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Start-up culture has been in focus post-2014 especially with the emergence of unicorns with their billion- dollar valuations.
A paper in the Reserve Bank of India’s January bulletin, written by Rajas Saroy, Ashish Khobragade, Rekha Misra, Sakshi Awasthy and Sarat Dhal, has said that start-up fundraising in India is expected to rapidly rebound from the macroeconomic disturbances seen over the last 2-3 years.
“While foreign capital and expertise may be important for nurturing of world-class businesses in the country, concerns about macroeconomic and financial stability may arise due to their rapid integration into global supply chains and finance,” the authors said in a paper titled ‘‘What Drives Startup Fundraising in India’‘.
107 unicorns
According to data from the National Investment Promotion and Facilitation Agency, there were 107 unicorns as of September 2022, with an aggregate valuation of $341 billion. Bengaluru, Gurgaon, and Mumbai are the top three cities with the highest number of unicorns in India .
The authors have pointed out that fund raising by start-ups is usually determined by macroeconomic factors. In India there has been a shift towards facilitative policies such as Make in India and Startup India initiatives. Such policies may have an impact in boosting such investment by reducing policy uncertainty and business frictions.
“However, fundamental factors like economic growth, attractive capital markets and a stable exchange rate ultimately facilitate the availability of start-up capital,” the paper said.
There is a need to keep track of foreign financial flows and the changes in management control arising from that, the paper warned. In this context, the authors have pointed out that some domestic investors have routed funds by setting up offshore entities in tax havens to invest in startups.
Startups that came into existence in 2020 and 2021 seem to having a more success i raising funds, especially thoae in new age sectors such as fintech, eductech and increased investor interest in artificial intelligence in industrial applicaitons.
Establishment of International Financial Services Centres may help in the onshoring of such investments while there are other avenues too to finance startups especially in segments such as defence, health and biotechnology.
The authors said that the policy focus is likely to shift to creating an environment for faster growth of startups and for funding from private investors.
“It may be necessary to factor in principles of equity in such policies to give founders who are not from premier institutions a fair chance at securing funding from the market,” they said.
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