India's startup dreams will only flourish if we nurture the VC ecosystem

India must build a homegrown VC culture, leverage defence procurement, and expand digital gains like UPI to fuel the next wave of startup growth

I struggle to deal with the number of calls I receive from various state and central government officials inviting me to speak at conferences on startups being organised by them. The ones I attend each typically have a few hundred college students eagerly listening all day to speeches and presentations from entrepreneurs like me, as well as senior government officials. 

Reflecting on these meetings, I can’t help but wonder why and how startups entered the typical business fashion cycles that we have lived through: The Green Revolution in the 1960s, the era of the public sector as a saviour in the 1970s (Hindustan Machine Tools, Bharat Heavy Electricals, Modern Bread, to name a few), the free markets in the 1990s, foreign direct investment in the early 2000s … 

At the risk of contemptuous stares from my economist friends, I can't help but pose a question. Are these business waves akin to ones we have seen in the real fashion world of our women friends: Silk saris giving way to nylon saris, which then gave way to blue jeans and black T-shirts, followed by the salwar-kameez becoming the choice of Indian girls and women from Kanyakumari to the Himalayas. 

How do these apparel trends arise, what decides how long each one lasts before fading away? In the fashion industry, adoption by close friends, along with Bollywood actors and models, appears to be a leading explanation. 

Can we then substitute terms like “Keynesian”, “free market”, “Thatcherism”, “Washington consensus”, “neoliberalism”, etc for fashion jargon, and postulate that similar forces determine economic policy trends? That is to say, shall we conclude that in India, we follow the fashion trends of “models” that have been followed by countries we admire in a particular period? 

In the startup world, today’s fashion leaders are primarily based in the United States (US), specifically in Silicon Valley, so it’s worth decoding the messages from that fashion capital. 

As is usual for us nowadays, as a first step, let’s pose this question to our frequent companion, ChatGPT. Here is his answer: 

“Silicon Valley’s rise as the world’s premier startup hub is not the product of a single ingredient but of a rare combination of history, culture, and institutions that reinforced one another. Its origins lie in the mid-20th century, when the US defence spending on radar, semiconductors, and computing flowed into the Bay Area. Stanford University, led by Frederick Terman, encouraged students and faculty to commercialise their research, spawning firms like Hewlett-Packard and Fairchild Semiconductor. This created the template for close ties between academia, industry, and government. What followed was a culture unlike any other: One that embraced risk and treated failure as a stepping stone rather than a stigma. Venture capitalists, who pioneered their industry in the Valley, reinforced this ethos by betting on entrepreneurs more than once and offering stock options that aligned employees with long-term success. Equally important was the density of talent and ideas. Within a small radius, engineers and entrepreneurs exchanged knowledge freely, while Stanford and Berkeley kept refreshing the talent pool. Immigrants added ambition and diversity, while the US market provided scale. Finally, successful founders reinvest as mentors and investors, creating a flywheel that continues to power Silicon Valley's enduring dominance in global innovation.” 

As you can see from these comments from our pal ChatGPT, the key to Silicon Valley’s prominence in the tech startup field is, simply put, plentiful venture capital (VC) and defence procurement, which gave startups and early-stage companies active involvement from Stanford. Silicon Valley seems to account for 20 per cent of all US startups, with other hubs in New York ( around 15 per cent), Boston (10 per cent), Los Angeles (8 per cent), Seattle (6 per cent), and Austin (5 per cent) accounting for the other major centres. 

However, in framing the proper policy measures for India, we probably need to accept the learning we have had from an astonishing breakthrough event: The combination of Unified Payments Interface (UPI), Aadhaar, and affordable mobile phones and the Internet, which has led to the creation of a vast domestic Indian consumer user base of over 500 million, 65 million merchants, and 675 banks connected to the system. UPI handles 85 per cent of all digital payments in India and nearly half of all real-time digital transactions across the world. 

What we need to do next is encourage our defence departments to procure from Indian startups. Recently, they have increased their domestic purchases, but these appear to be primarily for items licensed from a foreign company for local manufacture.

The final step needed is for India to step up its early-stage and VC system. We have hardly any early-stage, tech-savvy VC firms; the few that exist are subsidiaries of foreign (primarily American) ones or government entities whose personnel are not accustomed to a tech-risk-taking culture. They typically confront startup entrepreneurs with a heartbreaking “tell-me-who-else-has-succeeded-doing-this” question. 

The fact that family businesses account for 80 per cent of India’s gross domestic product  (GDP), compared to 55 per cent in the US, adds another challenge for our startups: Taking investment from these firms means dealing with a non-tech-savvy investor and the threat of being absorbed into that family business. Let’s work flat out and create a policy framework that fosters the growth of Indian non-family business VC and private equity firms. 

This will allow our Indian startups’ dreams to flourish. 

The author (ajitb@rediffmail.com) is devoting his life to unravelling the connections between technology and society