The start-up ecosystem in India, the country with the world’s highest youth population

In May 2022, as the country registered its 100th unicorn, it stood only after the USA and China in terms of total number of unicorns. At the closure of the Indian financial year on March 31, 2022, the country counted 65,861 registered start-ups, with an estimated valuation of USD 332.7 billion. As a fact, in 2019 alone, 1300 new tech start-ups were created in India, which means two to three new tech start-ups every day. As the dynamism of the start-up ecosystem is appealing, this news looks at the key pillars of this system in the country.

Investors

The Indian private equity (PE) and venture capitalist (VC) firms had a watershed year in 2021. The investment activity in India was at its peak, at USD 63 billion. Private investors brought in USD 30 billion to Indian start-ups in 2021, compared to USD 11.6 billion in 2020, registering a whopping 160% rise in a single year. The country witnessed an 11% rise in the number of incubators and accelerators.

The growth of the start-up ecosystem in India is rooted in attracting early-stage investments. The duration of the fund raising phase is also shrinking, from years to months now. The top 15 investment deals received about 40% of the year’s total deal value, showing that most funds are invested based on the quality of the deal, rather than being attracted towards quantity.

However, the development of Indian start-ups is sustained by corporate investment. Corporations are interested in the disruptive potential of start-ups. Also, a few established corporations, which have grown too big to have an organized innovation with lesser turnaround times, find early-stage start-ups who lack cash a right match. These corporations also bring to the start-ups market access, successful product/service launches and, most importantly, an organized work culture and systems. For example, Microsoft India has supported more than 4000 start-ups. TATA Motors is engaged with half a dozen start-ups and is currently exploring ventures with 20 others. L’Oreal, through its open innovation programme, partners with tech start-ups focused on digital beauty services and incubators and has accelerated the creation of more than 30 start-ups.

The number of start-ups that have continued on to the next round of funding is on the rise, signalling the dawn of a matured investment phase in the Indian start-up ecosystem.

Resources                                                                                             

India has a huge population of 1.4 billion people with an average age of 28.5 years. The country also produces the highest number of English-speaking graduates, which means a significant number of aspirational and potential youth. However, India needs to work on scaling up its infrastructure to provide its population, which is spread over an extensive geography, with quality education. The IIMs (Indian Institutes of Management) and IITs (Indian Institutes of Technology), R&D institutes and non-profit organizations are driving the agenda of creating innovation and incubation centres, with the government’s help. A study on tech start-ups of 2021 shows that a large chunk of edtech founders are young graduates from IITs and other premier engineering colleges. The number of women entrepreneurs also witnessed a surge from 10% and 11% in previous years to 14% recently. Educated and aspirational entrepreneurs and a trained workforce are key to the growth of Indian start-ups.

Start-ups feel a need for an evolved supply chain in India. The unavailability of some key products has proved to be a challenge for many product-based start-ups. The transport system also needs to evolve. Unless that, the turnaround time in innovation will be a challenge for start-ups too.

Policies

The Government of India is trying to offer a conducive atmosphere to the start-up ecosystem. The repeated discussions in the Indian Parliament, frequent policy announcements, and active participation/arrangements of trade shows make its efforts evident.

A recent example of the Government’s impetus to develop innovation is its presence at trade shows held by the Drone Federation of India (DFI). The DFI organized an event that was attended by the Prime Minister, along with representatives of the Ministries of Civil Aviation, Agriculture and Information Technology.

The Government also has been keen on announcing monetary schemes, aimed at motivating start-ups. For example, the Department of Animal Husbandry and Dairying conducted a grand challenge in association with Indian start-ups to reward the best start-ups in five categories. The Small Industries Development Bank of India launched a scheme to provide assistance to existing micro, small and medium enterprises (MSMEs) in need of capital for growth. In fact, over 26 Indian states defined “start-up policies”. The Start-up India Seed Fund Scheme (SISFS) aims to provide financial assistance to start-ups for proof of concept, prototype development, product trials, market entry and commercialization.

