India’s Startup Dream: How Financial Services Are Driving the Change?

Discover how India's startup ecosystem is transforming with the support of financial services. Insights by Rajeev Gupta, Director - PB Pay Private Ltd., on funding, insurance, and domestic capital's role in driving growth.

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India Startup Dream Financial Services Are Driving the Change

The decade has been nothing short of a transformative phase for India’s economy, especially for its startup ecosystem. Today, we have about 1.4 lakh registered startups. This perspective, brought by Rajeev Gupta, Director - PB Pay Private Ltd., highlights how various government initiatives and the entrepreneurial spirit of Indians have played a significant role in nurturing innovation and entrepreneurship like never before. 

Startups contribute immensely to the nation’s economy by creating jobs and bringing technological advancements. DPIIT-recognized startups have generated over 15.53 lakh direct jobs as of June 30, 2024. The flourishing growth of India Inc. has also played a pivotal role, with corporates increasingly collaborating with startups to innovate, diversify, and scale operations. It is fair to say that this startup ecosystem will play a huge role in propelling the Indian economy towards the ambitious $10 trillion milestone by 2035, if not sooner. That said, it is equally important to understand that this startup ecosystem cannot exist in isolation on the back of merely talent and innovative ideas. To truly flourish and become a huge success story, it needs one critical enabler: financial services. Let us understand how financial services play a key role in fulfilling India’s startup dream.

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A Multi-Faceted Role of Startups

The longevity and growth of startups are dependent on access to financial services, be it insurance or credit. Financial services not only offer protection against unforeseen risks for startups but also provide the fuel they need to scale their operations.

It is common knowledge that startups across the world usually operate in high-risk environments. For them, the only certainty is the immense uncertainties they are likely to encounter. These could be in the form of market volatility, natural or man-made disasters, operational challenges, or even legal liabilities. To protect startups against these, insurance has emerged as a critical power-shield. It provides these young companies the much-needed security to help them navigate uncertainties.

A great example of this is business and liability insurance, which can protect startups from potential financial losses due to unforeseen disasters. In the digital world we live in, cyber insurance policies can protect companies from liabilities arising from data security breaches. This is a growing concern, especially for tech startups. By opting for the right policy, these startups can ensure business continuity even in the face of cyberattacks.

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Credit System: The Fuel to Scale Up

Insurance is not the only financial service that is vital for startups. While it is crucial to help young companies survive crises, they need another financial service to scale their business. It wouldn’t be an exaggeration to say that access to capital is the lifeline of any startup. Today, we keep talking about equity funding as it often grabs headlines. However, credit plays an equally important role in the growth story of Indian startups. After all, no matter the size, every company requires liquidity to manage cash flows, expand operations, and invest in technology. And when it comes to startups, which often have unique business models and high-risk profiles, traditional funding avenues often fall short. This is where financial institutions and fintech lenders step in with innovative credit solutions.

From venture debt and credit lines to revenue-based financing, these are great options to fund startups without having to dilute the ownership of the company. Today, fintech companies use technologies like AI and Big Data Analytics to determine the creditworthiness of startups. To do that, they no longer rely solely on traditional metrics like credit history but also focus on revenue trends, customer retention, and digital footprints. This ensures that startups with robust business potential get the funding they need. Government initiatives like the SIDBI Fund of Funds have been instrumental in boosting access to capital. Along with private players, this fund has built an ecosystem in which startups can access much-needed credit to fuel their growth ambitions.

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Need for Domestic Capital

It is true that foreign investors have historically played a crucial role in shaping India’s startup ecosystem. However, the need for domestic capital cannot be overstated. After all, it is domestic investors—be it family offices, Indian banks, or corporates—who are better equipped to understand the Indian market. They are in a better position to ensure that investments in startups are aligned with the nation’s economic priorities. Startups in the financial sector space are also aiding this growth through innovations in fields like payments, UPI, lending, and insurance, among others.

Domestic investors provide a stable source of funding that is also context-driven. Moreover, foreign capital in startups in sensitive sectors like cybersecurity, defense, and AI can cause strategic issues. On the other hand, domestic capital in such sectors can insulate them from geopolitical risks.

Over the next decade, India’s startup ecosystem is likely to mature. Thus, it is important to create a self-reliant framework for its growth. For that, leveraging financial services effectively is the key.

Note: This article is written exclusively for TICE by Rajeev Gupta, Director - PB Pay Private Ltd.

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