It’s prime time for India’s startup scene

India has taken on a more important role in global geostrategic and business affairs over the past year with the growing U.S.-China rivalry and the war in Ukraine. Earlier this year, India surpassed China as the world’s most populous country and Prime Minister Modi was in the U.S. last week for what was only the third White House red carpet state visit of President Biden’s administration. 

We spoke with Sasha Mirchandani, founder and managing director of Kae Capital, one of the pioneers of early-stage investing in India, about why current geopolitical affairs represents an opportunity for India’s tech and innovation sector, which has evolved from established IT service giants to a thriving startup scene.

What has been the reaction among Indians to becoming the most populous country in the world?

It really isn’t too much of a big deal as we all knew it was coming, especially since China’s population growth was affected by its one-child policy over several recent decades. The good news is that we have the largest young democratic population in the world. That’s the key and our difference maker from China. China has an aging population, while we’re a young, under-25 population. Of course, it’s now our job to get these younger populations jobs, and to skill them. This is the biggest challenge and opportunity for entrepreneurship. We have a large group of folks who are being educated, but not educated in the right way. This has to improve dramatically and it’s a work in progress. 

India is known for big IT firms like Tata, Infosys, Wipro, but there are now successful tech startups and unicorns. How and when did this shift come about?
It has been a natural transformation. Venture capital started here as early as 2001 when the dot-com dynamic was happening. Softbank actually arrived in India on a joint venture as early as 2001. They weren’t very successful then, but they were one of the first institutional investors. By early 2006, lots of folks were coming to India, and I would classify them into three buckets: I call the first group “Suitcase VCs” as they came with a suitcase of cash, and a networking partner would come to India and look around for opportunities and maybe he or she found something exciting and innovative and they would do the investment. The second bucket would be the established Indian firms getting set up in India like Nexus, and then finally, you have U.S. firms setting up a branch like Accel Partners, Sequoia and Matrix. So by 2008 VC was getting institutionalized in India, and that’s how we started to scale up. Fast forward to last year. and more than $25 billion was invested in startups in India, so the results now are staggering.  

Bangalore plays a prominent role as the hub for startups. Are there other cities in the mix?

Bangalore is by far the dominant epicenter of startups in this country. The Delhi Gurgaon tech hub has become one of the largest zones, while Mumbai is still up there, too. Those two big cities follow Bangalore. Chennai is also a big tech hub, with lots of SaaS startups based here. These are the four main ones. Hyderabad hasn’t kicked off like it was touted to do so in the 1990s. There’s been lots of stops and starts, and there are chances it could kickoff at some point. But right now, Bangalore is dominant. To give you some context, take my VC firm. All of my partners are based in Bangalore, I’m the only one of the partners based here in Mumbai, which also hosts our back offices. 

What are the unique aspects of the Indian economy and way of life that make certain startups more likely to succeed?

That’s a good question. The first set of companies that come on as big success stories were copycats of U.S. companies. Amazon was the model for Flipkart. From Uber we get Ola. Obviously the pressure to execute is easier said than done; you need to raise capital and build large companies. But now you see lots more innovation happening. You see companies building business models for our tech culture, for India and unique business models for the needs of smaller towns across India. So, it’s a nice mix as the market evolves and we see the maturity of business models happening. You look at the U.S. and Chinese dot-coms that are big businesses, but in India it’s been such a big pain point in so many different ways in getting entrepreneurs to build companies with models that are specific to India. 

India has had a reputation as a tough place to do business. What attributes have been driving people to reconsider your country?

It's not perfect, but it’s definitely easier now. People are reconsidering because when you think about it, which other country has the opportunity that India has, especially now with China declining in terms of easy access—not just economically but also geopolitically? Latin America has so much promise, but nothing has really happened. You have some smaller Asian countries that are rich, but they are much smaller markets in scale. India is a huge block of a market. That’s why this week there is so much hope with Prime Minister Modi’s visit to the U.S to see President Biden—and with all the red carpet treatment. A big week with Modi in town! 

Is it still difficult for startups or even VCs to establish a foothold in India without strong local partnerships? 

Lots of U.S. investors have Indian arms now. Lightspeed India was one of the first to build a strong foothold here. Sequoia was strong here, but Sequoia India broke up with the U.S. arm just a few weeks back for geopolitical reasons, I feel. They now have two separate India and China arms with two unique names. Peak XV is the Indian arm. There’s enough U.S. money to keep the VC market vibrant. 

Does China’s tech crackdown give India’s tech sector an opportunity to be viewed as more attractive for incoming VC investment?

The China Plus One strategy really explains this phenomenon and it’s where India stands to benefit. China’s tech crackdown and overall hands-on policy to business has driven this situation in recent years. This theory rides on the strategy that while you can still maintain a presence in China, it’s now strategically necessary to diversify your operation or investment focus in other markets as a de-risk strategy. With its scale, India is often seen as the most relevant market in size compatibility to the opportunities that China has previously offered. 

india startups TO Watch

Zetwerk is one of India’s growing numbers of unicorns and a B2B manufacturing e-commerce marketplace for manufacturing components. Fractal Analytics is another unicorn and one of India’s contributions to the Generative AI space—in this case for digital sales. Dream11 is India’s biggest fantasy sports platform in a nation where cricket is the craze.