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For anyone who hasn’t been paying close attention, it can seem like India’s startup ecosystem has appeared out of left field. Throwing a stone in Bangalore will hit a hyperlocal grocery delivery company and, as Indian YouTube show “The Viral Fever” explains it, being an entrepreneur carries the same allure that playing the guitar once did.

With over US$6.4 billion invested into Indian startups in the first three quarters of the year, it’s time to separate the men from the boys, so to speak. What’s real, what’s not, and what’s next for India?

See: What are the hottest sectors for venture capital in India this year?

But first, a history lesson

Before Alok Goel, former CEO of Freecharge and Redbus, ex-Googler, and managing partner at investment company Saif Partners, placed his bets for 2016, he explained that it was important to first take a few steps back in order to get a panoramic view of India’s current startup ecosystem and identify its patterns. Saif’s portfolio spans everything from mobile wallet and ecommerce site Paytm to hospital appointment scheduler (recently acquired by rival Practo) Qikwell. It has had five IPOs in India.

“Let’s start with 2003,” he explains. “Until this point, India was an outsourcing hub. People were sending their work out here for cheap costs. Things were changing, however. Global companies like Microsoft, Google, Yahoo, and Cisco had opened up centers in India and were realizing that there was so much more that could be done with them. It’s like they all sat down together and thought, ‘why can’t we use our presence in India to our strategic advantage? Why can’t the real work happen out of this country?’”

Next, came 2006, and with it the wave of copycat innovations. I’m talking the ‘Amazon of India’, the ‘Expedia of India’, the x’s and y’s of India. The large businesses of today – think Zomato and Flipkart – are all a result of this system. They’re important but copycat models in some ways.

“2015 was really the landmark year for copycat startups. Valuations were imbalanced and the number of startups trying to solve the same problem went through the roof,” Alok says.

So, with everyone talking about the end of this holy era, will the purported “bubble” burst?

“Not at all,” says Alok. “In fact, we’re at a great point in the ecosystem. Today, the amount of time it takes to launch a startup in India is shorter than it’s ever been before. The information gap has been bridged globally.”

This, Alok explains, will spur a series of India-focused startups. “When we used to raise funds for Freecharge, we would go to the fundraising meeting with our investors and get asked who we were like,” he says. “This was necessary for them to understand our business model and envision it in the Indian ecosystem. I would always say that we weren’t like anyone.”

“Soon, the ecosystem will also evolve more in a way where India’s problems will get solved and a lot of these startups will become more visible. Think of something like Tencent’s WeChat in China – it’s not like chat was popular in another part of the world, and it’s not based off of a Western model in any sense. It’s entirely unique to its setting. These new ones are going to be India-centric startups,” he says.

India-centric startups

Of course, all VCs have unique perspectives on the market – that’s why their portfolios are so different. When I asked Sid Talwar, partner at Lightbox Ventures, for his opinion on this new breed of Indian startups, he explains that he doesn’t see it as a new trend. Last year, he predicted on Tech in Asia – with decent accuracy – that food tech, original content, and SME loans would be popular startup ideas in 2015.

“We’ve technically only invested in India-centric startups,” he says after some thought. “None of those models exist anywhere else in the world.” Lightbox’s portfolios include furniture rental service Furlenco and what is often known as India’s most innovative startup, mobile advertising network InMobi.

“Nowhere else in the world have startups like these existed with an interchange of food and technology, or furniture rental and technology,” he explains. “Take Faasos, for example – its interplay of distribution centers, technology, and food – that’s uniquely Indian.” Faasos is a food delivery service that tackles the India-specific problems of difficult logistic management and a lack of access to information. It uses data to personalize orders, provides customers with alerts if their favorite orders are out, and sets up “fulfillment centers” across cities to complete orders quickly. It recently raised US$30 million as a part of its series C round.

The two VCs do agree on one important fact: now that the soil has been tilled, it’s time for Indian startups to personalize their offerings for their market. “It’s a basic fact,” Sid says. “The most successful startups will be fine tuned to the country’s demands.”

Edtech

With 315 million students enrolled and what will soon be the world’s largest number of young people entering its workforce, both Alok and Sid agree that India’s education system is full of promise for the new year.

Still, in the last year, funding for edtech startups accounted for less than one percent of the US$7 billion invested into the country. Globally, less than two percent of funds allocated toward education go to India.

See: Why edtech is getting so little love from VCs in India“There are a lot of teams that have made an effort in the past 7 to 8 years to improve the system, but most of them have failed,” says Alok. According to him, many of their failures are because they have not specialized for the country. “People enter with lots of biases. Here’s an example: those in India care only about grades and not learning. A smart business will ask, how can I solve that pain point? How can people actually get better grades, a better job, and a ten-percent hike in salary?”

The lack of easy edtech scalability across borders – it’s particularly stark once you leave the Western world – is an important insight. Take the neighboring country of China, for example, where edtech is reportedly booming. Startups like 17zuoye, an online learning service for students K-12, focus on English and math and offer features like immediate feedback on pronunciation. A service like this in India – the world’s second largest English speaking country – might not be as popular. When it comes to India-led startups, it seems like edtech is one sector where origin matters most. “You won’t see a global company entering India in this space,” explains Sid. “That’s because education is so vastly different in India. There are specific insights and outtakes that will only work here.”