Economy

The economy of a country is key to stimulating the rate of start-up creations. India is a consumption-led story, with a huge domestic demand. This has been further enhanced by technology reaching every corner of the country. The lower prices of mobile phones and data charges have made information available to the deprived strata of the country. Addressing their service needs makes up a huge consumer base. This, with the addition of the transport infrastructure as a catalyst, can change the product market, as much as the service market.

India is the fifth largest economy by nominal GDP, and the third largest by purchasing power parity (PPP). The country has been the fastest growing major economy between 2013 and 2018. This huge economy, paired with an ever-increasing middle class and access to technology, is an attractive combination for the growth of the start-up ecosystem.

An interview with Mr. Smit Shah, President, Drone Federation of India

JEC Composites Magazine: Can you tell us about the DFI and your role in it?
Mr. Smit Shah, President, Drone Federation of India: “The Drone Federation of India (DFI) was founded in 2017. The DFI is a non-government, non-profit industry-led body whose mission is to promote and strive towards building a safer and scalable drone industry in India. Today, it represents more than 200 companies, 2000 pilots, and a large number of training organizations.

The DFI was created at the time when drone regulations were looked upon as a security threat. It was pivotal as the voice of the Indian drone industry. The DFI worked closely with industry and government bodies for a conducive and responsible shift in the country’s drone policy. Today, we focus on: 1) policy advocacy; 2) trade promotion; 3) skills enhancement; 4) standards development and certifications; and 5) community building. Our dream is to make India a global drone hub by 2030.

As the DFI’s president, my role involves engaging with government institutes, start-up co-founders and bridging the gap. We have a huge role to play negotiating the contrasting roles of government bureaucracy, for controlling the misuse of drones, and companies, in motivating the drone ecosystem. The core idea is to balance and accelerate the development of the domestic drone industry and its infrastructure.”

JEC Composites Magazine: What is your opinion about the start-up ecosystem in India?
Mr. Smit Shah: “In my view, most policy interventions by the Government of India have helped many start-ups to incubate. The drone industry has been one of the largest beneficiaries. Today, the leaders of the drone industry are start-ups. So much so that they have posed a challenge to many multinational companies with mature technologies.

The key prowess of start-ups is their disruptive power. Their ability to turn around with minimal resources and time has unmatched benefits in the tech space. This has been the reason for the exemplary work of start-ups in telecom, electric vehicles, space, and other technology-lead areas. The Government also is not ignorant of the potential of start-ups to contribute to the economy. According to a ministry report, Indian start-ups are spread across 640 districts and have generated around 0.7 million jobs.

Thus, the Government’s thrust to support start-ups is logical and straightforward. This can be seen with schemes such as SAMRIDH (Startup Accelerators of MeitY for Product Innovation, Development
and Growth), which was launched by the Ministry of Electronics & IT (MeitY), who announced a vision to help close to 300 start-ups in the early stage.This is in sync with the Government’s forecast of one unicorn start-up per week.”

JEC Composites Magazine: How would you describe the industry’s response to the recent Indian drone festival, especially the response from start-ups?
Mr. Smit Shah: “The Bharat Drone Mahotsav 2022 (Indian drone festival) was organized by the DFI in partnership with the Ministry of Civil Aviation. The event was a great success.

The event was inaugurated by the Prime Minister (PM) of India, and it was the first time that the serving Prime Minister flew a drone in a public event. The message was clear: the government is highly focused on the drone industry and keen to ensure its growth. The event was attended by a plethora of ministers and the heads of the three divisions of the Indian Armed Forces.

The show also witnessed participation from 100+ companies, many displaying their products and ideas, and we registered 10,000+ attendees. The festival highlighted many partnerships, opportunities, and leads. There were many announcements and vital initiatives between companies too. All in all, we are glad to have provided the Indian drone industry a much-needed platform.”

