Up the innovation curve: The latest wave of Deeptech startups in India

India’s startup economy has been booming. The last decade has seen significant activity on multiple fronts including the founding of new startups, amount of funding and number of investment rounds, influx of global investors and startups, development of regulatory infrastructure, global mergers and acquisitions, and internationalization. Entrepreneurial success stories abound.

Amid all this fervor, it is important to take a step back and reflect on how the Indian startup ecosystem has reached its current position. History repeats itself, they say, but our intentions lean more towards understanding the patterns of evolution. That can help us equip ourselves and create interventions to keep the momentum going.

Like most old economies and cultures, entrepreneurship and trade have blossomed in India for centuries. Built on these foundations, India’s current entrepreneurial ecosystem is a result of three waves of entrepreneurial activity with distinct focus areas – Information Technology (IT), consumerism and innovation. In our view, each of these waves is marked by distinct kinds of businesses, predominant activities and ecosystems comprising various social, regulatory, technological, economic and cultural elements. While each wave draws upon the previous one, we find that it is distinct from its predecessor and successor.

Up the Innovation Curve

The latest wave in India has two defining characteristics — B2B models and deep-tech, IP-driven innovation.

Over the last two decades, India has evolved from being the IT, services and business process outsourcing hub of the world to being a significant R&D center for multinationals and many Silicon Valley startups. Bangalore, particularly, has emerged to be the capital of GCC or Global Capability Centers, with about half of the global 1200 multinationals having set up their R&D centers in India. Today, we see entire product lines and unique products being designed, developed and delivered entirely from India. A few multinationals including GE, Cisco and Adobe have even shifted the P&L of some of their R&D business units to India.

Some may say that India’s R&D story began with Texas Instruments setting up their R&D center in Bangalore in 1985. However, we find that the R&D activity in the ecosystem accelerated significantly from the late-1990s, perhaps linked to the opening up of the Indian economy and the foundations created by the first wave of IT businesses. While these offshore-R&D development centers started off with basic testing, product maintenance and some rudimentary software development, many of them significantly went up the value curve over the next two decades. This led to many global multinationals setting up their second largest R&D sites beyond their headquarters.

Closely clued into the global ecosystems, Indian startups are moving up the intellectual property ladder, too. We are seeing fewer ‘me-too’ e-commerce models and more startups building unique products and solutions. The target customer is no longer only (or primarily) India and an increasing number of startups in India are now born global. These entrepreneurs are more seasoned, with experience of having worked in large multinationals, and have a global exposure with working in the U.S. or Europe before returning to India. Most importantly, these entrepreneurs have a product mindset unlike their counterparts from the previous generation who were more services focused. These entrepreneurs are building from India, for the world. Playing in the global market also brings home strong IP sensibilities for the ecosystem.

The other characterizing feature of the current wave is the salience of B2B models. The growth of the IT businesses from the first wave and the consumer-driven startups from the second wave along with the drive for traditional businesses to compete on a global playing field has created opportunities for business (as against consumer) products and solutions. The demand for B2B solutions from the global markets is a few times over. Many of us would have heard startups shying away from B2B models often citing the difficult working relationships. This is beginning to change with businesses that were themselves struggling startups in the recent past, now creating a more encouraging market for other young B2B startups.

The mass consumer segment from the second wave appears to be hyper-invested now with winners already picked, but there are several niche opportunities that are getting capitalized. Beyond the current unicorns, the next wave of 100 startups in India are much more diverse, going beyond consumer to B2B marketplaces, healthtech, enterprise-tech, robotics, fintech and many more. Some of these startups include Grey Orange Robotics, Medgenome, Blackbuck, Bankbazaar, Uniphore, etc.

