Bengaluru start-ups hope to stay warm in long winter

Bengaluru’s start-up ecosystem so far has maintained a decent appetite for funds, but the scenario is slowly changing now with global macro-economic factors and signs of a global recession already starting to play on the minds of investors

Updated - July 22, 2022 10:46 am IST

Published - July 22, 2022 02:30 am IST - Bengaluru

A file photo of a startup in Bengaluru, the start-up capital of India, which enjoys a unique leadership position, being the third largest start-up ecosystem in the world after Silicon Valley and Shanghai.

A file photo of a startup in Bengaluru, the start-up capital of India, which enjoys a unique leadership position, being the third largest start-up ecosystem in the world after Silicon Valley and Shanghai. | Photo Credit: Sudhakara Jain

Bengaluru, the start-up capital of India — which currently enjoys a unique leadership position, being the third largest start-up ecosystem in the world after Silicon Valley and Shanghai — is likely to enter a long winter as the ongoing Russia-Ukraine war, rising interest rates and recession fears are tightening the liquidity in the global funding market.

The city has a full-fledged funding landscape studded with close to 500 venture capitalists (VCs), private equity (PEs) players, dozens of corporate funds, some 4,687 angel investors, hundreds of high net-worth individuals (HNIs)and other investors. In fact, it saw an unprecedented surge in VC investments over the last couple of years. Start-ups in the city attracted VC funds of $7.5 billion in the first half of 2022, when the whole country received only $18 billion, as per fund tracker Venture Intelligence.

The start-up ecosystem so far has maintained a decent appetite for funds. Therefore, funding in the last five years, even amidst the pandemic, has been good. However, the scenario is slowly changing now with global macro-economic factors and signs of a global recession already starting to play on the minds of investors, according to venture capitalists in the city.

V. Balakrishnan, Chairman of Exfinity Ventures and former CFO of Infosys, said that the city’s start-ups have been successful in attracting significant venture investments so far. However, the funding scene is slightly changing now, he added.

Liquidity getting tighter

“The start-up funding generally is slowing down with investors insisting on profitability and better unit metrics. Large B2C rounds, which we have seen in the past, are not happening now. With liquidity getting tightened globally, it is going to be a long winter for the start-up funding environment,’‘ cautioned Mr. Balakrishanan.

Prashant Prakash, partner at venture firm Accel, said the velocity of funding has continued but it would change with the reset in global liquidity over the next year. “It is not that the funding has dried up completely. Product and engineering-led growth will be the focus over the next one year. Great companies will find capital chasing them and so funding will continue,’‘ Mr. Prakash explained.

With global uncertainties in the backdrop, global VCs are currently delaying funding for several Indian startups. However, the investors further said startups that were innovative, frugal and with great unit economics would continue to attract global funds.

Other challenges

Other than the impending global fund crunch, the start-up economy is also facing several other challenges, including lack of affordable office space, traffic snarls, poor road infrastructure, long-time commute, lack of rapid intercity/intercity connectivity (a patchy metro rail), the rising cost of talent, inability to attract the right talent, red tape, bribes and market-reach challenges.

“The State government is very supportive, despite that we still have bureaucrats who don’t move files or give clearances without bribes. Many entrepreneurs keep quiet and pay up out of fear of getting into controversies and losing further time,’‘ said a source at a drone technology start-up who did not wish to be named.

Geetha Manjunath, founder of Niramaya, a healthtech venture, said although the city has several things going for start-up ventures, it does not have hospitals like Tatas or AIIMS to collaborate with. “The government seems to have a bias towards any tech test done out here,’‘ added Ms. Manjunath.

Tim Mathews, CEO, and co-founder, Finsall, a fintech firm, said both the cost of talent and cost of living in the city was increasing on a par with other cities. Apart from rising wage costs, poor infrastructure continues to be an issue. “We have our employees traveling two hours daily for work. Start-up hubs, like HSR Layout, do not even have metro services yet,’‘ added Mr. Mathew.

Some start-up founders also felt the government was not showing much willingness to buy products and services from small start-ups instead it preferred big brands. It was important that Karnataka came out with some changes in procurement norms to increase the government’s buying from start-ups, suggested industry apex body Nasscom.

Why start-ups thrive

Despite these issues, the State is home to 18,000 start-ups (60,000 across the country), employing over six lakh people and these ventures cumulatively generated revenues of over $4 billion in 2021-22. This was despite pandemic shutdowns and challenges.

The city’s PSUs, such as HAL, BEL, BEML, ITI, HMT, BHEL, prestigious research and science organisations like IISc, DRDO, ISRO, NAL and other R&D centres, academic institutions like IIMB and National Law School of India University and a chip design environment brought by Texas Instruments in mid-1980s made it an attractive haven for entrepreneurs in and outside the country.

K.S. Viswanathan, vice president, industry initiatives at Nasscom, said, “Karnataka, no doubt, has the natural advantage of a strong, academic and research heritage that propels the growth of tech ecosystem, including start-ups. Availability of a complete start-up ecosystem including VCs, PEs, GCCs, MNCs, deep tech founders adds value to Bengaluru’s start-up story.’‘

The ambiance became even more defined and well suited for entrepreneurship, once the city started riding the global wave of tech revolution right from the early 90s. Today, the city has over 400 Fortune 500 companies, it has 5,500 tech firms, both domestic and multinational players, and over global capability centres (formerly captive centres).

In addition, the State has dozens of incubators and accelerators. Sectors that are doing well, post-pandemic, are tech firms focussed on finance, education, commerce, drone, consumers, and health, say venture capitalists.

The start-up capital of the country has emerged as a unicorn and soonicorn (soon to be unicorn) hub in the last over two years, and currently houses 40 of the country’s total 105 unicorns. Bengaluru will add 46 new unicorns, to its existing tally in the next two to four years, when the whole country is expected to see the emergence of 122 new unicorns during this period, as per a forecast by Hurun India Future Unicorn Index 2022.

Global recognition

Bengaluru has been constantly turning the heat on the existing global start-up leaders such as the US and China.

According to the Start-up Ecosystem Report 2022, released by the Israeli firm Startup-Blink, Bengaluru is set to pip Shanghai in the global start-up ecosystem index. Karnataka has been consecutively winning the ‘Top performer’ ranking by Start-up Ranking Report prepared by the Department for Promotion of Industry and Internal Trade (DPIIT), Government of India, from 2018 and 2019 and even recently in 2022.

Karnataka has set an ambitious target to achieve $150 billion worth of IT exports and grow its digital economy to a $300 billion mark by 2025.

According to minister for IT, BT, Science & Technology and Skill Development, C.N. Ashwath Narayan, in addition to the inherent strengths of the city, the State government has introduced supportive policies and made strategic interventions to grow the start-up economy as the sector is expected to significantly contribute to the State’s economic growth and GDP mandate for 2025-26.

The State has been supporting new ventures throughout their business lifecycle — right from providing funding at the ideation stage, to offering incubation support, mentorship, co-working facilities and setting up of dedicated start-up cell, the Minister said. Through Elevate, for instance, the Government has supported 531 start-ups with a committed fund of ₹124.28 crore.

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