The building blocks of India’s startup ecosystem

Explore the core components of India's startup ecosystem, from government policies to venture capital and domestic funding, shaping India's innovative landscape. Click to read more!

The India we live in today, brimming with innovative technology, owes much to the golden age of startup development (2014–2021). Let me illustrate what that era looked like: Two friends from IIT, Sachin and Binny Bansal, raised $2.3 million for their e-commerce venture, Flipkart. Around the same time, Deepinder Goyal secured funding for his restaurant rating platform, Zomato. Venture capitalists like SoftBank, Tiger Global, and Sequoia were eager to claim their share of India’s burgeoning market.

This wave of optimism led to the creation of long-lasting businesses, some of which have since gone public and become market leaders in their categories.

By 2021, Indian venture capital reached an all-time high, hitting a record $38.5 billion. That year, venture deals nearly doubled from the previous year, climbing to 1,545 deals. The foundation for this rapid growth was laid in the early 2000s, when companies like Infosys and Wipro emerged as the first successful large-scale startups.

With the Indian startup ecosystem growing at such a remarkable pace now, we thought it timely to break it down into its core components and explore how each contributes to shaping the ecosystem into what it is today—here are the essential building blocks of India’s startup ecosystem.

In the beginning

It’s no secret that the Indian startup ecosystem operates robustly today. The foundations for this type of activity were laid down several decades ago, in the late 90’s to early 2000’s. Infosys listing on the NASDAQ in 1993 was almost a signal that world-class businesses could be built from India. By the late 1990s, India became a preferred destination for software development and IT services due to its large pool of skilled engineers and cost advantages. The foundations laid by the Infosys and Wipro’s of India have driven the market to significant heights. In 2023, the IT Services Market reached a value of $14.5 billion. Now that the past has been reflected upon, what policies and changes at a central level brought us to this exact moment?

The government's intervention

Since the golden period of startups began in the country, the government has introduced a number of key initiatives that have supported startups in the country. For instance, under the DPIIT (Department for Promotion of Industry and Internal Trade) the government made it easy for startups to get recognised by the government and hence, ideal candidates for funds and other schemes.

This is particularly helpful for startups in niche or upcoming industries that rarely receive recognition or concessions from both local and central governments. As Rashmi V Abbigeri, founder of blockchain startup Sunflora told us at a DPIIT registration drive: “For me registering with DPIIT at least helps me add a face to the name for now and it helps me find sources where I can bring blockchain technology to the government.”

(Side note: We’ve done some extensive work with DPIIT, KDEM and other government bodies. You can read about that here.)

Besides recognition, startups in the country also have benefitted from a number of fundraising initiatives. Under the Startup India Seed Fund Scheme (SISFS) over a 1,000 startups received nearly Rs 177 crore in funding to kick-start that idea.

That brings us to understanding how venture capital has evolved in the country, the next building block.

Also Read: Decoding the startup ecosystem with Arvind

Role of capital in India

When it comes to mapping the role of capital in startups, it would be remiss to not speak about the rise of domestic capital within the Indian startup ecosystem. Despite recent challenges—a funding slowdown in 2022 and 2023—domestic VCs have remained resilient, accounting for more than 90% of fundraising activities in 2024. Equally, within these years, there has also been significant dry powder accumulation within the startup ecosystem as well.

(Dry powder refers to capital that is raised but not yet deployed.)

Peak XV Partners, a leading blue-chip VC, recently said that their fund has nearly Rs 16,000 crore in dry powder to invest in Indian companies. Per Rajan Anandan, the firm’s MD, the entire VC and private equity ecosystem has nearly Rs 20 billion to invest in startups in the country. Although, VCs in the country continue to maintain a risk-averse approach to their investments, which could be a greater

Perhaps the most significant layer for venture funding in the country is the angel investments layer. Post 2016, there has been a rise in the number of micro-VCs in the country who are ready to deploy checks between $100,000 to $500,000. At the moment, they have a major fight for relevance going forward—as larger VC with greater capital will look at deploying smaller checks and cash-in on the early stage as the market matures, just as much as startups are looking for the right backers for their ideas.

Needlessly to say, the government wants healthier competition. The first move to encourage this came with the abolition of angel tax this year, which was a major deterrent for startups that wanted to raise capital from overseas investors.

Domestic funds have had a greater role to play particularly in the early stages of a business, while foreign funds' role in the Indian startup ecosystem has remained locked-in to the late stages. All this points towards domestic capital having emerged more strongly in the few years than it did over the last decade.

These are some fundamental pillars that make up the Indian startup ecosystem. What are your thoughts on how India has evolved over the last decade? Let us know. See you in the next WeWork Labs blog!

(Reference images used are from Unsplash)