Start-up boom: Can the momentum be sustained?

Today, the entrepreneur’s mindset in the country is fuelled by universal mobile connectivity, internet penetration and the low cost of data.

Published: 21st March 2022 12:11 AM  |   Last Updated: 21st March 2022 12:11 AM   |  A+A-

Work, career, desk job, corporate job, start up

Image used for representational purpose only. (File photo)

For years, many of the brightest of India’s youth have migrated abroad in search of greener pastures. Despite latent discrimination, many of them have advanced in their jobs and quite a few turned to entrepreneurship. Many businessmen of Indian descent have achieved enormous success and are objects of appreciation both at home and abroad.

The liberalisation of India’s economy during the early 1990s largely removed the shackles on industries. While the decades following 1991 witnessed rapid growth in economic progress and reduction in poverty, it took a while to stoke the spirit of enterprise amongst youth. Jobs, especially in the government sector, continued to lure educated youth. However, the growth of IT and ITES sectors at the turn of the century crafted a new narrative in the nation. Centres like Bengaluru and Hyderabad became desi Silicon Valley(s) and attracted many. Even then, entrepreneurship was still not a perceptible mainstream mindset yet.

Things are changing, though. Generically described as “start-ups”, mostly based on innovative business ideas and embedded in technology, they are the new ubiquitous phenomena. While vast unemployment still exists and lakhs of youth stampede for lowly government jobs, young entrepreneurs are bristling with ideas and exude a rare sense of confidence.

Today, the entrepreneur’s mindset in the country is fuelled by universal mobile connectivity, internet penetration and the low cost of data. The proven innovative approach by Indians has also come to play. In the global innovation index, India has now ranked amongst the top 50 countries in the world for three consecutive years (World Intellectual Property Organisation).

Heaps of government support in the shape of funding, incubation, allowances and mentorship have certainly helped. A 10-times exponential growth in the number of start-ups is an indication of the new mindset of Indian youth in the last five years. At the same time, the number of MSMEs has doubled during the last ten years. In the last decade, the number of incubators has increased 15 times.

Due to several policy initiatives, access to funding is becoming easier, which is evident from the capital inflow (RBI). In absolute terms, FDI into India has risen from $97 million in 1991 to $82 billion for 2021. Similarly, the increase in the overall investment by private equities and venture capital firms in Indian companies touched an all-time high of $77 billion in 2021, 62% higher than 2020 (Indian Venture Capital & Private Equity Association). Several international firms such as Sequoia Capital, SoftBank, Lightspeed, Blackrock, Tiger Global, etc., have invested a large amount of money in small businesses in India.

In addition to capital from private players, the government is providing funds to propel growth in start-ups. SIDBI is operating a fund of `10,000 crores (DPIIT). Several initiatives by ministries under the Central government like National Innovation Foundation, ARISE-ANIC, SAMRIDH, etc., to promote innovation in critical sectors are helping. An array of tax benefits have been extended. Start-ups that meet the eligibility criteria can avail a tax holiday for three consecutive financial years out of its first 10 years since incorporation under section 80 IAC of the Income Tax Act. The state governments have also been proactive to support the growth trajectory of MSMEs/start-ups. For instance, the government of Odisha has created a fund of `100 Crore with alternate investment funds, seed funds and other grants to incubators. The state-of-the-art O-Hub was recently opened to house the state incubating facility.

Smaller businesses with unique ideas have picked up great interest amongst industries, raising their valuation. At the last count, unicorns in India have reached more than 90. More dramatic is the number of unicorns achieved during the last two years only. The word “soonicorn” is used by media pundits to predict which ventures will become a unicorn in the coming months. An analysis by the media platform Next Big Brand predicts that despite Covid, there are 26 “soonicorns” in 2022.

There is greater appetite for enterprise and risk taking in the socio-cultural milieu today. The viral success of business reality shows like Shark Tank is indicative that even the semi-urban Indian is also excited about entrepreneurship. Successful start-up founders and new business leaders today have become icons in society. However, the path to success is not all that rosy and there are many thorns.

One of the more critical skill sets for entrepreneurs is their ability to visualise the limitations to their ideas and pivot accordingly. The most well-known example of this was YouTube, which started as an online dating service where users could upload videos about themselves to search for romantic partners. However today the platform is synonymous with digital content for both entertainment and educational purposes. There are also several successful start-up founders who started with a business model but were prudent enough to switch to a completely new idea.

Analysis of the start-up ecosystem across different stages reveal a comparatively high failure rate in India in the initial stages. Out of 100 seed funded start-ups, 27 reach early-stage funding, out of which seven reach late stage. In contrast, out of 100 seed funded start-ups in the US, 48 reach early-stage funding and nine reach the late stage.

In India, the growth and funding at the early stage has not been encouraging. Since it is the early-stage investor who takes the maximum risk, the ecosystem needs to incentivise this. Most early-stage investors make returns via capital gains, i.e. selling their equity to late-stage investors at a higher value. In the current taxation regime, long-term capital gains from start-up investment is taxed at the same as unlisted equity, around 2.4 times of the applicable rate for listed equity. In business-friendly ecosystems, several incentives are provided to early-stage investors. For instance, in Singapore, start-up investors who hold an investment for two years can claim a deduction on the taxable income at 50% of the investment, though this is capped at SGD500 thousand. While the Indian government has brought about angel tax exemption, several experts are of the opinion that they are too complicated for implementation.

Another emerging trend is worrisome. Many successful IPOs are trading far below their listed prices. For example, Zomato has been trading around 27% of its listed price, Paytm stock prices have been on a downslide, around 50% of its listed price (Inc 42). One of the contributing factors may be the over-hyped valuation numbers for their initial public offerings. The founders will need to deliver sustainable financial performance to convince the stock market.

An interesting characteristic of the current start-up environment is that it is dominated by few sectors. An analysis of VC funding during the last decade shows that around 57% has gone to retail, fintech and travel tech. Foodtech and logistics sectors are rising, but the growth in agri-tech has been among the slowest. Obviously, even in this realm there is movement, but a host of policy reforms will be needed before a full-on wave is visible.

Asit Tripathy, IAS (Retd.)

Former Chief Secretary, Government of Odisha



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