India vs China as startup ecosystem

India vs China as startup ecosystem

Disclaimer: I started to write this in August 2020 and let it as a draft. And today the number of unicorns in India is already above 60 with a specific acceleration during the pandemic. Which kind of highlight the main point of the article regarding India’s ecosystem booming.

India and China are among the world’s top five largest economies. They have GDPs of $3.2 trillion and $14.14 trillion, respectively.

Both countries have witnessed rapid growth since China announced its 1978 open door policy by opening its doors to foreign businesses and India’s liberalization of its economy in 1991 which made it more market and service oriented and expanded the role of private and foreign investment.

While the United States is currently the world’s largest economy. China and India are both expected to overtake it by 2030, to become the world’s two largest economies. Now, during these two countries, early post reform years, their growth was largely defined by traditional businesses growing at a steady rate.

  1. Internet changed the Game
  2. Unicorns: India vs China
  3. Startup creation: China vs India
  4. Ranking by the World Bank: India vs China

Internet changed the Game

However, the internet changed that when it was made available to the public in both countries in 1995, suddenly, the number of potential customers that businesses had access to exploded to include pretty much anybody who had an internet connection.

While everybody capitalized on this opportunity differently, there was a very specific type of business, which was made possible by this internet explosion.

The startups! These were companies that were typically started in people’s bedrooms with whatever funds that companies’ founders could scrape together, they didn’t have a lot of employees, they didn’t have a lot of money.

But what they did have was the Internet. By the late 2000s, smartphones started to replace “feature phones” and traditional cellphones in both India and China. As the demand for mobile data increased because people are spending more time on these smartphones, the cost of that mobile data decreased, which resulted in an increase in internet penetration, and also an increase in the opportunity for startups to access new customers.

Let’s take Infosys as an example here because they’re one of India’s earliest and most successful IT companies. It was founded in 1981. That’s 10 years before liberalization and 14 years before the internet reached India.

Now, after the internet reached India, it only took Infosys another four years to become a unicorn. A unicorn, by the way, is a startup that’s valued at $1 billion or more. 18 years past from the date that the company was founded, until it reached that $1 billion market cap in 1999, which is kind of insane.

I mean, look at what they have done when they started in June of 2016. And in just 26 months later, they had achieved unicorn status.

The situation is similar in China. Back in 2005, China saw one startup become a unicorn: Alibaba, five years later, in 2010, they saw another VANCL, which is an e commerce fashion retailer, but between 2010 and today, the number of Chinese unicorns has exploded.

Unicorns: India vs China

Today there are more than 500 unicorns around the world. And over 200 of them are Chinese. India, on the other hand, have other 20 – 30 unicorns (hard to cross check the exact number) making it the third largest startup ecosystem in the world.

Now it might not seem fair to compare India’s startup ecosystem to China’s. China, after all, has six times the number of unicorns but I feel like India startup ecosystem is currently in a similar position to that of China’s startup ecosystem.

In 2017, you have this startup explosion between 2015 and 2016 in China, which is what India saw in 2018, followed by a bit of a low in 2017, which is what India is seeing right now. But then things pick right back up for China in 2018, when 58 Chinese startups became unicorns and I have a feeling that India might see a similar resurgence in 2021, or 2022.

Obviously, things have slowed down a bit, with the pandemic, but I still have faith that India will become the home of at least 50 unicorns before 2025.

Let’s look at these two countries to see what India startup ecosystem can learn from China’s startup ecosystem successes and mistakes. But before we jump in, if you haven’t subscribed to the newsletter yet, now would be a great time to do so 😊

I try to write something worth reading each month about startups, entrepreneurs, technology, China and innovation.

Startup creation: China vs India

Time magazine cover from 2011

Let’s talk about Chinese startups because there’s a bunch of reports floating around on the internet, claiming that 10,000 new startups are created in China every single day. Other reports claim that China is home to more than 30 million startups, which is more than the entire population of Nepal.

Imagine an entire country where every single person is an entrepreneur. Now I know what you’re thinking. This is China, those numbers are being stretched and companies that shouldn’t qualify as startups are being included in that 30 million number.

True! But let’s take a quick look at the United States were out of a population of 331 million people. 31 million are entrepreneurs. That means that one out of every 10 Americans is an entrepreneur.

