In the Economic Survey 2021-22 released in January 2022, India was named the third-largest startup ecosystem in the world, after the US and China. A Nasscom report said the number of start-ups has been growing steadily with ten percent being added every year. Earlier, Prime Minister Narendra Modi said India has emerged as the second-largest startup hub in the world. 

While stats imply a rosy picture, ground realities seem to be different. Indian startups are taking a hit in valuation. Paytm Mall, which lost its Unicorn status in 2022, is a good case in point.

A funding crisis is looming large. To that end, India’s biggest tech investor, SoftBank’ Vision Fund has reported a record loss of USD 26.2 billion. In the last few months, more than 5,000 employees have been laid off from ‘promising’ startups like Vedantu, Meesho, etc.

So, what has led to the crisis situation?

Lack of innovation

India is behind only the US and China in terms of the number of startups. But in terms of innovation, India pales in comparison. In 2015-16, India applied for only 1,423 patents, while Japan led with 44,235 patents, followed by China (29,846) and South Korea (14,626). India ranked #46 in the Global Innovation Index, 2021, trailing behind Switzerland, Sweden, China, and the US.

According to the IBM-sponsored study, Entrepreneurial India– released in 2017– as many as 90 percent of Indian startups fail in the first five years. As much as 77 percent of the venture capitalists believed lack of innovation – building new technologies or unique business models – was the primary reason for the failure of startups.

Like China, Indian startups strive to emulate global ideas – think Ola for Uber, Gaana for Spotify, Flipkart for Amazon. But in China, companies like Baidu, Alibaba, and Tencent are superior on the tech front compared to their Valley counterparts.

In the last few years, the China model has taken a complete U-turn. Now, other countries are copying Chinese products. The best example is ByteDance, which has quickly emerged as the most valuable startup in the world. In 2021, the app had 1.9 billion active users across 150 countries and with USD 58 billion in revenues. ByteDance’s short-video app TikTok has been downloaded 3 billion times. The popularity of the short-video app is chalked up to its AI-based recommendation system.

India, on the other hand, has nothing to write home about. While it is an exciting time to be part of the Indian startup ecosystem, we cannot discount the fact that India is yet to produce a major company like Facebook, Google and ByteDance.

Giving back to the community

The public cloud has been transformative in terms of software development. Today, it seems impossible to build software at scale with just proprietary tools.

Microsoft was not always a cheerleader of open-source software. Former CEO Steve Ballmer went as far as calling it a ‘cancer’. However, this attitude changed when the current CEO Satya Nadella came on board. Under his leadership, Microsoft joined the Linux Foundation, open-source initiative (OSI), and open-source security foundation (OSSF). The company has open-sourced its own technologies, the most famous example being the .NET framework. Microsoft had acquired GitHub for USD 7.5 billion.

The contribution of Indian startups to the open-source ecosystem has been less than desirable, even as they continue to build most of their defining technologies using these open tools. According to Arnav Gupta, who handles Product and Strategy at Scaler Academy and the founder of FAANGShaadi (acquired by Scaler), said not many Indian Unicorns have built open-source tools with industry-wide applications. “I’m not saying “make something open source” should be a business level OKR (that’s ridiculous) or even a goal. You are building a product, selling it, and running a business. You’re not in the business of making developer tools. But when you move beyond writing the same old CRUD APIs to move data from point A to B, you’re sure to find technical challenges which you’ll solve for the first time And if you’re truly “tech first”, you’ll build a solution you’ll feel proud to stand behind and show the world,” he said.

Companies like Hasura are exceptions. An open-source engine, Hasura helps developers connect to PostgreSQL databases and microservices across hybrid and multi-cloud environments, and then automatically builds a GraphQL API backend to build data-driven applications on top of the unified API.

According to GitHub, in terms of developer contribution to open source projects, India is the fastest-growing in the world. In 2021, GitHub COO Erica Brescia predicted the platform would have 10 million developers from India by 2023.
Regulation is one of the main challenges Indian startups face. The over-regulation results in ‘opaque administrative processes’. However, there is hope. Indian startups have some of the brightest minds. Throw in the strong government support and promotion of the startup ecosystem, India should be able to tide over the funding crisis and give the China and US a run for their money.