5 key trends that will shape the start-up industry

My ex-boss John Chambers (former executive chairman and CEO of CISCO) once said every company will become a technology company eventually as no business in this world can be successful without adopting technology.

I take that insight to categorise start-ups in three broad classes: start-ups that use technology to create efficiency and better customer experience, start-ups that apply technology to create new use cases, and start-ups that create new technology to address a new market or an existing market differently.

Broadly, the unique application and creation of technology is what I call ‘tech’.  By that definition, tech or deep-tech is not a start-up segment but merely a characterisation of what they do to create value. While there has been an unprecedented rise in funding in so-called tech or deep-tech start-ups backed by a new age venture capitalists (VCs), much still needs to be done to complete a start-up’s journey from ideation to market scale.

I am listing below five key trends that will shape the start-up industry, and therefore the asset class.

Rise of new generation ‘product’ VCs
Previously, we had two types of VCs - consumer internet VCs and B2B or enterprise VCs. Most of the major dry powder was in the hands of the consumer VC, some of whom aspired to become a B2B VC but lacked the insight, knowledge and the risk appetite to do so. But over the last 30 months, half a dozen or so VCs are willing to call themselves product VCs with a singular focus on intellectual property right (IPR) led innovation. These are mostly second-generation VC partners, entrepreneurs or corporate honchos, who clearly have the knowledge, operational strength, and business network to be a true partner in the product start-up’s path to success.

Need for CVC scheme
In today’s world of digitisation, corporates need to capture innovation and harvest them quickly from start-ups, where the idea is well-evolved and prototype-developed. A corporate venture capital (CVC) programme can be defined and structured to achieve these objectives. It is unfortunate that not many Indian powerhouses have a CVC programme and probably miss the point that they need to impact themselves with a market disruption enabled by a start-up to learn, adapt and accelerate their digitisation and customer experience goals. This will change in the next few years as corporates bring immense value to product start-ups through their CVC programs.

Well-oiled product innovation ecosystem
The challenges pertaining to the access to seed or pre-series A capital have somewhat been mitigated by several angel investors coming from product background and are part of the angel networks. The accelerator and incubators are also complemented by the start-up mission run by several state governments. I have found them to be extremely effective and professional. The role and importance of the central government’s start-up mission - a Fund of Funds for Start-ups that has a product and technology focus - also cannot be undermined. Interestingly, some of our local specialist VCs have them as their limited partner (LP). At least a dozen start-ups in Tech or Deep-tech have come up and scaled primarily due to government projects like Smart cities, Digital India, Digital Payment or Pre Payment instrument (PPI) and others. Conclusively, we can say that the conjoint product innovation eco-system has finally come together, albeit in its early avatar.

Interplay of mobility, AI and IoT will continue
When it comes to innovation, India will follow a pattern similar to its global peers. However, the emphasis may be on the interplay rather than breakaway research in any of them. It is imperative that product start-ups in India aim to create a unique intellectual property portfolio, preferably global patents, and eventually create global proof points through customer validation in the European or the North American markets. No doubt, it is expensive to sustain an international operation but that’s where a specialist VC or a CVC partnership may come handy. On the business model side, there are the three Ss - software, services and subscription - for which India’s time has arrived,  India for India and India for the world.

Countering challenge of product firm funding
Although leading indicators are favourable and ecosystem, though not fully evolve, is effective with a huge validation of domestic demand, the journey of the platform, product or tech start-ups is expected to be a little bumpy. One imminent challenge is the paucity of product VCs in the growth stage. As of now, most of the specialist VCs are small funds. Most of the start-ups being funded by them are expected to come up for growth stage fundraising sooner than later. The size of this round of fundings is expected to be bigger by the sheer nature of product business. Hopefully, the traditional consumer internet VCs would find this as a good opportunity to diversify their portfolio and be eager to participate as some of the risks would have been mitigated by then. If this does not happen then there could be a huge vacuum in the funding continuum, creating disappointment to founders and VCs that have backed them.

By: Joydeep Bose
(The writer drives corporate strategy at Tejas Networks, is also associated with E&Y Lead advisory)

Source: DNA Money