Now China is home to 1.4 billion people. If we assume that one person is in charge of every single one of those 30 million startups, that means that one out of every 48 Chinese people is an entrepreneur, which isn’t that hard to believe.

Startups are usually founded by two or three people. So that ratio of one in 48 could be closer to one in 16, or one in 24.

India, on the other hand, claim having around 80,000 startups. And like I mentioned earlier, roughly 30 of those are unicorns. This is significant. That means that for every 145,000 startups, China has one unicorn vs India, on the other hand, has one unicorn for every 2580 startups.

Indian startups are more than 56 times more likely to become unicorns than Chinese startups (with data based on August 2020).

China having 375 time more startups is also due to the crazy number of startups accelerators there is.

In case you haven’t heard of startup incubators, the term is taken from the name of the device that’s used to warm eggs until they hatch. Similarly, startup incubators foster the growth of early stage startups with things like mentoring seed funding, office space and training so that these startups have a better chance of surviving and eventually thriving.

Incubators: China vs India

China has roughly 11,800 incubators, and in 2018 alone, these incubators helped in theory more than 620,000 startups. India, on the other hand, has just 520 incubators. These incubators are capable of supporting 6200 startups every single year.

In terms of ratio, India has 1 incubator for 150 startups when China has 1 accelerator for 2542 startups. I know, it’s bad to sum up things like this, on top not all accelerators are comparable (not the same selection criteria, not the same people, not the same programs, batch size, verticals etc…) and what matters is to check their output to see which one is among the best, and the data is not always available which makes it more difficult. But it put things in perspective.

If each program would have the same duration to have a similar rate of incubation would mean that China’s incubating 100 times more startups than India.

Now, traditionally, incubators have been physical places, but that big thing that’s been happening for the last few months has changed things a little bit. And we’ve started to see a couple of incubators popping up online here and there. But generally speaking, a majority of a country’s incubators are located in just a few key cities in China.

Those cities are Shanghai, Hangzhou, Shenzhen and Beijing. Beijing, which of course is the capital of China, is also the unicorn capital of the world. 82 of the world’s 481 odd unicorns are from Beijing.

That’s nearly 17% of the world’s unicorns and 40% of China’s. In India, the startup hubs are Delhi NCR, Mumbai, Hyderabad, and “the Silicon Valley of India”: Bangalore.

On the 31 unicorns in India, 14 of them, or 45% of them are from Bangalore. But what about value? Like I said earlier, Indian startups are 56 times more likely to become unicorns than Chinese startups.

But what if we just focus on the top three unicorns in both countries, that should give us a rough idea of just how much potential both ecosystems have. On China’s side, we have Bytedance, Didi Chuxing and Kuaishou.

Bytedance is valued at $75 billion, you might have heard about their extremely popular video sharing platform: TikTok. Didi Chuxing which is essentially China’s Uber valued at $56 billion and then finally, we have Kuaishou which is valued at $18 billion, it’s a direct competitor to TikTok. These three startups have a combined value of $149 billion.

Now, moving over to India the three most valuable startups are PayTM, BYJIU’s and OYO.

PayTM is valued at $16 billion is an Alibaba backed FinTech and mobile payments startup that is currently competing with companies like Walmart and Google (and to a lesser extent WhatsApp, Amazon etc..) on payment.

We’ve got the leader in India’s EdTech space BYJIU’s, which is backed by Tencent. BYJIU’s is valued at $10.5 billion, and OYO an Indian hotel aggregator startup, which was last valued at $10 billion. Although that might change because OYO has seen some pretty heavy losses. Combined value of India’s top three startups is $36.5 billion

But of course, valuations aren’t everything in the world of startups, things can change in a matter of weeks, or even days, sometimes how much you’re worth matters less than who’s backing you. With that in mind, let’s talk about investments.

Between January and mid-November of 2019. Chinese startups raised a total of $35.6 billion, vs Indian startups with $14.5 billion. In other words, in 2019, China’s startup ecosystem raised 2.5 times what India’s startup ecosystem raised in the same year.

Now, if these funds were evenly distributed amongst all of China’s startups, each startup would get $1,186 whereas in India, each startup would get $181,250.

Indian ecosystem had never raised that much money before. The previous record-breaking year was 2018 when India’s startup ecosystem raised $10.5 billion, so there was a 40% increase from 2018 to 2019.

