Startup environment needs more care post 2020

Gyan Pathak
India has an estimated 26,000 startups, making it the third-largest startup ecosystem in the world, recording consolidated inflows of over $36 billion in the past 3 years with 26 “unicorns” – startups valued over $1 billion. However, data suggest that the expansion in the startup ecosystem has largely been clustered in the large (Tier 1) cities and states with financial depth, and especially in IT-enabled sectors including e-commerce, transport, and finance. Small businesses beyond the metros are not fully aware of, or integrated into, programs that provide startups with various Government incentives and tax breaks. Despite the progress made so far, Indian businesses face huge challenges, such as the unorganized and fragmented nature of the market in most sectors, a lack of clear and transparent policy initiatives that startups can tap into quickly, as well as a lack of infrastructure, a lack of knowledge and exposure, and complications in doing business.
The current wave of startups began around 2004 with Silicon Valley Bank set up its first office in Bengaluru. Since then the momentum of investment in startups has increased. By 2015, India had 10,000 startups. It would be a pleasant surprise to know that the number was almost equal to that of in China. It also had eight “unicorns” – startup with a valuation of $1 billion or more – across e-commerce marketplaces, transport and mobility, logistics and hyperdelivery, adtech, digital banking and finance, online aggregators, and analytics. Presently, with 26,000 addition in the last three years before the COVID-19 outbreak, India has over 50,000 startups with 3,500 growing at 30 per cent year on year making it world third largest startup ecosystem after the US and China.
The years 2014 and 2015 was an inflection point for Indian starups with emergence of six “unicorn”. Since then the Indian startup ecosystem has expanded quite rapidly mainly through private investments including seed, angel, venture capital, and private equity funds, with technical support from incubators, accelerators, and the Government. The government, for its part, is creating an enabling environment through its flagship Startup India initiative, which came into force in 2016. With India pushing toward a knowledge-based and digital economy, the Government is attempting to deploy ICT infrastructure and provide policy support for enhanced e-governance, investments, and technology innovation through research and higher education to support entrepreneurship and spur economic growth.
India has become attractive destination for foreign investment in startup since the launch of Jio. Several domestic and international companies invested in them. An interesting trend came from the East, including Japan’s SoftBank Group, which had invested $8 billion by the end of 2018, followed by China’s Tencent, and Singapore’s GIC and Temasek. Even as startup ecosystem grew, exits and M&As were few and far between. However, that changed in 2018 when Walmart acquired a 77 per cent stake in Indian e-commerce giant Flipkart for $16 billion in the world’s biggest e-commerce M&A deal of that time.
However, despite its rapid expansion and vibrancy, India’s startup ecosystem is far from mature. For a long time, Indian entrepreneurs did not focus on solving local problems or working with cutting-edge technologies. The reluctance can be partly attributed to the lack of bold venture funding, given the lack of investors with deep pockets, resolve, and patience. Further, changes in customer behaviour, low price points, long gestation periods, and cash bum, especially due to the diversity of stakeholders in a democratic and decentralized structure, did not allow for reforms to be rolled out at the same speed as in China.
The data relating to funding opportunities for India’s startup is very difficult to obtain. However, some data are available, though mostly in the private realm who charge a subscription free for accessing investment data and corporate financials. However, the data from other open sources suggest that investment has been witnessing a rapid increase which has doubled between 2017 and 2019.
Thus by leveraging its strength in human capital and ICT services, and transitioning to a digital and knowledge-based economy, India is fast becoming a breeding ground for innovation and startups. This is promising but challenges also exist in areas like developing low-cost technologies for price-sensitive customers, popularly known as “frugal innovation”. Such low-ticket, low-tech solutions need to be implemented on a large scale to address underprivileged and undeserved populations.
One of the problems is that there is no precise definition of startups in the Indian context, though the accepted characteristics are span of its age, scale of operations, and mode of funding. It is usually defined as a young company, a few years old, and yet to establish a steady stream of revenue. Government of India’s definition states that it should be headquartered in India, not more than ten years old, an having annual turnover of less than Rs 1 billion. That is all. Startup India programme was revised in 2019, which updated its list of benefits to include income tax exemptions on capital gains and investments above fair market value, options for self-certification on various compliances, fast-tracking of patent applications at a discounted rate, the ability to sell to the Government, and the ability to wind up a failed company within 90 days. Registering with Startup India provided exemptions from Angel Tax, access to Knowledge Bank, partnered service, online courses, and innovation challenges. However, a sorry state of affairs is that this programme recognized only nearly 27,000 startups in the country.
As for Government support and initiatives, many impediments exist. It has resulted in hampering their growth and sustainability. Though 2019 was the year of unicorns, India had only a meager 26 unicorns compared to over 200 in the US and China. Moreover, if the hurdles remain India is likely to have only 54 tech unicorns by 2024. Now in the new scenario after corona outbreak India needs to change the startup policy post-2020, when all the companies suffered due to lockdown with ceasing of activities, and a slow unlocking is underway.
In such a scenario, the latest ADBI working paper titled ‘The Startup Environment and Funding Activity in India’ has suggested that creating more awareness of Government initiatives and incentives, credit disbursement to priority sectors, promoting outreach and network benefits to Tier 2 and Tier 3 cities, as well as easing financing and tax breaks for foreign and domestic investors could improve opportunities for startups in India.