Even after the initiation of the Make in India campaign by Prime Minister Narendra Modi last year, Indian start-up technology firms still believe that the domestic ecosystem is not the most appropriate place for them to raise capitals. The major problems Indian start-up firms face are the taxation process, rigid legal regulations and investor supports.
Too many tax breakages and tax registration processes still remain as demotivating factors for the new start-ups in India.
“Instead of treating a new entrepreneur as a support to the society, the government officials often try to make more money out of them. During the VAT (Value Added Tax) registration the first thing they ask for is bribe. In total, more than 20 registrations and legal procedures should be followed to properly start a company and we have done more than 14 registrations till date,” says Bipin Rajgopal, Associate of Rockforest, which entered the Indian market in 2005.
The complex and non-transparent tax structure in India often makes the Indian start-up firms to station their branches outside the country.
“In India there are a lot of tax breakages while in other countries like the middle-east or the US, the tax process doesn’t heavily affect the start-ups in the commercial or IT-service markets. India still has a lot of tax barriers which may make the new entrepreneurs consider setting up their headquarters abroad,” says Partha Bala, management intern at Deloitte which provides audit, enterprise risk and financial advisory services to the Indian start-ups.
Lovleen Bhatia, the CEO and co-founder of an Indian start-up firm, Edureka believes, “If the tax registration process would have been much simpler, we could have focused more on the product building innovations than diverting our attention in complex legal procedures.”
The taxation process, however, is just one of the multiple problems that an Indian start-up faces. These firms usually find it very difficult to gain the trust of the Indian Private Equity and Venture Capitalists (PEVC). Indian investors usually shy away from investing in the start-ups as there is the risk of failures or bankruptcy getting shared.
“If a start-up firm wants a quick ramp up, it needs a proper support structure from other industry bodies, accelerators, VCs or institutions supporting start-ups. But the Indian investors usually don’t invest easily and prefer the known companies more,” says Rajib Sundar, Director, Deloitte.
Bhupender Kkanal, CEO and co-founder of Simplify 360 says, “The Indian investors usually don’t have a high risk appetite. For example, American entrepreneur and venture capitalist Peter Thiel has invested in various challenging and innovative companies and many of them might have gone bankrupted but the capital he has gained from 4 or 5 successful start-ups is enough for him to invest in 4 more. While in India, for an investor who has somehow collected a few crores, investing in an innovative start-up that might fail is a great risk.”
It’s even hard for the Indian start-up firms to get a foreign investor as the foreign investors usually prefer the locally based companies to the Indian start-ups. The Indian start-ups also face problems in finding a proper market to sell out their product or services inside the country or abroad.
“The Indian customers while buying a service or product do ask for more discounts or offers from a start-up firm and the firm is forced to compromise with capitals,” says Loveleen Bhatiya.
The Indian start-up firms which targets the global market also face problems in raising capital as the foreign customers usually prefer the locally based firms for the ease of operational services and the transparency in the legal procedure.
“Predominantly, the technology market runs much better in the US. The IT product laws in the US are much stricter. When an American acquirer intends to buy a product or a service from an Indian start-up firm, it’s very hard for the entrepreneurs or founders to gain their trust because in case there is any problem like an IP violation, it’s very hard for the American buyer to track the Indian entrepreneur. In the legal perspective, India still needs to catch up with the Middle-east countries and the US,” says Bhupender Khanal.
The Make in India campaign started by the Prime Minister had given a ray of hope for the start-up firms as they believed that it might have a good impact on them and the future start-ups. But nothing much has changed so far.
“Though technology firms have more tendencies to go abroad to earn more capital, things might change in two to three years. Make in India campaign initiated by Modi has at least psychologically motivated a lot of start-ups and we are yet to see how it actually changes the Indian market for the technology start-ups,” says Bipin Rajgopal.
Commenting on the ISPRIT’s (Indian Software Product Industry Round Table) survey report which projects that 3 out of 4 technology start-ups that focus on global market will be stationed outside the country in 2015, Bhupender khanal says, “If today 75 % of the Indian start-ups are moving abroad, the next year hopefully the number will decrease and we can expect that with the initiative taken by Modi the number will decrease gradually.”
Khanal adds, “A US Company having branch in India is valued more than the US locally based company. India has a huge power factor in terms of future market and in terms of high quality resources.”