The third-largest technology start-up ecosystem in the world offers opportunities for scale, exits, and globalization
The Indian tech start-up ecosystem has grown tremendously in the past two decades since VC firms started making formal investments in the late 1980s. In my first year of investing in 1999, we saw around 270 tech deals. Today, Chiratae Ventures sees 4,000 tech deals per year. We estimate that the number of start-ups is growing by over 30% and the industry will see a flow of 12,000 deals per year. Several key trends undergird the growth of India’s vibrant tech start-up ecosystem.
India’s tech start-ups achieve scale and profitability
COVID-19 was a gamechanger for India’s tech VC portfolios in many ways. At Chiratae, 70% of our portfolio companies grew faster, but with a lower burn rate, compared with pre-pandemic times. Thanks to rapid technological adoption, technology investments grew at scale with new business revenue models, products, and technology. Companies in our portfolio that scaled better than before the pandemic include food tech company Curefoods, e-commerce portal for eyewear Lenskart, artificial intelligence-based marketing cloud start-up Pixis, agtech company Cropin, health tech portfolio Redcliffe, as well as B2B made-to-order platform Bizongo. Fintech start-ups Vayana Network and EarlySalary have seen rapid growth while consumer-driven companies like FirstCry, Emotix (Miko 3), and Playshifu went global.
This trend is driven by the Indian market’s large digital footprint, which offers opportunities for tech start-ups. At the same time, more than a billion consumers need efficient healthcare, loans, and insurance, with many needing digital solutions. Specifically, Indian farmers constitute a market of almost 150 million. The education sector targets 580 million people between the ages of five and 24. There are also over 100 million small businesses currently seeking innovative digital solutions according to Chiratae’s research.
Our research shows that since 2007, over 11,500 tech start-ups have been funded in India. In 2020, their revenue was around $20bn, up from $4.5bn in 2007. This growth is illustrated by several VC-funded portfolios achieving annual revenue of over $500mn and even $1bn. In Chiratae’s portfolio alone, we have three companies now approaching more than $1bn in revenue each in the next two years. These firms have dominant brand names in India with positive EBITDA and a global footprint.
India is now home to over 100 unicorns with more in the offing. As stated above, VC-backed portfolios in tech are seeing companies emerge with over $1bn in revenue. Based on our forecasts, by 2027, India’s tech start-up portfolio will surpass $150bn in revenue, up from $20bn in 2020, while a VC-backed portfolio of over 25 companies will have a scale of $1bn revenue each.
Growth of Indian VCs and domestic fundraising
According to Chiratae estimates, in the past seven years, India’s PEVC investments amounted to approximately $145bn. In the next seven years, we expect this to be over $450bn as the underlying deal flow is quickly increasing and tech companies are scaling up massively, which will create the need to raise capital for acquisitions. Tech VC investments make up approximately 15% of these. Today, 90% of capital invested is from international investors, and 10% from Indian investors. We observe a strong emerging trend of India investors (LPs) investing in Indian GPs. Chiratae Ventures has raised 40% of its $1bn assets under management from within India. India’s investors are attracted to India’s new class of GPs, who are delivering returns in the top 10%-25% percentile of performance. This growing tribe of high-performance Indian PEVC fund managers presents an enormous opportunity for both domestic and global LPs to invest in India or increase their allocations to Indian GPs.
At the same time, the number of Indian LPs such as family offices, insurance, and pension funds, and sovereign wealth funds is increasing. As they are actively seeking to invest in India’s PEVC market, Indian GPs now have access to higher levels of domestic LP capital. This includes the Government of India supported fund of funds including Small Industries Development Bank of India (SIDBI) and National Investment and Infrastructure Fund (NIIF) with increased allocations.
Favorable exit environment
The exit engine of India from PEVC funds and co-investments remains strong and adds to investor confidence. Top performing funds are returning capital at scale every year. PEVC investments amounted to $145bn in the past seven years, while the aggregate value of exits in the same period was approximately $80bn.
Notably, the bulk of VC exits are secondary sales to late-stage funds. Secondaries will continue to make up over 50% of exits for many funds. The next class is merger and acquisitions (M&A), which is categorized by predominantly global portfolio buyers. Until India buyers scale up, this class will remain the second-largest in the pecking order of exits. While IPO exits are currently below 10% in proportion, with more companies of VC portfolios scaling up, we expect this to grow.
Route to global expansion
While little industry data is available, Chiratae’s portfolio is tracking $2bn in revenue and international revenue takes up 10%, or around $200mn. We expect the international revenue component to grow to at least 25% of portfolio revenue in the next three years, based on our current fundraising experience.
India’s tech start-up ecosystem will expand its global footprint through M&A, as well as organic means. More global portfolios are acquiring firms in emerging markets and we see increased interest and opportunities for globalization in Indian companies in the e-commerce, SaaS, marketplaces, fintech, health tech, and agtech sectors. We believe that India’s PEVC fund managers and portfolios will continue to deliver top-tier returns as the country’s tech ecosystem scales and globalizes, drawing increased global and domestic LP interest.
About
Sudhir Sethi is Founder and Chairman of Chiratae Ventures, a leading tech venture capital firm in India. Chiratae manages an AUM of $1bn and five funds. It has invested in 125 portfolio companies and exited 45 firms. The active portfolio is now at a revenue run rate of $2bn. It has backed eight unicorns and taken three companies through IPO. Chiratae’s team of 28 professionals is based across its headquarters in Bangalore, as well as Mumbai and Delhi. Chiratae Ventures has backed marquee and market leaders like Flipkart, Myntra, FirstCry, Lenskart, Curefit, Bizongo, Uniphore, Pixis, Redcliffe, Vayana, EarlySalary, Agrostar, Bounce, Cropin, Curefoods, GoMechanic, HealthifyMe, Miko 3, Playshifu and PolicyBazaar.