Since the beginning of this year, India has produced an average of three new billion dollar ‘unicorn’ start-ups1 start-up technology companies every month, and the country now has 66 such companies (the highest number after the US and China) with a combined market valuation of c.US$224 billion2. 40% of these start-ups have joined the club this year alone, and India has become the second most attractive destination in the world for venture capital investment, attracting c.US$20 billion of venture funding in the first eight months of 2021, nearly twice as much as in all of 2020.
India’s technology adoption levels appear to be at a similar stage to China’s approximately a decade ago with c.750m internet users3 and e-commerce sales of US$64bn4. The past ten years have seen China’s technology sector take the world stage, starting with Alibaba’s IPO in 2014, the world’s largest ever at the time, and its e-commerce sector growing exponentially to US$2.3tn as of 20205, the largest in the world and more than twice as large as the US’s, producing 164 unicorns with a combined market valuation of c.US$400 billion6 in the process.
The coronavirus pandemic, and investors’ increasing concern with China, have changed the stakes for India’s emerging technology giants, and these companies have built scale domestically during the past decade, and are increasingly venturing into new markets internationally. Unlike the previous wave of technology value creation which was driven largely by the initial shift towards e-commerce, the current wave is being driven by sectors such as FinTech, EdTech, SaaS which are beneficiaries of longer-term shifts underway that have been accelerated by the pandemic, as well as by the next generation of e-commerce companies across specific categories (such as food delivery, online groceries, or hotel bookings), and India is also starting to produce global market leaders in emerging areas such as e-mobility, cloud communications, gaming and marketing automation.
As the coronavirus pandemic ebbs and unleashes a series of global transformations in how people work, communicate, transact and interact, India now has an opportunity to emerge as a major global power of the Digital Era, where wealth and power will be driven by access to intellectual property, data, and know-how. In the coming years, India’s technology giants have the potential to become global leaders, that have a positive impact on India and the world, facilitating the transition to a more sustainable digital era underway, supporting development across key UN Sustainable Development Goals promoting inclusion (digital as well as a financial), economic growth, innovation, and equality.
This month’s Sign of the Times looks at India’s unicorns, the sectors and themes that are driving them, and the implications for investors and the world at large.
Context: Key Growth Drivers of India’s Unicorns
Following decades of economic and technological development, India’s development as a global technology hub has entered its third stage of growth. The first stage, in the 1990s and early-2000’s, saw India emerge as an offshore IT services (ITES) hub, giving rise to India’s ITES giants such as Tata Consultancy Services, Infosys and Wipro; and led to global technology companies such as Accenture, Cognizant and Capgemini setting up large-scale operations in India. Indian ITES companies today account for c.55%7 of global IT-BPM spending, and US$150bn of annual export revenue8, and its top-15 companies, all publicly listed, have a combined market value of over US$450bn currently9.
The second stage, in the 2000’s and early 2010’s, saw the rise of Indian mobile and e-commerce players driven by rising mobile connectivity and smartphone penetration, combined with scaled and sustained funding from global venture capital investors. Many of the early movers of this phase are today’s largest unicorns (such as Flipkart, which was sold to Walmart for US$16bn in 2017). And the current wave of new unicorns is being driven, in part, by the second generation of e-commerce players across niche categories such as property bookings, B2B e-commerce, healthcare e-commerce, food delivery, etc. There are 26 e-commerce unicorns in India currently, with a combined market valuation of c.US$100bn.
The current stage, since c.2015 is being driven by the shift in global technology demand patterns towards products and services (e.g., such as cloud computing and SaaS) where India has core advantages. This has led to the emergence of world-class global technology product companies, across key areas including SaaS, FinTech, EdTech, as well as a growing number of companies in other areas such as marketing automation, media and communications, gaming and e-mobility.
This third stage has seen exponential growth in the number of unicorn companies. Nearly 60% of India’s 66 unicorns have been created since the beginning of 2020, and c.40% of these have been in 2021 (see Figure 2).
Overall venture funding since the beginning of 2021 has already crossed US$20bn in August 2021, with no signs of slowing down, nearly twice the average annual venture capital investment in India over the previous four years (see Figure 3).
The new wave of Indian technology companies is not only capitalising on the continued domestic growth of e-commerce but capturing some of the growing areas of global technology spending, and generally expanding internationally. Building on India’s expertise as an IT offshoring hub, Indian engineers and developers are now creating cloud-based software products, expanding their FinTech platforms to new geographies, and serving demand for online education content from across the world. More than half of India’s unicorns, both in terms of number and value, are in segments other than e-commerce (see Figure 4).
