B2B and advanced technology start-ups on a growth path

20% of start-ups emerged from tier-II and III cities: NASSCOM-Zinnov report

Strengthening its position as the third largest start-up ecosystem across the world, amidst intensifying competition from countries like the UK and Israel, India continues its momentum of being one of the most vibrant landscapes for start-ups, according to NASSCOM-Zinnov report on the “Indian start-up ecosystem—traversing the maturity cycle”. Adding over 1,000 tech start-ups in 2017, taking the overall number to 5,000-5,200, India is witnessing a rapid rise in the B2B tech start-up landscape, focused on verticals such as healthtech, fintech, and e-commerce and aggregators. While Bengaluru, Delhi-NCR and Mumbai retained their position as the key start-up hubs in India, 20 per cent of the start-ups emerged from tier-II and III cities. According to findings of the report, with 40 per cent of start-ups in the B2B segment, B2B’s share in the overall tech start-up funding is over 30 per cent. Corporates are playing a vital role in supporting these with 50-plus collaboration programmes, 20-plus corporate accelerators recording a 33 per cent year-on-year (YoY) growth, and 30-40 active corporate investors, thus increasing their role in the rise of the start-up ecosystem.

The fin-tech start-up base is estimated to be 360 in 2017, indicating a 31 per cent YoY growth with over $200 million funding received in H1 2017, recording a growth of 135 per cent since H1 2016. Sub-segments such as digital payments and lending are maturing, while wealth management and insur-tech are emerging as growth areas. Implementation of advanced technology is also becoming prominent, with 33 per cent of fintech funding towards advanced technologies such as artificial intelligence and analytics. With over 60 per cent start-ups, the B2C tech start-up segment is focused on creating innovative business models and taking the vertical approach, securing close to 70 per cent of the overall tech start-up funding in H1 2017. The leading verticals in the B2C segment are travel and hospitality, food-tech, fintech, and health-tech.

Self-funding is driving digital initiatives across organisations

According to Gartner’s 2017 CEO survey, 42 per cent of chief executive officers (CEOs) are now taking a digital-first approach to business change or taking digital to the core of their enterprise model. To fund digital initiatives, CEOs indicate that the largest bulk of money comes from self-funding, rather than existing budgets, as they see the primary purpose of digital initiatives as winning revenue rather than saving costs.

“This should give chief information officers (CIOs) a pause for thought, given that conventional IT management works mostly on the basis of using operating budgets,” says Andy Rowsell-Jones, vice-president and analyst at Gartner. Transformation requires commitment, leadership, strategy, technology, innovation and, importantly, money. This year and the next are likely to be the optimal timing points of overlap between the business cycle and the tide of digital business change.

In two years’ time, the rising cost of capital could make strategic investment more expensive, and playing digital catch-up is going to be harder. A few of the key ways to fund the shift to digital business are: 

Internal self-funding: digital revenue pays—This will only work for short-term projects to gain immediate revenue returns, such as for digital marketing campaigns or price-elevating digital product features. This approach needs clear revenue attribution and is good for continuous, incremental growth, but will not work for disruptive market change. 

Within existing budgets—It can work for relatively superficial digital business change over two to three years, if budgets are healthy, generous and need trimming. It is not good for rapid transformation as it might throttle existing business.

Investment from reserves—Reserves are the part of profit set aside for internal reinvestment to help the business in tough times, which digital disruption and market loss might fit under. If reserves are healthy, it might accelerate digital transformation with low financial impact on current operations.