China’s startup ecosystem, on the other hand, saw a 60% decrease in the amount of funds that it raised from 2018 to 2019.

India’s startup ecosystem, on the other hand, is still very chaotic. There’s still tons of room for growth and plenty of nascent markets for investors to dump their money into. And you might have noticed earlier how I highlighted the fact that India’s top startups are backed by Chinese firms.

And that’s purely because India has so much potential in fact, out of that $14.5 billion raised in 2019, 4 billion came from Chinese investors like Tencent, Alibaba.

Ranking by the World Bank: India vs China

But what about the actual startup ecosystem? What is it like on the ground? If you’re a startup entrepreneur in China versus India? Well, the World Bank has a list of 190 countries ranked by how easy it is to do business in them.

Back in 2015, China was in the middle of that list at number 90 its neighbors on that list were countries like Serbia, Antigua and Barbuda, Namibia and Paraguay. India, on the other hand, was ranked much, much lower at 142, sharing their section on the list with countries like Pakistan, Gaza, Sierra Leone and Gabon.

But fortunately for both countries, they’ve left these positions behind China has moved up 59 places to 31st (India has moved up 79 places to 63rd). But of course, this is all just data.

Well, in 2015, on average, it took 31 days to start a business in China, and 29 days to start a business in India today, it only takes nine days to start a business in China and 18 days in India. So that might explain why there are so many more startups in China than in India.

Simply put, the Chinese government has reduced barriers and cut down the number of steps required to start up while the Indian government has been slower to reduce these barriers.

Indian government has said that they’re committed to reducing the number of days that it takes to start a business to just five days then in terms of raising funds, which is a pretty big part of a lot of startups journeys. India has been attracting more and more investments over the years.

The other side of the coin is protection. Investors need to feel secure in their investments. They need to feel that there are rules and regulations governing the startups that they’re going to be investing in, otherwise they won’t invest.

For example, if a startup ecosystem is known for its lack of transparency and disclosure with minority shareholders or for the misuse of funds raised from those shareholders or even for a lack of legally protected rights for shareholders, then there’s not going to be any shareholder.

Investors just won’t feel comfortable investing in an ecosystem like that, no matter what kinds of opportunities the market offers. And of course, without investors a startup ecosystem growth will be stunted.

So long story short minority investor protection is a very important metric in a country’s overall ease of doing business score. Back in 2015, China was ranked 132nd for its minority shareholder protection, and India was ranked 7th by 2019.

Now India score had decreased slightly to 14th, while China’s score has increased significantly to 28.

Chinese government launched its mass entrepreneurship and innovation program in 2015. And China witnessed what is known in China as its fourth wave of entrepreneurship. In order to accomplish this, the Chinese government did things like providing startups with financial support creating technology infrastructure, revising outdated laws and regulations, tax reductions and exemptions, and just generally trying to make entrepreneurship more accessible to everyday people.

India has taken a similar approach with its startup India campaign, which was launched in 2016 with the goal of increasing entrepreneurship and innovation in the country. Prior to “startup India”, just four Indian states had implemented startup related policies today, though 26 out of India’s 36 states and union territories have enacted startup policies to promote entrepreneurship.

The Indian government has also created a $1.3 billion fund, which they’re calling the fund of funds and they’re using it to invest in emerging startups. $480 million has been invested into 338 Indian startups (Around 10% of capital raised in India in 2019).

For promoting Chinese startups, China’s government secured $320 billion, or nine times what China’s startup ecosystem raised in 2019. China’s government is giving its startup ecosystem, more financial support than India’s government is giving to its startup ecosystem.

That is why Indian startups tend to end up raising funds from outside investors Chinese funds.

Indian government introduced policy reforms in 2020, which make it more difficult for Chinese investors to invest in India. But some people have criticized this move, saying that if the Indian government wants to start walling off Chinese investors, then they need to make sure that those funds are coming from somewhere else, because it doesn’t look like those funds are going to be coming from the Indian government.

India doesn’t have (yet) homegrown tech giants that are willing or capable of investing as much as Chinese investments like Tencent, Alibaba and Xiaomi. Indian startups rely on foreign direct investment because they don’t have any other choice.

However, in the meantime, I think that India should definitely be proud of its startup ecosystem, and the fact that it’s the third largest startup ecosystem in the world. To me, that’s something worth celebrating.

Digital Laoban