The pace of activity – in both investments and exits – has been frenetic. In the last month alone, India’s largest food delivery company (Zomato) successfully listed in India with a market capitalisation of c.US$15bn, nearly three times its last private funding round; a SaaS company (Freshworks) debuted on the NASDAQ at c.US$10bn, approximately The sharp rise in both the number of Indian unicorns would suggest that India’s tech industry is at a major inflection point and has entered a virtuous cycle of rapid growth and increased funding, which will allow its companies to scale rapidly three times its last valuation; an EdTech company (Eruditus) raised funding at a valuation of US$3bn, a four-fold increase over its last round less than 12 months prior, and India created its first cryptocurrency unicorn (CoinDCX). While critics may argue that this is a clear sign of a ‘bubble’ fuelled by unprecedented global liquidity, there does not appear to be any sign of a slowdown. India’s largest FinTech company (PayTM) is preparing for an initial public offering in the coming months, along with a number of other Indian technology companies which are taking advantage of the IPO window and the growing recognition of the value of Indian technology companies (in India and abroad).
The recent rise of India’s technology giants has not been limited to venture funding and the start-up unicorns. India already has 1712 publicly listed IT companies with market capitalisation exceeding US$1bn (which are not included in the figures above), and its six telecommunications giants valued at over US$1bn (including Jio platforms). The share of technology investments in overall FDI coming into the country increased from c.10-15% in previous years to 44% in FY21, driven in a large part by a US$25bn13 investment in Jio Platforms, India’s largest broadband company, by several large US technology companies and private equity firms.
The sharp rise in both the number of Indian unicorns and the value of its tech sector would suggest that India’s tech industry is at a major inflection point and has entered a virtuous cycle of rapid growth and increased funding, which will allow its companies to scale rapidly. Their growth both in India and abroad is due to a combination of global and local factors, including:
- The Accelerated ‘Great Transformation’ from the Pandemic15. The coronavirus pandemic has changed the way people the world over work, how they transact and how they interact, and is leading to permanent shifts in the manner in which technology is used by both individuals and businesses. Furthermore, the pandemic has also revealed that education and healthcare can be delivered virtually and at scale, and India’s perennial access issues can be addressed to a significant extent through EdTech and HealthTech.
- Unprecedented Global Liquidity. The advanced economies have injected c.US$23 trillion into the global financial system through their fiscal and monetary stimulus over the last year16, which in turn has driven a sharp increase in global liquidity and equity markets reaching all-time highs, driven in large part by the growth of technology and healthcare companies. This capital is finding its way to Indian technology investments in ways that previous booms did not.
- Sustainability Has Emerged as a Mega Theme17. The pandemic has also seen a sharp rise in global funding for sustainability with ESG-integrated assets growing to c.US$25tn in 2020 from US$17tn in 201818. A significant portion of these assets are being invested in technology companies, particularly software companies, which lack carbon intensive supply chains and manufacturing and have often implemented strict ESG policies themselves, allowing them to pass strict investor ESG screening criteria.
- China’s Inward Turn. China’s attractiveness to foreign capital has taken a knock, despite some high-profile commitments by major financial institutions such as Blackrock. Recent years have seen China’s government enact a series of policies widely seen as anti-market, anti-private sector and anti-wealth creation. The government’s crackdown on tech and EdTech companies, and their founders, the ongoing anti-corruption campaigns targeting entrepreneurs, the nationalisation of overseas-listed companies, and the detention of foreign executives is raising the risks for foreign venture capital and technology investors.
- India’s Proximity to the US and Other Power Blocs19. Four power blocs – the US, China, the EU and India – will likely shape the world over the next several decades, and given China’s increasing economic and military strength, it is in the other three’s interests to align more closely with each other. India’s technology companies are already deeply integrated with the US and European counterparts. China was once the biggest investor in India’s start-ups, investing US$4bn between 2015 and 202020. However, with deteriorating ties between the two countries, India introduced laws to curb that, and given China’s own inward turn, Chinese firms are withdrawing from India, and India’s technology giants have shifted their sources of funding to the US and the EU (as well as to Japan, the Middle East and Canada).
- Growing Mobile Broadband and Smartphone Penetration. India’s internet user base has grown three-fold from c.250m in 2014 to c.750m in 202021, due to the growing availability of 4G connectivity and penetration of smartphones. This, combined with the pandemic-driven lockdown, has hastened the behavioural shifts towards digitalisation across a range of sectors including e-mobility, food delivery, healthcare and education. In the next few years, India’s internet user base will scale to beyond one billion people, which will in turn drive the continued growth and scaling of these unicorns domestically.
