By Reji K. Joseph and Thankom Arun
‘Start-up’ has now become the buzzword in the policy circles and discussions on innovation. They operative at a higher end of the innovation value chain. The new technologies provide a lot of opportunity for the 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 quite 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, recently published Hurun Global Unicorn List 2019, by the Hurun Research Institute, Shanghai, provides very useful information for developing an understanding of global start-up ecosystem.
US and China: Major countries in the global start-up ecosystem
The report is based on start-ups in 24 countries and covering 118 cities. It identified those start-ups established in 2000s, crossed valuation of USD 1 billion, and yet to be publicly listed with cut off date of 30 June 2019. There are 494 unicorns globally of which more than four-fifth are from just two countries – China and US; 206 and 203 unicorns, respectively. India ranks 3rd with 21 unicorns followed by UK with 13 unicorns. Europe in general appears to be lagging behind. It has just 35 unicorns, of which more than one-third is from UK alone. A study conducted for the Digital Economy Council of UK points out that more than one-third of fastest growing tech companies in Europe are based in UK.
An interesting part of the global start-up ecosystem coming out from the Hurun’s 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. And we found that 24 out of the 36 investors are from the US, followed by China (7) and Singapore (2).
US is a major investor in innovation in foreign countries. The FDI Markets data of Financial Times shows that US’ outward greenfield FDI on innovation (R&D and design, development & testing) constitutes more than 40% of the global greenfield FDI on innovation during the period from January 2003 to December 2018. US’ overseas investment in innovation helps it to benefit from the strengths of innovation systems in foreign countries. As opposed to US, China has a share of only 4% during the same period.
While US has been very active in investing abroad in R&D, China increased its domestic R&D spending massively over a period of last one and a half decades. The share of gross expenditure on R&D of US increased from 2.6% to 2.8% during the period between 2001 and 2017. But this share in the case of China increased rapidly, from 0.9% to 2.1% during the same period. Following figure provides the share of R&D in GDP of China and US.
Source: World Bank
But as opposed to US, China has a greater number of start-ups spun-off from large tech enterprises. Out of the 494 unicorns, 22 belong to this category. Out of this, 20 are spun-off firms of Chinese enterprises and the remining two are from US enterprises. Ant Financial, which tops this segment in valuation, is a spin-off from Alibaba. The enhanced role of private sector in Chinese domestic R&D could be a major reason for China having many spun-off start-ups. Data on R&D performed by the business sector provided in the Science and Engineering Indicators of National Science Board of US shows that during the period between 2001 and 2015, the share of private sector in R&D in US was stagnant around 70%. Whereas this number in China increased from 61% to 77%.
Firms in certain technology sectors gets higher valuation
Hurun’s report provides information on Unicorns according to their technology area and valuation. In terms of number of unicorns, top five technology sectors account for half (49%) of them. But in terms of valuation, just one sector – FinTech, has a share of more than 20%. This shows that valuation per unicorn is heavily in favour of FinTech. One FinTech firm – Ant Financial, has a valuation of USD 150 billion, which is much higher as compared to other firms in the same sector. Even when this firm is excluded from the comparison, FinTech has higher valuation as compared to other sectors; it has per unicorn valuation of USD 4 million as compared to USD 2.2 billion of E-Commerce and USD 2.6 billion of Cloud. Following table gives the top five technology sectors in terms of number of unicorns and valuation.
India has three unicorns in FinTech in Hurun’s report – Paytm, BillDesk and PolicyBazaar. The start-up India website of Government of India (https://www.startupindia.gov.in/) shows that there 1689 FinTech start-ups in India, which accounts for 3% of total start-ups listed in the website.
India: Third largest but way behind
According to the Hurun’s report and some other reports, India ranks third in terms of global start-up ecosystem, after US and China. Although it ranks third, India is way behind US and China not just in number of unicorns but in some other respects as well.
Lack of investment into the start-ups for scaling up is a major challenge facing the start-ups in India. According to the veteran industrialist Kiran Mazumdar Shah, 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”[1]. Indian venture capital investors are not willing to invest big amounts in start-ups. Bugworks, s start-up incubated in C-CAMP, Bangalore, was unbale to secure adequate funding from investors in India. But it was able to raise venture capital funds from US and Japan easily. Japanese venture capital firm – University of Tokyo Edge Capital, invested $9 million in 2018 [2].
The start-up India website provides the details of start-ups, sector-wise. There are more than 67000 start-ups listed in the website. It also provides list of investors interested in investing in start-ups. There are 63 investors listed, out of which nine are investors based in foreign countries. None of the 63 investors have invested in any of the 21 unicorns listed in the Hurun’s 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 startups, one can see this as a significant challenge for female led startups. 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 startup capital is a function of networking and liaising which gets negatively affected by profiling characteristics such as risk taking ability, part time nature of job and work life balancing pressures which work against female entrepreneurs. This is true in the case of 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 [3] . 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, the 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. Large technology firms like Google and Alibaba do invest in start-ups and mentor them. In the course of time, many such start-ups get absorbed by large firms. Google has invested, through its investment firms such as Capital G and GV in a number of start-ups belonging to various technology areas, ranging from FinTech to healthcare.
