By Reji K Joseph
& Thankom Arun
In policy circles and discussions on innovation, ‘start-up’ has become the buzzword. Start-ups operative at the higher end of the innovation value chain. New technologies provide a lot of opportunity for new ventures to come up. There are a number of reports on start-ups coming out regularly and, at times, one may get lost in the ocean of information.
Some reports use unique methodologies for the analysis, which makes it difficult to compare and contrast various reports and develop a comprehensive view. For example, the reader may not know the basis on which certain start-ups have been included for analysis in a report. However, the recent Hurun Global Unicorn List 2019 (Hurun Research Institute, Shanghai) provides useful information for developing an understanding of the global start-up ecosystem.
The US and China
The report is based on start-ups in 24 countries and covering 118 cities. It identified those start-ups established in the 2000s, crossed valuation of $1 billion, and yet to be publicly listed with cut-off date of June 30, 2019. There are 494 unicorns globally, of which more than four-fifths are from just two countries—China and the US, with 206 and 203 unicorns, respectively. India ranks the third, with 21 unicorns, followed by the UK with 13 unicorns. Europe, in general, appears to be lagging behind. It has just 35 unicorns, of which more than one-third are from the UK alone. A study conducted for the Digital Economy Council of the UK points out that more than one-third of fastest-growing tech companies in Europe are based in the UK.
An interesting part of the global start-up ecosystem coming out from the Hurun report is financing of start-ups. It provides a list of leading investors in unicorns. We traced the country of origin of 36 investors, who have invested in at least 10 unicorns. We found that 24 of the 36 investors are from the US, followed by China (7) and Singapore (2).
The US is a major investor in innovation in foreign countries. The fDi Markets data of the Financial Times shows that the US’s outward greenfield FDI on innovation (R&D and design, development and testing) constitutes more than 40% of the global greenfield FDI on innovation during the period January 2003 to December 2018. The US’s overseas investment in innovation helps it to benefit from the strengths of innovation systems in foreign countries. As opposed to the US, China has a share of only 4% during the same period.
But as opposed to the US, China has a greater number of start-ups spun-off from large tech enterprises. Of the 494 unicorns, 22 belong to this category. Of this, 20 are spun-off firms of Chinese enterprises and the remaining two are from US enterprises. Ant Financial, which tops this segment in valuation, is a spin-off from Alibaba.
Firms in certain tech sectors get higher valuation
The Hurun report provides information on unicorns according to their technology area and valuation. In terms of the number of unicorns, the top-five technology sectors account for half (49%). But in terms of valuation, just one sector, i.e. fintech, has a share of more than 20%. This shows that valuation per unicorn is heavily in favour of fintech. Ant Financial, a fintech firm, has a valuation of $150 billion, which is much higher as compared to other firms in the same sector. Even when this firm is excluded from comparison, fintech has higher valuation as compared to other sectors; it has a per-unicorn valuation of $4 billion as compared to $2.2 billion of e-commerce and $2.6 billion of the cloud (see accompanying table). India has three fintech unicorns in the Hurun report: Paytm, BillDesk and PolicyBazaar.
The Start-up India website of the government (www.startupindia.gov.in) notes that there are 1,689 fintech start-ups in the country—accounting for 3% of total start-ups listed on the website.
India may be the third-largest, but is way behind
According to the Hurun report and some others also, India ranks third in terms of global start-ups, after the US and China. And yet India is way behind, not just in the number of unicorns, but in some other aspects as well.
Lack of investment into start-ups for scaling up is a major challenge. According to veteran industrialist Kiran Mazumdar-Shaw, due to lack of adequate financing options for scaling up, “India loses out on its innovation quotient even though early-stage research for many of these takes place in India.” Indian venture capital investors are not willing to invest big amounts in start-ups. Bugworks, a start-up incubated in C-CAMP, Bangalore, was unable to secure adequate funding from investors in India. But it was able to raise venture capital funds from the US and Japan easily—Japanese venture capital firm, University of Tokyo Edge Capital, invested $9 million in 2018.
The Start-up India website also provides the details of start-ups, sector-wise (there are more than 67,000 start-ups listed on it), and the list of investors interested in investing (there are 63 investors listed, of which nine are based in foreign countries). None of the 63 have invested in any of the 21 unicorns listed in the Hurun report. This probably indicates, apart from the lack of willingness of investors, the level of risk-taking capability of Indian investors. Investors will take more risk when they have higher levels of capital at disposal.
Although capital needs to be available at different stages of development of start-ups, one can see this as a significant challenge for female-led start-ups. For instance, in Bihar, the work between Manchester Metropolitan University (MMU), Chandragupt Institute of Management (CIMP) and the University of Essex finds that the amount of start-up capital is a function of networking and liaising, which gets negatively affected by profiling characteristics such as risk-taking ability, part-time nature of the job and work-life balancing pressures that work against female entrepreneurs. This is true in the case of the US as well, where the initial orientation of a venture and the gender bias of investors contribute to gender disparities at different stages of the entrepreneurship process.
The MMU-CIMP-Essex study also finds that the definition of entrepreneurs often disadvantages women in partake, and the general start-up initiatives in India. In order to provide a level-playing field for women, start-up policies need to incorporate gender-specific roles and contexts within which women operate businesses in India.
Another limitation of the Indian start-up ecosystem is the absence of large technology firms (firms like Google and Alibaba do invest in start-ups and mentor them). In due course, many such start-ups get absorbed by large firms. Google has invested, through its investment firms such as CapitalG and GV, in a number of start-ups belonging to various technology areas, ranging from fintech to healthcare.
Joseph is associate professor, Institute for Studies in Industrial Development, New Delhi, and Arun is professor, University of Essex, UK