- India’s Low-Cost Structure. India’s large and educated workforce, and the resulting low(er) costs for white collar workers has provided Indian technology firms with a formidable competitive advantage in selling their products internationally. India’s large number of scaled SaaS companies for example have leveraged these lower costs to build world-class engineering teams, and globally competitive products, with a fraction of the capital of their US competitors, while India’s large English-speaking workforce has enabled ‘inside sales’ which allows them to operate at a significantly lower cost of customer acquisition22. This has allowed Indian SaaS companies to scale from US$1bn of revenue in 2015 to US$5.3bn of revenue in 202023, representing a 40% CAGR, with these firms more effectively serving the small and medium enterprises that are driving the incremental demand for cloud-based software solutions.
India appears to be at a similar juncture to China’s of roughly 8 to10 years ago when total e-commerce sales were c.US$55bn (2011) with c.700m internet users (2015) and annual venture funding was c.US$10-20bn (see Figure 6). Following Alibaba’s landmark US$25bn IPO in 2014, China’s technology giants across categories would of course go on to scale rapidly, both domestically and abroad through acquisitions and venture investments (many of which were in India). E-commerce sales in China scaled to US$2.1tn as of 2021, while the total number of unicorns increased from 41 in 2014 to 17024 currently.
Given the accelerating shift to the Digital Era, India clearly appears to have the same (if not a bigger) opportunity than China had, and capitalised on, a decade ago. As the world’s transition to the Digital Era accelerates, spurred by the pandemic, it would appear that the stars are well-aligned for Indian technology firms to be significant beneficiaries, with the potential to help make India a Digital Era superpower. Given its current state of development With a billion people yet to reach global levels of prosperity (and several hundred million living in absolute poverty), this digital revolution can help India drive inclusion on an unprecedented scale, but also achieve prosperity without the carbon-intensive industrial growth that other large emerging economies have relied upon. and the growth potential of its tech sector, India has the potential to bypass entirely the traditional labour-intensive industrial model that China (and others) remain in today, driving a broad shift of its whole model to the Digital Era.
The scale of the market opportunity globally for Indian technology companies is potentially an order of magnitude greater than others, well backed by India’s internal drivers, and also by a government that is allied to and getting closer to the US, and an integral part of the quad, which has a clear technology security angle within a broader security framework. With scaled start-ups focused on the very market opportunities which are driving the global digital transition (see Figure 7), India has the potential to emerge as a superpower of the Digital Era.
This shift to a digital economy would be transformational for the country and help drive a large proportion of the investment, jobs and productivity growth that India needs to achieve double-digit growth and provide opportunities for its burgeoning workforce. With a billion people who have yet to reach global levels of prosperity[ Source: Sign of the Times, Creating Prosperity for a Billion People: Re-Architecting the System of Wealth Creation (Link)] (and several hundred million living in absolute poverty), this will help India not only drive inclusion on an unprecedented scale, but also achieve prosperity without the carbon-intensive industrial growth that other large emerging economies have relied upon. Given India’s scale and relative importance from a global environmental sustainability and inclusion perspective, this will clearly also be transformational for the world.
This transition will of course not be uniform. The recent, sharp rise in valuations for Indian technology companies would suggest signs of overheating, indicating that the journey may well be one of stops and starts driven by global Achieving its rise as a democracy with open and free speech and the unfettered flow of information is as essentials to Indian as it is to others around the world. Indeed, it may not be possible to be successful as a Digital Era economy without these fundamental human rights being the backbone.liquidity and the availability of capital. However, the direction of travel is clear, and the underlying drivers for the growth of India’s unicorns go well beyond the current global liquidity environment. While clearly not all current unicorns will endure the inevitable shocks and disruptions the sector will face in the coming years, Amazon and Google both weathered the dot-com crash to become the world’s fourth and fifth most valuable companies today, pointing to the long-term potential of a group of India’s unicorns of today emerging as leaders, not only in India but internationally.
Clearly, India’s technology firms have a unique window of opportunity to capture his moment, and for every unicorn, there are hundreds of start-ups competing in each of these segments, and others, striving to launch. India has found itself in the position of producing leading global technology companies across many of the key sectors which are driving the global transition to the Digital Era.
Conclusions: Implications for India, Investors and the World
The pandemic appears to have been the turning point that spurred India to embrace its role as a digital economy. And India’s emerging tech businesses and unicorns are scaling to play a critical role in realising the opportunity to create a digital economy domestically, and expand abroad as these same themes play out worldwide. For India, this is an opportunity to emerge as a real Digital Era superpower and attract the scale of investment, and create the productivity growth, it needs to achieve double digit growth and lift a billion people into real prosperity. Given that the country was already slowing before the pandemic and has seen a severe impact (both economic and human), this is an opportunity it cannot afford to miss.
