The History of Indian venture Capital

Three decades after the first Venture Capital (VC) firm mushroomed in the US, in 1975, risk capital found its way to India. Even though there were several instances of accidental VC underwriting businesses before 1975, the first formal VC scheme in India was in the form of interest-free loans through the Industrial Finance Corporation of India (IFCI). It then took another decade and a half before ICICI and UTI came together to launch a formal Venture Capital Scheme in 1988. In the formative years, VCs in India were structurally very different from the firms we have today, but it was risk capital nonetheless.

With all that was happening in Silicon Valley around the time, Indian entrepreneurs were arming themselves to go into battle. They believed they could ride the wave of the internet and build businesses around it. VCs followed them and nudged them. So by 1999, India doubled the number of VC firms to ~20 from around 8 at the start of the decade. In case you are wondering, we have 1,500 active VC firms in India today.

While the late 1990s was all about the dot-coms, as India rang in the new millennium, everything came crashing down. The dot-com crash reset the startup ecosystems globally, very much so in India. A reset similar to the one we saw in 2022, sans the dot-com crash.

Fast forward to today, India has a vibrant VC ecosystem. Funds and investors are looking to support almost all sectors – it used to be just IT and software just a few years ago. We have entrepreneurs emerging from not just metro cities but also from the smaller towns of the country. There is more focus on localization than ever with solutions.

All said and done, India, with the third largest startup ecosystem in the world, has been one of the hotbeds of startup activity over the past few years. We have nearly a million registered startups, increasing 200x since 2016, adding around 9 Lakh direct job opportunities since 2017. The past two years, 2021 and 2022, have attracted almost 60 billion USD in venture capital funding. Compare that with the 8-year period between 2012 and 2020, when just 50 billion USD was invested in Indian startups. The acceleration of funding over the past two years was unprecedented. While it seemed throughout that the funding taps would never run out, it has simmered down quite a bit as I write this towards the end of 2023.

But if there has been a significant change in the Indian startup ecosystem, we no longer look towards the West for solutions. But there is still a long way to go. Almost 90% of the VC funding in India over the past decade and a half has been foreign capital. At Rainmatter, we speak about this quite often; for India to do well and grow inclusively, there needs to be more domestic capital available for entrepreneurs.

The next couple of decades will be quite interesting to live through. As the Indian startup ecosystem takes shape, VCs themselves will have to evolve and move past the Sand Hill Road model; simply replicating the Silicon Valley model of VC will not suffice. But it is quite an exciting time to live through.

Now that we have the history behind us let’s understand the finer aspects of the VC industry.

This is the second guest post by Dinesh Pai after Venture Capital 101. Dinesh heads investments for Rainmatter and is an avid blogger. In a series of multiple blogs, he will discuss all things Venture Capital.