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India’s tech startups closed 2018 on a record high note, securing several major deals to further cement the nation’s position on the world map. But despite an influx of money from international investors, the local ecosystem’s overall health has some concerned.

The year saw a high-profile acquisition, the emergence of new unicorns, and more startups than ever expanding their businesses internationally. These local players were joined by Silicon Valley companies hoping to turn India into their next big market.

India’s startups participated in 924 rounds to secure a record $10.5 billion in funding last year, slightly ahead of the $10.4 billion they raised (through 1,141 rounds) in 2017, and a major rebound from the alarming down cycle of 2016, when they raised just $4.3 billion, according to data from Tracxn, a firm that tracks startup funding.

Going global

The funding rounds gained momentum in the second half of the year, giving India two new unicorns (private companies with a valuation of $1 billion or more). Oyo Rooms, headquartered in Gurugram, raised $1 billion in September to grow its business in China.

Mobile wallet app Paytm secured $300 million from Berkshire Hathaway, the Warren Buffett-led firm’s first investment in the country. Paytm, which expanded its service to Canada last year, launched mobile payment service PayPay in Japan in a joint venture with SoftBank and Yahoo Japan.

In the second half of December, food delivery startup Swiggy, which became a unicorn in mid-2018, secured a fresh $1 billion. Also last month, Chan Zuckerberg Initiative-backed edtech startup Byju’s raised $540 million. The startup said it would use the fresh funds to expand the reach of its service in several global markets.

Speaking of going global, ride-hailing firm Ola Cabs, which rivals Uber in India, became a bigger pain for the American company. Earlier this year, Ola entered Australia, followed by parts of the U.K., and finally New Zealand.

Chinese investors

Besides Japanese conglomerate SoftBank, which is aggressively funding startups in all corners of the globe, Indian startups also saw record funding from Chinese investors. Tencent invested in Swiggy and music service, while Alibaba gave capital to Paytm and Zomato, to name just a few examples. Overall, Chinese investors participated in 43 funding rounds by Indian tech startups last year, up from 29 in 2017 and 25 in 2016, according to Tracxn.

But it is not all sunshine and rainbows. Even as India’s tech startups raised a record amount of funding, analysts say that the major players are getting all the attention. Jayanth Kolla, founder of research firm Convergence Catalyst, described the funding frenzy as “lopsided.”

“Last year, we saw some early stage startups in the country explore innovative and creative solutions, but if you look at the quantum of the funding, it was the big players that attracted most of it,” Kolla said.

Early stage startups left out in the cold

Early stage startups participated in 304 deals in 2018 and raised $916 million in funds, according to data from research firm Venture Intelligence. This is a substantial decline from the $988 million they raised from 380 rounds in 2017 and the $1.096 billion in 430 deals they got in 2016, the firm said.

India’s regulators can take some of the blame for that. Early stage startups typically raise money from angel investors, but a current law in the country requires roughly a third of the money a startup receives from an angel investor to be paid as tax, Kolla explained.

On top of this, in a major blow to fintech firms and payment banks, which have seen exponential traction in the last two years, India’s apex court ruled in September 2018 that using customers’ Aadhaar ID number for authentication is unconstitutional. Using Aadhaar, a 12-digit unique biometric ID (akin to the Social Security number in the U.S.), allowed fintech startups to onboard new users and offer them a range of services without the hassle of going through paperwork.

The move by the Supreme Court took “the wind out of” the fintech startup ecosystem, said Kolla. Additionally, he said the venture capitalists are still not patient enough to let an early stage startup experiment with new ideas. “Innovative startups working on emerging technologies such as AI require patient capital,” he said.

No profitability on the horizon

But even the marquee startups have some soul-searching to do this year. Faisal Kawoosa, founder of research firm TechARC, said even startups that have earned unicorn status are not going public. “This indicates that there are still huge gaps in their financials and the primary market doesn’t accept them. Or else the primary market has been traditional in its outlook and does not recognize these businesses and their business models,” he said.

It is becoming apparent that the exit goal of some major startups in the country is to get acquired by a global player. The best example of this is Flipkart, India’s largest ecommerce player, which sold a majority stake to U.S retail giant Walmart in May 2018. Walmart said in May that Flipkart may go public in four years.

“This may be good for the company, employees, and the stakeholders. But for the Indian startup story, it’s not a healthy sign,” Kawoosa said. “Where do startups go for the next chain of growth if we can’t adequately fund them domestically? This will result in us not owning intellectual properties, not adding to the domestic value, and, above all, the control getting ‘exported’ out of the country.”

Founders of some other major startups, like Ola and Paytm, have considerably diluted their ownership in the company over the years as they raise more capital, handing much of their stake to SoftBank and Chinese investors. And as they start the new year, they will likely need even more money soon.

Noida, India-based Paytm, which has over 200 million active users, will have to face WhatsApp, the Facebook-owned service that counts India as its biggest market. WhatsApp entered Paytm’s territory when it rolled out payment service to some 1 million users in the country last year. It is currently working with regulators on a nationwide rollout of the feature.

In Q3 2018, Uber India held its “strongest position ever — as the ride-sharing leader in India,” according to a leaked email. The company told CNBC that it planned to continue investing heavily in the country. On the ecommerce front, Amazon is quickly closing in on the lead held by Flipkart, according to a recent Barclays report obtained by VentureBeat.

In the meantime, Chinese developers are invading India, quickly dominating the Google Play Store chart in the nation. With early startups receiving less funding than before, India will likely see more foreign players win much of the market. “So, how do we create the organizations/businesses of the future that will propel the digital economy of a trillion dollars?” analyst Kawoosa asks. We should get more clarity this year.

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