For India’s government, the simplest mantra needs to be facilitation, playing a constructive role in creating an enabling ecosystem. Liberalising regulations in key sectors (such as health and education), creating the enabling frameworks (such as the India Stack for FinTech), and lowering restrictions on foreign capital will all play a key role in determining the extent to which India’s unicorns can scale. Governments around the world have a mixed record in backing national champions, with China showing success in enabling the growth of Alibaba and then damaging Ant’s IPO, and post-war America backing IBM to a dominant position through security and defence related contacts. The case for backing sectors with enabling policies, such as Taiwan backing semi-conductors as an industry and seeing it rise to a global position, is perhaps far safer.
For investors, this is certainly a long-term investment strategy based on value appreciation and decent returns for risk along the way. While for each success, typically, many fail, the depth and breadth of the tech sector in India seems healthy enough to back. Indian tech firms seem set to create disproportionate value in the coming decade across a range of Indian and global investment themes. Aside from a broad portfolio or sector approach, for active investors, this is an opportunity to help high potential businesses learn from the lessons of other markets to maximise their chances of success in India to scale rapidly, and to also help them execute international expansion strategies effectively (organically and inorganically), tapping into international capital markets to fuel their growth.
From a global geopolitical and security perspective, while China is seen as a rival, India is more likely seen as an ally. Given the US-China rivalry seems set to continue for decades to come, India as the fourth of the geopolitical power blocs – along with the US, the EU and China – is likely to continue to represent a privileged position as the technology corridor between Asia and the West as well as within the Quad (of the US, Japan and Australia). China’s rise as a technology superpower has been a powerful one in raising its position in global tech, but it has been a difficult one for foreign tech businesses wishing to access the Chinese market, given the restrictions on protecting data and intellectual property, as well as the primacy of local partners in any conflict, as Yahoo found with Alibaba. The rise of India’s technology giants has neither of these issues, so while it will certainly compete with them, it is more likely that it will be a mutually reinforcing partnership.
From a global partnership angle, India’s tech boom highlights a synergy between the US and India which has been decades in the making. This is a partnership that links the world’s largest population to 2050, in a democracy that America can and is working with, with the world’s most sophisticated tech hub that already has thousands of people of Indian origin working in its Silicon Valley and leading some of its biggest technology companies. This of course needs to be supported by continued development of the bilateral relationship.
India’s successful transition from a primarily agrarian labour force into a Digital Era labour force, alongside scaled industrial and services sectors that are powered by data and technology too, can position India as the first of the next generation of truly Digital Era economies. Today’s Indian tech companies, as they scale to become unicorns, and then global players, are pioneering something as important to the world as China’s rise from an agrarian society to a scaled industrial one in the early 2000s. Achieving that rise as a democracy with open and free speech and the unfettered flow of information is as essential to Indians as it is to others around the world. Indeed, it may not be possible to be successful as a Digital Era economy without these fundamental human rights being the backbone.
- Refers to start-up technology companies that have achieved a valuation of US$1bn or higher in a private funding round; the list of unicorns for India excludes India’s publicly-listed IT services companies, of which 17 have a market cap of over US$1bn
- Source: Venture Intelligence
- Source: Statista
- Source: Statista
- Source: eMarketer, Dec-2020
- Source: CB Insights
- Source: IBEF
- Source: IBEF
- Source: CapitalIQ
- Source: Venture Intelligence Note: one additional CPaaS company (RouteMobile) which listed in Aug-2020, and whose market capitalization crossed US$1bn has been added to this list
- Source: Venture Intelligence, Bain Note: 2016-2021 from Venture Intelligence, 2012-2015 data from Bain & Co. 2021 India Venture Capital report, which is based on Venture Intelligence and other sources, 2021 data is until 26-Aug-2021
- Source: CapitalIQ
- Source: Crunchbase
- Source: Government of India, Ministry of Commerce, Annual FDI Statistics
- Source: The Coronavirus Pandemic Part III: The World Emerging from this Crisis
- Includes US$14 trillion of total fiscal stimulus by advanced economies since January 2020 (Source: IMF Database of Fiscal Policy Responses to COVID-19) and US$9 trillion of quantitative easing by four advanced economy central banks since in 2020 and 2021 year-to-date (Source: Atlantic Council, Global QE Tracker)
- Source: 2021 Capital as a Force for Good Report
- Source: GSIA
- Source: Sign of the Times, The Quadrilateral Power Blocs Shaping the World: Will Democracy Prevail?
- Source: Observer Research Foundation
- Source: Statista
- Source: Google-Accel Partners, A New $50 Billion Industry for India: SaaS for a Global Audience
- Source: Chiratae Ventures and Zinnov Research Report
- Source: Tracxn
- Source: Sign of the Times, Creating Prosperity for a Billion People: Re-Architecting the System of Wealth Creation