Making Venture Capital in India Work
Many global investors are aware that India is the fastest growing major economy in the world this year and is also on track to become the third largest economy in the world by 2030. What they may not be aware of is that India now has the third largest startup ecosystem in the world.
This creates incredible opportunities for international investors who want to invest in India’s growth through its dynamic startups. And the best way to do that is through the venture capital market.
But making venture capital in India work is not necessarily as straightforward as it might be in developed markets where the industry has decades of history and more established processes. Navigating the Indian context successfully requires a profound understanding of India’s economy, its key sectors and companies, its capital markets, its legal system and its cultural differences. And it needs capital providers that have deep experience of working with startups and their founders and a proven track record of success.
Two sectors in the Indian economy that we believe are highly attractive for venture capital are consumer and tech.
Indian consumer spending has generally been growing in the past four years. India’s consumer story is being driven by an enormous expansion of India’s middle class. The middle class is the fastest-growing major segment of the Indian population in both percentage and absolute terms. It now represents 31% of the population and is expected to be 38% by 2031 and 60% in 2047. The middle class is growing so fast because of rising incomes. India’s GDP per capita has been steadily increasing, from $1,350 in 2010 to $2,700 in 2024 per the IMF, growth of around 6%. It is expected to reach $15,970 by 2030.
But there is an early-stage funding gap in India's consumer discretionary sector, meaning that venture capital investors which will provide capital, strategic support and mentorship to Indian start-ups to foster innovation and scalability will benefit from lower competition at the start of the process, and the value gained by building businesses with a bigger moat. There is an opportunity to focus on startups that resonate with India's burgeoning middle class, tapping into their rising disposable incomes and evolving lifestyle preferences.
Venture capital investors in the tech sector can target startups with the potential to become brand builders, prioritizing scalability and technology. Tech is particularly attractive because India now has approximately one billion internet and mobile phone users, and its tech firms are already world-famous, with many international firms having a significant presence in the country. India’s tech sector is supported by a growing startup ecosystem which is well-suited for venture capital investment.
There was a period of extraordinary growth in this ecosystem between 2020 and 2022, when the number of unicorns trebled to over 100 and the number of startups has grown more than 300 times in the last ten years. The picture became more complex in 2023, which was a difficult year for a number of reasons, including a global economic slowdown and post-Covid market corrections. There was a sharp decline in deal volume and fundraising, which fell 50% overall. Now, however, there are clear indicators that growth is returning. The number of startups in India surpassed 100,000 last year and the number of unicorns has also continued to grow, with 415 “soonicorns” in the pipeline.
This growth meant that the exits that VC funds were able to secure in 2023 in India amounted to $6.6 billion. This is tangible proof that venture capital in India can provide the guidance and assistance that shapes the trajectory of high-potential startups in the country. We believe that investing through venture capital in bold founders with a compelling vision for India’s future and the drive to execute is the way to access India’s incredible growth story.
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Archana Jahagirdar is Founder at Rukam Capital
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