JEC Composites Magazine: What are the major supply chain challenges facing the drone industry?
Mr. Smit Shah: “The last few years have seen a real transition in the drone industry. In its lifecycle, the sector is slowly moving from being a greenhorn to growing its own technology. Back in 2017-2018, it was faced with supply chain challenges in composite structures, brushless motors, dependable propellers, and evolving AI needs.

However, the industry is now able to produce and discover dependable sources for the manufacture of advanced composites. Almost 50% of composite imports have been substituted with domestic products. AI has always been the backbone of this industry. And the overall AI skills level has also improved by leaps and bounds. Brushless motors, however, remain a major import for the industry.”

JEC Composites Magazine: How is the composites ecosystem for drones evolving in India?
Mr. Smit Shah: “The composites ecosystem for drones has seen a phenomenal evolution in the last five years, predominantly due to the strong research efforts from several IIT incubated start-ups. It was also made possible due to veterans with experience in the composites industry, taking entrepreneurial risks to foray into MSMEs focused on composites manufacturing.

However, even today, technical textiles are the biggest stumbling block. India solely depends on imports of carbon fibre, Kevlar fibre, and other advanced yarns, thanks to a few companies who can stock and weave these yarns. They are also making them available in lower minimum order quantities (MOQs), enabling drone start-ups to break even sooner. If there are Indian yarn manufacturers, core research and manufacturing will help both the local defence and drone markets.”

JEC Composites Magazine: Where do you see the Indian drone industry by 2025, and what is the role of start-ups in its growth?
Mr. Smit Shah: “The Indian drone industry is becoming more robust with each passing month. According to the Drone Industry Insights Report 2020, the Indian unmanned aircraft systems (UAS) market is expected to grow at a compound annual growth rate (CAGR) of 20.9% between 2020 and 2026. This is 1.5 times the world forecast of 13.6%. The revenue of our drone industry is expected to reach USD 1.5 to 1.8 billion by 2026.

Drones are finding applications in varied sectors such as infrastructure, telecommunications, transportation, land record mapping, agriculture, courier, homeland security and, of course, defence. In my view, this is due to the disruptive capability of drones. To put this in context, land mapping in rural areas, which usually takes weeks, can be done by drones in days. A traditional two-day mine survey can now be done during the lunch break. The sprinkling of pesticides, which takes 1.5-2 hours, can be done in 15 minutes. This technology saves time, cost, and labour.

However, what interests me most is the scope of our industry by 2030. We are eyeing to become a global manufacturing hub. India is no longer a consumer in the drone industry. We have incubated and developed a plethora of technologies and we aspire to be a drone solution exporter by 2030.”

JEC Composites Magazine: What are the Government of India’s initiatives to promote start-ups in your industry segment?
Mr. Smit Shah: “The government is steadfastly focused on the growth of the drone industry through several schemes, including:

1. Drone Rules 2021 – I would call it a liberalization and opening up of the drone policy
2. Production-linked incentive scheme – a 20% incentive earmarked for promoting drone manufacturing in India
3. Prohibition on the import of completely built drone units – drones to be used in India must be built in India
4. Subsidy scheme for the purchase of agricultural drones (Kisan drones)

The Government, with a clear focus on developing the ecosystem for drone manufacturing, announced that the aids start right from the proof-of-concept stage. It will support the incubation of drone-related technology.”

JEC Composites Magazine: Which Government initiatives are most awaited by the industry to support the overall segment?
Mr. Smit Shah: “There were a set of problems at the inception. As mentioned at the beginning, we were focused on the security risks posed by drones. However, the journey from a security risk to a high-growth segment has been gradually addressed by the Government, due to the close interactions with an organization like ours – the DFI. We feel that our efforts were pivotal in addressing so many of these issues.

Today, we remain rather captivated witnessing the desired transformation of our industry. We not only see the Government as the largest customer, but also as the biggest enabler for the industry.”