A Startup is a young company started by one or more founders to create a new product or service with sizeable business prospects and bring it to market. Startup Businesses are full of aspirations and have huge goals to achieve. As they grow, they need a huge amount of capital for maintaining their operations, and hence they generally face hindrances due to lack of capital in their initial operating years. Generating funds through debt is not preferred by startups considering high-interest rates, additional charges, and increased liability of the firm. Another way is to bootstrap yourself through.
A Bootstrapped startup does not receive funds through any outside entity but has completely relied on the owner’s funds and their revenue generations to carry on the company’s operations. It is very difficult for startups to be able to bootstrap their way to glory. Therefore, the usual trend for raising money is by selling equity to various institutional and/or angel investors.
Coming to the Indian startup ecosystem, the past decade has seen a lot of startups budding from scratch due to internet explosion, digitalisation, and favourable changes under the government policies in India. With the help of which, the Indian startup ecosystem is the third-largest in the world, with more than 80,000 established startups in the country (as of 2020) increasing by more than 1,000 every year. Since fundings are necessary for the growth of these startups, there must be enough investors in the market to provide them. Well, for 80,000 startups in the country, the amount of available domestic investment capital for them is significantly insufficient.
There are two important factors responsible for this- actual limitedness of capital (it makes investors very selective), and lack of interest of domestic investors in newer & unconventional Indian Startups. This leaves the startups with no options but to turn towards Foreign Institutional Investors, or giant foreign Conglomerates, which in turn recognize their potential and provide them with the necessary capital in exchange for a part of their equity. The past decade has seen a dramatic rise in foreign investments to India, due to the huge market size and promising growth potential in the Indian market in the coming future.
Foreign investments in Indian Companies might sound like a very good thing, but in a wider perspective, it is not as good as it seems to be. Foreign investments are good until they only fill the gaps of investments that are left unfulfilled by Indian capital investments. What’s happening is that foreign investments are dominating the investments in India. Be it secondary market investments or startup investments, India is becoming dependent on foreign investments more than it does on its domestic investments.
In non-technical terms, new Indian firms are seeking more money outside of India than domestically. This means that Indian startups work their tough way to become successful, and when the time comes to reap the profits, they are taken by firms outside of India as investment returns.
Indian startups raised a record total of $14.5 Billion in 2019 (a year neutral from the effects of covid-19), out of which more than $4 billion worth of investments came from Chinese giants like Alibaba Group, Tencent, Fosun Capital, etc. In the past year during the incident in the Galwan valley, the people of India were outrageous and started boycotting Chinese goods, and as a result, the Indian government started banning Chinese apps from operating in India. Well as far as Chinese influence in the Indian market is concerned, it’s much deeper than what the general public is aware of: –
A unicorn is a startup with a valuation of more than $1 billion. They can be called the gems of all the Indian startups. Currently, India is home to 100 unicorns, like- Paytm, Byju’s, Flipkart, Zomato, Ola, Oyo Rooms, Swiggy, and many such companies. The above stats show that the major stakeholders in top Indian unicorns are mostly Chinese or else American. Jack Ma’s Alibaba Group and Ant Financials are very prominent bidders of Indian unicorns, having almost 30% stake in India’s digital payments giant Paytm along with a considerable amount of ownership in Zomato, Snapdeal, Big Basket, and other startups as mentioned in the list above. Tencent holdings (known for Pub-G Mobile) has a 10.9% stake in Dream11, 6% share in Swiggy, 5.1% in Flipkart, and scalable holdings in other unicorn startups- Byju’s, Ola as well.
While other capital firms like Didi Chuxing, Fosun, Steadview, and so on as mentioned above have been funding Indian Startups for years. Moreover, these investments don’t only come from China.
In 2017, Walmart of the USA bought a majority stake of 77% in Flipkart, India’s leading e-commerce Giant under a $16 billion deal; which, inter alia gave them the ownership of PhonPe, Mobikwik, Jabong, Myntra, and eBay.in (all earlier acquired by Flipkart).
Other firms like Berkshire Hathaway, Microsoft, Sequoia Capital, Goldman Sachs, and Softbank are prominent capitalist firms from the countries USA and Japan which have been showing interest in the ownership of Indian unicorns or soon-to-be unicorns.
These facts establish that foreign investors having significant stakes in Indian startups illustrates problems in Indian policy, which gives foreign investors greater influence over Indian startups and the country’s consumer market.
Almost all big Indian startups have significant foreign investment, which is not a positive sign. These startups were founded on an idea by their respective founders. Global investors invest in Indian startups because they have a lot of promise for fast growth and high returns. There is a lack of interest from Indian investors in Indian tech start-ups is due to their unwillingness to invest in non-traditional business models, which are at the heart of the majority of Indian startups. These businesses operate on a separate model, focusing more on marketing and human capital than on tangible assets.
Today, India’s almost all e-commerce businesses and all digital payments businesses, which are the future of Indian markets are owned by foreign entities. It is high time that the Indian investors and Government recognize the potential of these start-ups and create an atmosphere in our country where unconventional business ideas are appreciated.