Startup Ecosystem in India

Context
In India, the number of startups has increased fast. Hence, it is important to understand the growth drivers, challenges, pillars of support and road ahead, for these startups.

Background:

• ‘Startups’ are understood as “entities, which are in the early stages of setting up their operations, and work towards innovation, development, deployment, and commercialisation of new products, processes, or services driven by technology or intellectual property”.
• The number of Startups in India and worldwide is on the rise, and they are now being widely recognised as important engines for growth and jobs generation.
• In 2018, startups accounted for 64 percent of the total jobs created in India that year.
• The Indian startup ecosystem has evolved dynamically over the last two decades. In the 2000s, the ecosystem was still immature due to limited number of investors and support organisations, such as incubators and accelerators.
• In the last ten years, the number of startups increased fast and more support has become available in all dimensions. In 2018, there were at least 210 incubators and accelerators in India, which corresponds to an 11-percent increase as compared to 2017.

Opportunities and Growth Drivers for startups

• With a GDP growth of 7.0 percent in 2018 and world’s second highest population, India is one of the fastest-growing large economies. Therefore, the Indian market offers an abundance of opportunities for startups.
• As the Indian economy continues to grow, incomes and purchasing power are increasing Half of the country’s population is below the age of 25 and carries material ambitions.
• India’s huge diversity in culture, language, ethnicity and religion offers great potential for growth of regional startups, which can meet local needs.
• Given the scale of India and its resource constraints, low-cost, high-impact solutions are required. Technology startups play a crucial role in accomplishing this, because of their potential for scalability and exponential growth.
• Over the last few decades, technological change has reduced the cost of building digital products, and has provided access to consumer markets; for example, the largescale broadband penetration in India.
• Increased political will and government support through programmes like ‘Aadhaar enrollment’, ‘digital India’ and ‘Startup India’, is creating a new social infrastructure. This will promote financial inclusion, and offer an environment for growth of start-ups.
• Due to increasing uncertainty and fast-moving business environment, large companies face pressures to innovate ever more rapidly. For this, they rely on ‘open-innovation’; where they are reaching out to startups to increase their own innovativeness. They enter into exchange and strategic partnerships with startups, offering them corporate-specific resources. These engagements can be mutually beneficial.
• Most startup founders in India have strong intrinsic motivations driven by passion, problem solving, and desire to make a difference in society. Some founders have become India’s “startup heroes”, contributing to a current image of entrepreneurship as “cool” and “glamorous”, thereby increasing social acceptability of entrepreneurial careers.

Challenges faced by startups

• Founders lack business knowledge: Many Indian founders have a technical background and lack business knowledge.
• Lack of resources: For running a startup, a significant amount of working capital is required, but finding the right investor and raising funds is often difficult.
• Limited scalability of regional startups: Small startups are often limited to certain regions, making it hard to scale their products to customers across the country.
• Entrepreneurial drain: Startups with successful pan-India solutions venture in to markets abroad; for instance, the United States, where the user base has a much higher ability to pay.
• Disconnection between founders and consumers: Most startup founders come from well-off backgrounds in urban metro cities, while the customers of the mass market come from low-income backgrounds in villages. This creates in startups an insufficient understanding of the customers and their needs.
• Market access barriers: Indian markets are difficult to penetrate and largely dominated by large firms who are more capable of dealing with bureaucratic regulations.
• Low willingness to pay: Despite increasing incomes, the Indian customer base continues to be price-sensitive, and has low willingness to pay for products and services. Often customers expect discounts, or buy cheaper versions with low quality. Thus, startups find it difficult to find market for their new innovative products.
• Untimely payment collections: For those startups which do not charge customers through means of digital payment, collecting and ensuring timely payment can be another issue.
• Non-lucrative career option: Hiring Qualified Employees is often difficult for startups. For many job-seekers, joining a startup as an employee is not an attractive career option. There is risk of failure; most employees prefer more stable, reputed and high-paying jobs.
• Poor skills and high training costs: Many job applicants are not sufficiently skilled. Hiring fresh graduated require high training costs. While qualified specialists often move abroad for jobs. And Indian startups are yet to attract international talent.
• Complex regulatory environment: Though the government has introduced policies that aim to ease the business environment for startups, the regulatory environment is still complex, difficult and unpredictable. World Bank Ease of Doing Business index ranks India 77th of 190 countries; the country is 137th of 190 countries in the World Bank Starting a Business Ranking index. Closing down a business is equally difficult.
• Unfriendly tax policy: The tax policy and its enforcement are considered unfriendly for startups. They are required to file their taxes regularly, even if they do not yet generate any revenue.
• Flawed valuations: Most tech startups today, unlike traditional core-sector companies, do not have enough consistent cash flows to cater to the cost of operations and investment needs. Their valuations mostly rely not on free cash flows, but rather on assumptions of growth.
• Debt traps: Amid uncertainty of free cash flows, founders bank on future rounds of fundraise (debt or equity) to meet their financial liabilities. This leads to more fundraising to repay the debt, leading to a “debt trap".

Ways to strengthen startup ecosystem in India

• Startups do not exist in silos, but are part of the broader economy. Policy reforms, improving general economic conditions, as well as investments in digital and physical infrastructure (for instance, internet connectivity, roads and public transportation, power and electricity), can benefit startup ecosystem in India.
• Implementation of existing startup policies and removing inefficiencies within the bureaucracy will ease doing business for startups.
• Nowadays investors tend to fund rather mature startups which already have some market validation. There is need to help the younger and new startups.
• When startups go for more rounds of fund-raising (borrowings) to meet financial liabilities, they must first do an internal assessment if they are ready for ‘debt-traps’.
• Though funds can be raised used initial public offerings (IPOs), as it adds visibility and credibility to startups. But there is first a need to establish their readiness for IPOs.
• Governmental approaches like setting up a seed fund and giving grants to startups can be effective initiatives.
• More startups should be acquired and nurtured by large, established companies.
• Most support organizations and startup ecosystems are geographically concentrated in metro cities. Support must be extended to entrepreneurs in smaller tier 2, 3 and 4 cities.
• To overcome the disconnection between startup founders and mass customers, especially in rural India, there needs to be more field research and greater exposure to people on-site.
• Startups must widen their hiring net and be prepared to train first-hires. Fostering a good work culture can be helpful to attract and retain talent.
• Moreover, eradicating the male-dominated “bro-culture” will also help attract qualified women and foster a more inclusive and innovative environment.
• Through innovation and scalable technology, startups can generate impactful solutions, and thereby act as vehicles for socio-economic development and transformation.