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Why Indian startups are ready for a reboot in FY18

Even as the Indian startup ecosystem has seen declining investments, layoffs and shutdowns since last few months, the next fiscal will see fundamental changes and emergence of leaner ventures, says a white paper by Noida-based VC firm advantEdge Partners.

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“The conditions are ripe for a reboot of the Indian startup ecosystem. We expect a generation of lean startups focused on clear differentiation emerging, and capital will naturally flow to them,” said Kunal Khattar, General Partner at advantEdge Partners.

“One of the distinct trends to watch out is the emergence of startups focusing on solving unique problems of the next 200 million Indians who are just coming online,” he added.

The whitepaper by advantEdge VC firm predicts the following nine trends to watch out for in the fiscal year 2017-18. Edited excerpts:

AI, AR will be hot technologies

India has over 170 startups focusing on artificial intelligence (AI) and they collectively raised over USD 210 million in funding in 2016. Some of the more high-profile deals include a USD 100 million round by Mumbai-based Fractal Analytics and a USD 30 million Series-C round by Bangalore-based Qubole.

Global tech leaders are all working on their own versions of AI and AR technologies; including Apple, which is reported to have put together a team for its AR efforts. Indian startups like Smartivity are successfully demonstrating new applications for AR around STEM-based learning for children.

PVR’s launch of VR lounges could lead to new entertainment based applications with relevant local content. Education and entertainment applications for AR/VR in India will gain momentum and startups with a clear value proposition in this domain will attract a lot of interest in the next six-nine months.

Cyber security firms will be sought after

India witnessed theft of 3.2 million debit cards data, from leading banks including SBI and HDFC. Meanwhile, the US reported the now infamous hacking of the Democratic National Committee (DNC) with possible impact on the recent Presidential elections.

In January, UK’s GCHQ (the British intelligence organisation) chose Pune-based startup Spherical Defence for their accelerator program; demonstrating the global opportunities available for startups with a strong value proposition. Tracxn data as of end-January shows that 10 Indian startups have raised 11 funding rounds since 2016; led by Druva that has raised USD 118 million so far.

Transportation is going to be a hot sector

Autonomous and connected cars are seen as the next big market opportunity for the technology industry – though realistically we shouldn’t expect these cars to make it to India anytime in the near future. However, there is a big opportunity for Indian startups to drive technological innovation for global use, and there are already some Indian companies that are developing components for carmakers like Tesla. At the same time, India’s unique challenges in urban transportation will translate into great opportunities for startups looking to address these challenges – as already evidenced in the rapid growth of companies like Shuttl, Zoomcar, Baxi and Rapido.

A better generation of startups

One of the direct impacts of increased investor scrutiny in recent quarters will be seen in the quality of startups getting funded in the second half of 2017. These startups will invariably have to demonstrate a superior product-market fit, a sustainable competitive strategy and at the very least, a clear path to positive unit economics. The class of 2017 will not only be better poised for sustained growth but will also in many ways define the future of the Indian startup ecosystem.

Investors will focus more on portfolio companies

The general slowdown in follow-up rounds of funding will force the VCs to focus on keeping their portfolio companies alive. A series of unannounced bridge rounds for portfolio companies are likely- at flat or down rounds. There will be an industry-wide culling of startups with negative unit economics – as a result of which portfolios will get leaner and meaner. It is going to be survival of the fittest for sure.

The age of lean startups is dawning

The newer breed of startups and their founders are focusing on staying lean and efficient. They will increasingly focus on achieving scale through internal accruals rather than burning VC cash. Lower overhead and marketing costs will give these startups the ability to be more aggressive with pricing, in turn disrupting the conventional business models. Even when they are ready to bring an investor on board, they will prefer working with funds who can also bring strategic value to the table. Funds with rich in-house entrepreneurial expertise and deep industry linkages will gain a natural preference.

Conglomerates and large companies will invest in startups

India’s conglomerates and large public companies will increasingly borrow a leaf out of their western counterparts’ book and scout for startups they can invest in, or acquire outright. Some of the early examples of this trend are Titan buying a majority stake in CaratLane, L&T Infotech acquiring Pune-based AugmentIQ and Mahindra Univeg acquiring a 33 percent stake in agri startup MeraKisan. They will largely do so in order to have strategic bets to hedge against industry disruptions and capture any emerging opportunities.

Demand for regulatory support will grow

From taxation on e-commerce transactions to the recent incident with the Stayzilla founder, startups are beginning to raise their voice for more supportive regulatory and external environment – particularly in areas where the government can intervene. I believe they will find adequate recourse from the central government, which has frequently voiced its support for the startup ecosystem.

Digital India push will benefit consumer startups

One of the lasting impacts of demonetisation will be seen in Indians growing increasingly comfortable with digital payments – which in turn will benefit all consumer Internet startups in the mid to long term. Secondly, the sustained push on growing data consumption by Jio and other telecom operators will help mobile Internet adoption explode in the country.

Digital payments will bring the next revolution

The combined forces of increased access and comfort to digital payments will open a completely new market of Indian Internet users – the India 2 – comprising of the next 200 million users, who will be transacting online for the first time. Investors will actively pursue startups that can create products or services for the unique needs of India 2, in areas like education, healthcare, banking, e-commerce or access to government schemes. Take for example Gocoop that raised USD 800K or Haqdarshak that just raised USD 191K.

Finally, the digital payments revolution, supported by India Stack (building upon Aadhaar and UPI) has now opened new revenue streams for consumer Internet startups, for example dating apps like Tinder and TrulyMadly are looking at micropayments and virtual gifts, helping them along their path to profitability.

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