“I see start-ups, technology and innovation as exciting and effective instruments for India’s transformation, and for creating jobs for our youth.”
– Shri Narendra Modi, Hon’ble Prime Minister of India
One can say without a doubt that India has become a “start-up nation”. With an exponential rise in the number of start-ups, it is ranked third (after USA and UK) among the global start-up ecosystems. From booking a cab or an affordable hotel online and renting houses to purchasing groceries using mobile apps and facilitating banking transactions through partnership with banks, technology-driven start-ups are everywhere. It is estimated that India’s start-up sector has received a total funding of nearly $5 billion by the end of 2015. Some of the factors which have contributed significantly towards this massive growth in the start-up space are an increasing number of venture capitalists, private equity firms, angel investors, incubators and support networks, a large population and a high mobile penetration, among other things. In a recent report published by NASSCOM in association with Zinnov, this scenario is driving the Indian economy towards momentous growth; global investors are bringing FDI through investments in young innovative companies and new employment opportunities are being generated every day. Start-ups are now able to hire exceptional talent from the industry and offer them fairly good compensation and flexible work environment. Women entrepreneurs, too, are taking advantage of the innovation economy.
2016 has been the year of strategic and synergistic acquisitions by larger start-ups such as Flipkart and Snapdeal, and this is indicative of the vibrancy in the ecosystem. The money is well spent as the acquiring start-up stands to gain from the technology it otherwise would have to work towards. Some acquisitions have helped start-ups enter newer areas as in the case of online fashion marketplace Voonik Technologies. Its acquisition of Zohraa, Styl and Picksilk has enabled it to set foot in the ecommerce segment, and the acquired start-ups have gained from the transaction as they were not able to scale up. There are yet other cases where buyouts have helped the acquirer gain employee skills and expertise. In all, the deals with a total size of $534.9 million have generated entities that can cater to a larger number of consumers and may also deal in the global marketplace.
While we would want to look at the bright side, we must be cognizant of and responsive to the various challenges ahead. Some of the hurdles include lack of proper infrastructure as well as complexity of the market coupled with stiff competition. While there are several funding options available, many start-ups need the requisite mentoring to avail of proper finance. There have been some great business ideas which failed at the execution stage. India also faces some cultural challenges. Very few businessmen are prepared to take risks, something that is crucial to enter in the start-up sector. Moreover, India ranks 130 out of 189 countries in the Ease of Doing Business index, and Indian businesses still face issues as regards access to credit and ease of paying taxes. The said challenges have been underscored by other authors as well.
Some stakeholders of the start-up ecosystem have voiced their concerns over the fact that most of the top 200 start-ups are headquartered outside India so as to enjoy greater autonomy in operating their businesses. In this regard, think-tank Indian Software Product Industry Roundtable (iSPIRT) has campaigned for the Stay-in-India initiative and has argued that a number of changes at different levels such as faster incorporation and liquidation process, favourable IP-tax regime and relaxed external commercial borrowing norms must be brought about in order that start-ups flourish in a conducive environment. The government is responding to some of these concerns. On January 16, 2016, the government kicked off the much-awaited Start-up India Action Plan, wherein start-up on fulfilling certain eligibility conditions shall be entitled to benefits such as fast-track examination of patent applications, tax exemption on capital gains and funding support. More recently, the Ministry of Corporate Affairs released a notification facilitating easier access of funds by start-ups via the convertible note route by introducing several relaxations therein. On its part, the Reserve Bank of India too has resolved to ease regulations to enable start-ups raise foreign funding.
While the several policy initiatives are sending positive signals to young aspiring entrepreneurs, India must look at the entire scenario from a broader perspective. For instance, our education system, which focuses on rote learning rather than creative and analytical thinking, requires a complete revamp. The existing vocational training institutes offer outdated courses that are ill-suited to the start-up economy. India certainly cannot have a piecemeal approach towards start-up growth.