India needs a Larger Domestic Capital Pool

Domestic Capital Pool – The growth and economic development of our nation are supported by the startup ecosystems. In every way, India has experienced remarkable growth and progress.

The number of startups in India reportedly increased dramatically in just six years, from 471 in 2016 to more than 84,000 in 2022, as acknowledged by the government, which has recorded the creation of more than 8.5 lakh employment as of November 2022.

The 662 districts of the nation are home to the recognized startups, which come from all 36 States and UTs. Our nation has benefited greatly from the government-led startup India efforts, the notable implementation of the AIF regime in 2012, and the unprecedented deployment of strong, persistent, and high-risk capital into Indian entrepreneurs.

The majority of these unicorns work in the services industry, which accounts for more than 50% of India’s GDP. The startup ecosystem is one of the most important propellers of growth in the Indian economy, according to all these data. There are some difficulties related to the current macroeconomic situation in the world, but if India’s GDP increases in real terms by 8.0-8.5 percent annually for the next 25 years, I think India will have a 25 trillion dollar economy.

Domestic Capital Pool

We at IvyCap Ventures have always focused on the concept of Dragons (The development of value in the portfolio company in such a way that one may profit from it), even though India celebrated the birth of 107 unicorns at the end of 2022 and 47 unicorns in just the year 2021.

The Indian government has taken a number of proactive steps to encourage the expansion of startups in the country. A number of programmes have been adopted over the years under these initiatives to support entrepreneurs, establish a strong startup ecosystem, and transform India into a country of global job creators rather than merely job seekers, which has expedited support for Indian start-ups. The government is making every effort to support the Indian startup ecosystem, including allowing access to financing, filings for the protection of intellectual property rights, tax incentives, improving public procurement, and enabling regulatory reforms to attend international fests. Additionally, the government has implemented a number of steps to facilitate and draw in investment.

In many ways, all these initiatives are beneficial to startups. However, there are still significant gaps that the government needs to address as soon as possible if India is to meet its growth goals. Additionally, there is a critical need to launch domestic legislative efforts that support the startup in order to unlock local capital.

Currently, public market investments are treated differently from private ones under the tax system. Due to their relative difficulty to access capital markets, investors who invest in unlisted stocks supply the necessary risk capital, which is essential for the success of startups and businesses in their growth period. Investors place higher value in the listed space from a tax viewpoint, which is one of the problems.

The SIDBI funds of fund for startups have been India’s biggest success story; however, more growth funds are needed because merely venture capital funds are insufficient. Here are a few of the suggestions:

Insurance Businesses: Only 1% to 1.5% of the total budget for private capital is coming from insurance companies. This restriction has to be raised to 3 to 5X. Additionally, we must link our long-term goals with their investment time horizon.

Pension Funds: Although general guidelines have been set forth in the case of pension funds, these funds still lack operational clarity regarding how to go about investing in AIFs. Additionally, they might not have developed the necessary tools for evaluating

Family offices: The majority of family offices want to invest directly in startups and are eager to do so through joint investments in Venture Capital funds. The development of a supporting structure is required for the same. Co-investment structures could be rationalized to attract additional family office funding to the startup ecosystem.

Corporates: A lot of corporates are establishing their own accelerators, M&A teams, and venture capital funds. Even while this is fantastic news for businesses, there is a chance for them to divert CSR cash into VC capital.

Anticipations for 2023

From the perspective of startup capital availability, 2021 was a boom year. The 2022 revisions were both necessary and rather natural. The mindsets of long-term value creation and short-term valuation were split off as a result, though. It’s possible that this process will continue until the middle of 2023, when we’ll start to notice the dry powder of over 20 billion dollars being deployed more pro-actively. While this might make things more stressful for startups for the next six to eight months

During this period of struggle, there is a great opportunity for investors like us to pick the finest long-term winner. With that goal in mind, we plan to use a sizable portion of our USD 250 billion fund 3 in 2023.

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