“I hope that the trends in education are more vocational,” he goes on to explain. “Personalization will also be really important. How can we figure out how to attack the specific issues that an individual has?” The wheels have already begun to turn in this direction – prolific investor and chairman emeritus of Tata Sons, Ratan Tata recently announced a partnership with Khan Academy. His goal is to provide free, personalized, video tutorial-based education specifically for Indian learners.

Many others have emerged in the vocational sector, including Simplilearn, an online certification program for IT professionals to upgrade their skills that has been funded US$28 million in three rounds, and Upgrad, a similar service for courses like entrepreneurship and digital business management.

See: 10 top funded edtech startups bucking the trend in India this year
Another important and unique sector in India is test prep. Students in the country take a series of diverse tests in their lives. In order to get into India’s best colleges, for example – the Indian Institute of Technologies (IITs) – students are required to take the JEE (Joint Entrance Examination).

In terms of funding, Toppr reigns supreme in the test prep sector. The site provides unlimited access to practice tests and allows students to catalog their progress. Lightbox Ventures has also invested in Embibe, a similar test preparation website.

As Sid explains, the edtech ecosystem is one that will only get better with time. “We’re finally starting to understand that investment in education works in a different loop,” Sid says. “Education-based transactions take a longer cycle and we as investors need to understand how that works. The startups that have survived 18 months are producing tangible metrics and helping us learn.”

Fintech

“For me, the most interesting sector for the next year is the financial domain,” says Alok. He’s not alone in feeling this way – globally, investment into fintech is predicted to reach US$8 billion by 2018. In India, fintech startups are seeing unprecedented growth. “The country has always been a cash economy and this means that there’s a bunch of black money floating around in the system. There’s actually incentive for the government to work with startups in order to make money more trackable. For the first time, they’re actually in support of digitizing the economy.”

The government has made plenty of attempts to digitize the economy.

Aadhar, a government scheme that is considered the world’s largest numerical identification process, hopes to equip each of India’s 1.25 billion citizens with a trackable number that will help them apply for bank accounts and loans. As of December 1, 2015 over 940 million people have been issued an Aadhar card.

Just in the past few months, the Reserve Bank of India issued licenses to eleven companies to allow them to act like online wallets. In a country where cash remains the foremost form of payment, this is a first. This has brought on an onslaught of payment wallets, including Saif Partner’s own portfolio company, Alibaba-funded Paytm.

The data collection and mass digitization has also had another effect – easier, simpler loans.

“I think we’ll also see a lot of progress in financial inclusion,” says Alok. “This means that the 200 million people out there in the middle class with no credit system or RBI support will start getting affected.”

Loan startups have already started to see some action in the past year. LendingKart, a site that helps small businesses and entrepreneurs get loans, raised US$10 million in July. In October, peer-to-peer lending site Faircent raised a round from ex-Infosys CFO and head of Manipal Global Education, Mohandas Pai.

Remittances are also a massive pain point in India. Because it receives US$72 billion from its diaspora yearly – the most in the world – it also has the largest bank fees. Banks make up to US$5 billion annually off of the money that people transfer into the country. Startups like Instarem focus on disrupting this massive industry by making it quick, easy, and efficient to send money to people across borders.

Branded verticals

Lightbox Ventures has announced three “brands” in India, including refurbishment ecommerce site GreenDust. “I think that’s the next big trend,” says Sid. “We’ve put our money where our mouth is.”

These specific, branded verticals – think sites that focus specifically on one type of product, like plush toys – saw a surprising amount of attention last year. Half of the country’s investment money went into ecommerce funding. This amount was dominated by India’s ecommerce giants, Flipkart and Snapdeal, but a surprising number of stricter verticals saw attention. This includes furniture site Pepperfry, lingerie portal Zivame, and baby product store FirstCry.

“These ecommerce verticals will be important in aggregating and organizing the market,” Sid explains. “In America, where Gap owns something like 13 percent of the clothing market and the top retail markets own the top ninety percent of the market, if you make ten relationships per vertical, you’ve cornered the market. Here, the top brand has less than one percent of the market share and you have no idea what the consumer wants.”

In 2014, Flipkart acquired India’s largest apparel-focused site, Myntra. Myntra recently announced that it would be targeting a GMV (gross merchandising value, or total sales in a set time frame) of US$1 billion in the next year.

See: 15 top funded ecommerce startups in India this year – with a few surprises

Stay away from the gold rush

In order for education, fintech, and niche ecommerce startups to make a dent India, it will be important for entrepreneurs to stay away from the madness of the gold rush – and resulting hypervaluations – of food and ecommerce startups that we saw last year.

“Businesses in India need to stop thinking of how to create a billion dollar company for the next two years,” says Alok. “The race to a billion dollar business means that there are a lot of stupid ideas floating around with no light at the end of the tunnel. The time frame needs to be longer to propel India’s nascent startup ecosystem.”

While nascent isn’t exactly the word I would use, it’s clear that everyone agrees on one thing: the outcome for the next year will depend largely on the ability of entrepreneurs to fine tune for the environment.

This post The year ahead: 2016’s most anticipated shakeups in the Indian startup scene appeared first on Tech in Asia.

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