The spectacular surge of venture capital deals in 2015 in India has led to euphoria in the startup ecosystem but has also raised questions, as some startups are not profitable. 2016 will be the year of consolidation for Indian startups, with a focus on more efficiency. The increase of the internet penetration rate in India will be another major challenge this year as it is the only obstacle preventing the startups from reaching a huge market of 1.3 billion people. 

After the venture capital boom last year, the excitement was palpable during the Surge conference on 23-24 February 2016. As startups and investors repeated many times, it’s the best time for the Indian startup ecosystem, and it becomes also more mature.

The Surge event’s popularity itself has set the tone. Organised by the Web Summit, it attracted 5000+ attendees, which is 5 times more than expected and 12 times the number of attendees during the first Web Summit event in Dublin a few years ago.

Paddy Cosgrave, Web Summit and Surge founder. In In 2015 nearly 50,000 startups, investors, speakers and other attendees gathered at Web Summit events.

Every day, 4 startups register in India. The number of deals doubled in 2015 and the seed funding and angel investing in Indian startups grew by over 60% in 2015 as compared to 2014, according to data collated by VCEdge.

According to a recent economy survey from the Indian Finance Minister, more than 1,000 startups born in 2015 have received funding from VCs. There would be a total of 19,400 tech startups in the country, and 5,000 of them started in 2015 alone. 

While Indian entrepreneurs used to head to the Silicon Valley (19% of the startups in the Silicon Valley have Indian entrepreneurs in their founding team), they are more and more focusing now on their own country’s growth. This propelled India to the 3rd place in the world to get the highest amount of capital and got the attention from the government which launched a Startup India Standup India initiative in December to support the startups movement. “We understand very well that innovation and technology is creating growth. We want to become a catalyst for the startups” explained Binod Bawri, member of the Atal Innovation Mission, an innovation promotion platform launched by Indian government. The government is building a fund of funds amounting to $300-500 billion in the next five years to support innovation and entrepreneurship.

Binod Bawri, member of the Atal Innovation Mission, an innovation promotion platform launched by Indian government.

Towards more selective investment and more efficiency

Unfortunately, the end of the year has been marked by some bad news in the startup world with Zomato and FoodPanda slashing workforce and cutting costs, leading some sceptics to say that Indian startups are overrated and that there is a bubble in India. More cautious, investors have started cutting back and question the profitability of the startups. If raising funds has become tougher, startups and investors don’t think it will affect 2016 growth, which will continue at a very fast peace, but it will lead to more selective investment and a refocus on more efficiency. “2015 was two steps forward and one step back. Next year will be 3 steps forward”.

How to connect the next 1 billion consumers?

Only obstacle to their growth: the access to internet for the 900 million Indians who can’t afford a smartphone or data. “Everybody says India is a 1.3 billion market but it is not true until that problem is solved” says Shashank ND, founder of the MedTech startup Practo. While some expect a new business model to reduce the cost of data, others rely on the government or large companies to take up the challenge, without affecting the net neutrality (this refers directly to Mark Zuckerberg’s recent attempt to offer a basic version of internet for free with Free Basics, which has been a hot topic during the event as well). The founder of Hike Messenger, the equivalent of WeChat for India, Kavin Mittal, is confident. “The infrastructure has to change. Networks, phones have to get better. This is happening, but in pieces. The free internet is going to be the next big thing for the Indian mobile economy. New business models have to emerge to put the 1 billion people online.”

One of them is Jana, whose founder Nathan Eagle has pitched during the event. The startup provides advertisers a solution to engage with the next billion consumers in a way that they can earn free internet. “To bring people on internet, someone has to pay the bill, and it’s not going to be the data carriers. In the same time, reaching these people represent a market of 300 billion dollars which can be spent in advertising and a potential e-commerce market of 675 billion dollars. And the money paid by the advertisers to provide free internet will not go to the people owning the TV channels but to people in emerging countries to connect to the internet.” Started in 2008, Nathan has convinced the most skeptics. The startup has raised 100 million dollars and is the largest provider of free internet globally (more users than Facebook’s internet.org). “20% of the contacts in one our member’s address book also use MCent. We believe we can give access to the internet to 1 billion people in the next 4 years” he adds.

Flipkart, e-commerce leader in India, showcased on this screen the tracking of it sales in real-time.

Supply challenges for the “on-demand” models

The “on-demand” model has known a tough end of year with the food discovery and delivery startup Zomato laying off a tenth of its 3,000 employees and other startups such as FoodPanda or TinyOwl slashing their workforce as well as part of a massive restructuring. The challenge for these companies comes from the supply side, as explained by Abhiraj Bhal, founder of the services marketplace UrbanClap. “We have to invest in empowering the suppliers to be more professional, arrive on time, etc. Uber has put large expectations, now it has become a standard for the consumer”. Saurabh Kochhar, the co-founder of the food delivery startup FoodPanda, adds that “many of the suppliers were not ready, technologically. We had to explain what the internet actually is. It’s a long journey, which needs us to be on the ground. Having the App is really just the start, then only the real challenges come. It’s a hybrid model which needs an offline strategy and lots of work on the ground as well because not everybody is on the same level in the technology adoption curve”.

To conclude, the Indian startup ecosystem is growing at a very fast pace, learning from its young age mistakes, and looking for a solution to include the bottom of the pyramid in this movement and improve the life of more than 1 billion people.