The startup ecosystem is now shifting to more B2B models that have deep-tech and IP-driven innovation at their core. Examples include some of the startups in our Bharat Innovation Fund portfolio including Entropik Technologies (platform for Emotion AI, mapping EEG brainwave signals, facial expression and eye tracking), Detect Technologies (high temperature magneto-resistive sensor and signal processing for leakage and corrosion detection in oil refineries) and even a number of new-age Space-tech startups building affordable connectivity solutions, nano-satellite platforms and 3D printed modular rocket engines, taking a cue on the affordable Space-tech success from Indian Space and Research Organization (ISRO). There are now multiple success stories with Zoho and Freshworks leading the unicorn SaaS space from the southern city of Chennai. We now see over 500 AI startups in India leveraging the affordable talent and easier access to large pools of data and as well as a number of in-house and outsourced data science teams offering services to global customers.

While a plethora of challenges remain, most startups in the current wave seem to be adopting the Israeli way of establishing a global connect and customer base for scaling-up, after development, piloting and achieving product-market fit, done affordably in India in comparison to their global counterparts.

“These entrepreneurs are building from India, for the world.”

The Digital India Push

Digital India has been a big initiative by the Indian Government over the past decade across political party lines. The push towards this started with the development of public goods digital infrastructure known as ‘IndiaStack’ in 2009 and issuance of biometric IDs to Indians. IndiaStack is a presence-less, cashless, paperless, consent-based scalable architecture that promises to revolutionize and accelerate India’s digital push. It promises to enable the country leapfrog from being a digital infrastructure poor country to being a leader. In the last eight years, over 1.2 billion Indians have received their biometric IDs — Aadhaar — and onboarded on the Universal IDentification (UiD) project. This was the fastest ever rate of reaching a billion users, surpassing the growth of giants like Facebook, WhatsApp or even mobile phones!

The IndiaStack infrastructure seems to have enabled a more efficient opening of over 500 million bank accounts for citizens who never had one earlier. These bank accounts were opened with an aim to ease citizens’ access to formal credit and direct transfer of government benefits and subsidies. This IndiaStack infrastructure has also made its presence felt in the private sector with the country moving fast from largely an all-cash economy to cashless digital transactions.

Additional infrastructure layers are being built on IndiaStack. For instance, ‘HealthStack’ aims to enable India’s flagship healthcare scheme of insurance to 300 million citizens and ‘Digital Sky’ focuses on drone and small aeroplane flight plan authorization. A uniform single taxation scheme, launched recently, for the entire country has increased the tax net significantly and simplified the age-old taxation norms that have plagued the growth rate for decades. Infrastructure is ready for every citizen to have a Digital Locker for e-signed documents like driving license and certifications. India’s digital infrastructure is also attracting considerable interest from countries that are on the path of deeper digitization.

What Next?

Riding on the above wave and the government’s push for digitization, India’s startup ecosystem now stands firmly with over 300 incubators and accelerators, about 30,000 active startups. In 2018, institutional venture funding of over $4 billion channeled towards tech startups only speaks of the growing size of this ecosystem. With over 50 central and state government policies for supporting startups, the rails of policy and regulation are also getting stronger in India. The recent thrust on building technological infrastructure and enhancing the ease of business is further fuelling the growth of the ecosystem. While economic challenges remain, we are positive about the strong political will and the promise of bold reforms for the long run to get the economy to $5 trillion.

As 2019 flies by, we are closely witnessing the evolution of the third wave. We are seeing startups apply Artificial Intelligence and Machine Learning to create solutions across sectors. Novel use cases of IoT, blockchain and the IndiaStack are also emerging. We are seeing startups that are born global, creating solutions for the world as well as those that are applying next-gen technology to address deep and complex challenges of inclusion and livelihoods in India. The future holds immense promise and we are humbly contributing to its creation.

The authors are Somshubhro Pal Choudhury, a partner at Bharat Innovation Fund, Supriya Sharma, partner – insights at CIIE.CO, and Sanjay Jain, a partner at Bharat Innovation Fund. The article was originally published in knowledge@wharton.