India – An Emerging Start-up Central?

That change is the only constant over time may sound a bit trite to most of us. Yet the rate of change is changing so rapidly that we sometimes have to hark back to poets to make sense of the turmoil that is overtaking our lives. Following memorable lines from T. S. Eliot might be of help!

Do I dare disturb the universe ?

In a minute there is time

For  decisions and revisions which a minute will reverse.

I have measured out my life with coffee spoons

After the stunning burst of April 2000, when America’s technology dominated Nasdaq stock market plummeted and wiped out countless dotcom and telecom companies, many had written off internet led technology revolution as so much froth signifying nothing. But there were enough prescient minds who surmised that it was the crunch of gears that occurs when the heady upswing part of a Schumpeter cycle gives way to mature growth.

Now this wave of disruptive technologies is steadily but surely engulfing India. With over $38 billion in funding spread across 2055 rounds, 12 initial public offerings (IPOs) and the emergence of 40 unicorns, 2021 proved to be a landmark year for Indian start-ups. As per Economic Survey 2021, the Government has recognized 41061 start-ups so far, more than 39000 of which have reported 4,70,000 jobs. An encouraging trend is that, start-ups are increasingly veering round to focus on business to business (B2B) space. At present almost half of the country’s start-ups are offering services targeted at other enterprises. This is a significant shift from the initial rush of young entrepreneurs who were merely replicating models from Silicon Valley, primarily aimed at retail customers. While these businesses have made services such as booking a cab or a hotel room more affordable and convenient, Indian start-ups are way behind in creating products as Google and Microsoft do. But now deep-tech start-ups are fast catching up. There are over 2000 such companies in India engaged in high-end engineering, which is 70% higher than the number of deep-tech companies in 2018. For instance, with the Government opening up space sector, there are more than 40 private start-ups working on space and satellite projects.

While pandemic disrupted life in many ways, 2021 witnessed a booming digital economy, with crypto currencies, unicorns, decacorns, new age IPOs, super apps, data breaches, et al becoming part of the drawing room conversation! But as the noise and hoopla of new age IPOs from Zomato, Paytm, Nykaa, etc, captured investor fancy, there were clear signs of yet another promising trend gathering momentum. Although legacy conglomerates like Tata and Reliance expanded aggressively into the digital space through quite a few acquisitions and launches, the underlying trend of start-ups per se, scaling up was unmistakable. Nasscom estimates the start-up ecosystem to add 250 more scale-ups by 2025 in emerging areas like Edtech, Logistics, Automotive, Fintech and Healthtech. However, India’s start-up ecosystem has miles to go before it catches up with countries like Israel, China and the US. India has deep technical and scientific talent. But the best Indian minds look for better opportunities in other countries because of better infrastructure and a strong focus on R&D there. According to OECD, India has 3.12 million highly educated migrants working abroad, compared to 2.25 million of China. Israel for instance, decided early to invest in intellectual capital and create a knowledge based economy. As a result Israel today has more high-tech start-ups per capita than any other country. Tech start-ups with their capacity to grow, relatively quickly, from a novice to a giant, benefit the economy by increasing productive investment and creating jobs. They also spur growth in auxiliary trades (Eg.  e-commerce spiking growth in logistics) and among local suppliers. Successful tech firms spawn more start-ups, either by example or, through staff leaving to form other enterprises. This sort of cutting edge innovation is closely linked to economic growth. What then are the policy initiatives that are necessary to encourage and promote start-ups? Following are some recommendations for sustainable ecosystem to promote continuous growth of start-ups.

Start-ups require a multi-pronged approach, including:

1. Increasing access to capital;
2. Improving access to talent;
3. Opening up access to markets; and
4. Cutting red tape and instituting a pro-innovation regulatory and fiscal (particularly taxation) policy.
   • Start-up-friendly policies do not necessarily require large amounts of money or incentives. They do, however, require governments to do things differently than before.
   • Start-ups need access to overseas markets, which means supporting cross border data flows and limiting trade barriers.
   • Strong leadership can bring together universities and businesses to create the sort of talent pools that attract start-ups. Moreover, pro-innovation policy on the part of local political leaders can clear away some of the regulatory obstacles that hamper start-up growth.
   • An overall lowering of the corporate tax rate would help the most successful new businesses put more money back into their business and the economy, and free up capital for large companies to invest in new start-up growth through corporate venture capital, angel investment, and R&D.
   • Entrepreneurship has to be taught at an early age. The school should provide students with mentors from the start-up community in addition to project-based learning to spur entrepreneurial thinking and integrating technology and computer science into all aspects of the curriculum.
   • The government needs to invest more in research and development in order to fuel the next start-up boom.
   • Instituting a permanent start-up visa program would help. We need an immigration policy that encourages entrepreneurs to come and stay, rather than making them jump through hoops or wait in an endless line filled with red tape.

On their part Indian start-ups could focus on areas that cry out for innovation such as agriculture, air purification and water management. Also, before long there has to be a realisation that profitability cannot be sacrificed indefinitely in pursuit of valuation. It is essential that founders pay enough attention to the sustainability of the business model even as they strive to raise more and more funds to scale up to the unicorn/decacorn status. As Uday Kotak, Chairman, Kotak Bank says, The Cinderella Party fuelled by negligible cost of funds in a milieu of low or, even zero interest rates seems to be getting close to the midnight strike! The current copious flow of VC/PE funds could be a thing of the past with the advent of tighter monetary policy across the globe. In such a scenario, start-ups that have neglected profitability and a carefully thought out strategy could easily perish and the momentum built up over the last decade could come to naught.