and development (R&D) efforts between academia and industry. Eight research parks are being set up in technical institutions across the country.

Fifteen technology business incubators have been allotted to boost innovation and R&D efforts in institutions.

b) Ease of set up and exit

An application and web portal provide entrepreneurs access to information and a forum for resolving queries.

A startup hub has also been set up to allow stakeholders of the startup ecosystem to connect and engage with one another.

Intellectual property rights (IPR) have also been tackled through fast-track patent application and filing mechanisms. Patent applicants also receive up to an 80% rebate in fees and free legal assistance.

Formation of an insolvency and bankruptcy (IBC) board also allows startups to wind up their business within 90 days of making an application.

c) Alternative Investment Funds (AIF) regulations

The AIF regulations were notified by SEBI in 2012. Venture capital funds, startup/early-stage funds are typically set up as Category-I AIF Funds. These funds receive certain tax incentives and concessions from SEBI and other government agencies.

Owing to its light touch regulations, the AIF regime has proved to be more efficient on the regulatory front and hence more fund managers are opting to deploy capital through this route.

In a bid to further boost alternate investments, the government recently extended the provisions for domestic AIFs to the ones incorporated in IFSC (International Financial Services Centre) as well.

d) Tax benefits

The government recently abolished the so-called ‘angel tax’, thereby exempting companies from paying tax on money raised from investors over the fair market value of its shares.

Furthermore, startups are exempt from paying income tax for three consecutive years out of their first 10 years of incorporation.

e) Fund of funds for startups (FFS)

The fund of funds makes downstream investments in venture capital and alternate investment funds that in turn invest in startups.

In 2016, the government of India established an FFS with a corpus of ₹10,000 crore (to be built over the 14th and 15th Finance Commission cycles) with the specific purpose of extending support to the fledging startup ecosystem. The fund is expected to support more than 10,000 startups in its lifecycle.

5. Access to capital and funding: Angel and Venture Capital funding

Access to funding has played a significant role in boosting the startup ecosystem in India. Favorable demographic and macroeconomic factors coupled with targeted government initiatives had attracted numerous venture capital and private equity funds to India who continue to fund highly lucrative and favorable opportunities in the Indian startup ecosystem.

Early-stage equity financing ecosystem is critical for the development and survival of startups. Angel investors are considered to be the first source of external capital for a startup enterprise after founders, members of their families, and their friends. Early angel investors in India comprised of some of the successful Indian entrepreneurs in Silicon Valley. Over the years, a large number of individuals with different profiles and backgrounds have joined this ecosystem. Currently, technology and Internet founders, followed by technology professionals have the highest representation amongst top angel investors in India²⁵. Between 2015 and 2018, angel investors have invested more than $1.8 billion across 750 deals²⁶. More than financing, mentoring of novice founders by experienced entrepreneurs, acting as angels, has been a crucial contribution.

Furthermore, venture capital deals in India have increased from ~ $2.5 billion in 2014 to over $7.7 billion in 2018. Data collated by NASSCOM show that total funding for tech-based startups alone was ~ $4.2 billion in the first three quarters of 2018. We will look in detail at the evolution of the venture ecosystem in India in the next section.

1.3.4 Key sectors which have contributed to the startup story

Startups in India have been playing a crucial part in the Indian growth story by contributing to new business models, simplifying operations, enhancing customer service, and making innovative products and services accessible to the masses in a cost-efficient manner.

Figure 1.11: Breakup of Startups India by Sector²⁷

Of the approximately 48,000–50,000 startups in India, most have been in the space of enterprise tech. The second-largest segment is that of ecommerce, which refers to the online purchase and sale of goods and services. This segment can be both B2B as well as B2C. As seen in Figure 1.11, the share of funding resembles the share of number of start-ups across segments. Let’s take a look at the top startup sectors:

A. Enterprise tech

These are essentially the startups catering to the B2B segment across business intelligence, software as a service (SaaS), and data as a service (DaaS), among others. Almost 45% of the funded startups are in the SaaS space, followed by HR tech (9%), ERP (6.5%), and marketing tech (4%). India, hitherto a software force, has emerged as the SaaS startup capital of the world. A key factor has been the success of emerging local players who have risen to prominence, globally. Other factors like cost-efficiency, flexibility of customization, change-ready platform offerings, and remote-sales enablement have also contributed to the growth of this ecosystem. This is a true example of ‘Made in India’ for the world. The government policy on software products, unveiled in March 2019, and aimed at nurturing 10,000 technology startups by 2025, is further expected to boost the SaaS ecosystem.

B. Ecommerce

The Indian ecommerce industry has been on an upward growth trajectory and is expected to surpass the US to become the second largest ecommerce market in the world by 2034. It is expected to reach $200 billion by 2026 from ~$39 billion as of 2017²⁸. The sector has witnessed hectic interest from venture capital investors over the last 10 years with investments across B2C and B2B ecommerce startups. One of the biggest advantages of ecommerce was that along with the core product or service, it also created numerous startups in allied services and sectors that were required during the nascent phase of ecommerce in India. Most of these ecommerce players had launched or supported startups in sectors like logistics, payment gateways, wallets, and lending, among others. Some of these companies are now unicorns in their own right.

C. Healthcare

The healthcare industry in India is expected to grow on the back of both government and private expenditure. The government expenditure at 1.4% of GDP is one of the lowest in the world and is expected to grow to 2.5% in the coming years. Healthcare infrastructure as well as the pharmaceuticals industry is expected to drive this growth. Currently, the majority of funded startups are in online pharmacy (25%), healthcare IT (17%), nutraceuticals (8%), medical devices (8%), and personal health management (8%). These startups will have a crucial role to play in the healthcare innovation space creating aggregator websites, providing value added services, manufacturing wearables, offering online consultation, etc.

D. Educational tech

The reach of the mobile Internet in tier 2 and tier 3 towns and rural India has been one of the key pillars of the educational tech (edtech) story in India. Though the emerging business models hold power to disrupt the traditional education sector in India, edtech startups have faced challenges on monetization, low user engagement, and high