Impact of Venture Capitalists On Economic Growth
Venture capital (VC) backed companies play a crucial role in driving economic growth and fostering innovation. As traditional funding avenues prove challenging for young companies, VC emerges as a vital source of capital, and its significance has grown steadily over the years. VC-backed companies contribute directly to the economy's GDP. In countries like the USA, such companies contribute about 11% of the GDP, highlighting their impact. As the US economist and Nobel Prize Winner, Kenneth Arrow (1995), once opined: “Venture capital has done much more, I think, to improve efficiency than anything.”
About the Indian VC landscape
India's economy is thriving, making it an attractive destination for investors. The country's large and growing population, strong economic growth, and flourishing startup ecosystem offer promising opportunities. With the deepening of the private capital market, investment options include angel investing, venture capital, or private equity. Despite a dip in funding from US$ 38.5 billion to US$ 25.7 billion between 2021 and 2022, India's resilience is evident due to favorable economic factors, digital adoption, and government support. Though the average deal size declined, the number of deals increased.
Overall, the startup ecosystem has evolved significantly over the past decade, empowering innovation, problem-solving capabilities, and creativity. According to India’s Economic Survey, at least one new business was established in 555 of India's districts. This reflects the country's rapid growth across geographies, in the number of start-ups over the previous six years, with a significant majority of them being tech-related businesses which are a major catalyst in attracting billion-dollar investments and fostering digital infrastructure. This entrepreneurial transformation has also boosted the participation of women and student entrepreneurs.
India's vibrant start-up ecosystem is making a significant impact on the country's GDP. With over 92K registered startups, it is now the world's third-largest after the US and China. A StrideOne survey suggests that these startups have the potential to contribute 4-5% to India's GDP over the next three to five years.
Employment generation
Startups are not only driving economic growth but also generating employment opportunities. Job growth in the start-up sector is projected to increase by 24% between 2022 and 2027. In 2022 alone, homegrown startups generated 270k jobs in the country, up 35.8% from 198k jobs created in 2021.
Rural India Empowerment
The rise of startups and gig workers has transformed the employment landscape, and these entrepreneurial ventures are becoming key drivers of India's economic growth. Moreover, innovative startups are now reaching remote areas, bridging the urban-rural divide. Fintech and agritech startups are facilitating banking, supply chain, and market access for farmers. According to the Union Ministry of Commerce and Industry, nearly 50% of the recognized startups are from Tier I and Tier II cities. Recognized startups are spread across over 640 districts. Government initiatives have also empowered local entrepreneurs and contributed to India's economic growth on a global scale.
Driving innovation
The startup sector plays a crucial role in driving innovation by allowing private companies to invest in untested ideas and technologies. Although they represent only a fraction of the public markets, globally, venture-backed companies contribute 44% of the total R&D spending, and the knowledge they generate often spills over into the broader market. Research from the University of Munich shows that knowledge spillovers from VC-financed firms are 9x greater than those from general corporate R&D.
In India, the impact of startups on innovation is evident from the remarkable increase in patent and trademark applications. According to the Ministry of Commerce and Industry, between 2017 and 2022, the number of patent applications filed by startups surged from 179 to 1,500, while trademark applications saw an even more significant rise, growing from 4 to 8,649 during the same period. As startups continue to thrive and expand in India, they will likely play an increasingly vital role in shaping the future of various industries through their innovative endeavors and intellectual property contributions.
Investment and returns
Scaled-up Tech startups like Paytm, Zomato, and others have experienced a significant recovery in 2023 with their stock prices rising by 15%-60%, offsetting the value losses of the past 18 months.
This year, however, the successful public issue of ideaForge, with a 106X subscription rate, which nearly doubled IPO investor wealth with a 94% gain highlights the demand for new-age stocks in the market. It also highlights how VC-funded startups create value beyond private markets and add to public wealth creation.
Conclusion
The euphoria in the startup community has been tempered largely by receding global liquidity due to rising interest rates at a record pace by the Fed. Despite recent fluctuations in investment, the startup ecosystem has been steadily growing, with significant funding being poured into SaaS, fintech, logistics, and auto tech sectors.
Overall, Indian startups have a subtle yet significant influence on the country's economy. They create local employment, leading to increased cash flow and government revenue. Concentrated startup growth improves infrastructure, attracting more workers and boosting city revenue. Innovations enhance people's lives, particularly in uplifting remote areas, thus supporting the local economy. Moreover, when startups fulfill demands domestically, it reduces imports, increasing capital circulation within India and contributing to economic growth.