The Start-Up Ecosystem in India – Present Scenario

The emergence of Start-Up wave in India is a relatively new phenomenon. India is today undergoing a fundamental shift with entrepreneurship & innovation being primary catalysts in job creation and solving everyday problems. A decade ago, there used to be only a handful of Indian Start-Up success stories such as MakeMyTrip.com and Naukri.com. But now, with successes such as Flipkart, Quickr, Practo, Zomato, and Inmobi, the Indian Start-Up Ecosystem has indeed come a long way1.

A Revolution Unfolding in the Economy?

During 2014-15, more than 98,000 new companies were incorporated in India.2 According to a recent study by Nasscom, India ranks third among global startup ecosystems with more than 4,200 startups that employ close to 85,000 employees. With over $5 billion worth of investment in 2015 and three to four startups emerging every day,3 it is projected that the number of Start-Ups in India will increase to more than 11,500 by 2020, with job creation from these entrepreneurs reaching 250-300k by 2020.4 The number of Investors has also risen multi-fold in the past few years. At the same time, the number of funds investing in India grew by 40% between 2013-14 and half of those funds were investing in India for the first time.3Thus, the ecosystem for both technology and traditional startups has been expanding at a quick pace. With so much happening around, we can safely say that there is a revolution presently undergoing in India. This can certainly not be dismissed as a passing trend and it’s surely going to change the way the markets are working today in India. 5Moreover, the statistics on the demography of the ecosystem says that 72% of the founders are less than 35 years old making India home to the youngest of entrepreneurs in the world.

Is it all Inclusive?

However, despite such promising statistics, only a small segment of the country’s population presently falls under the ambit of the ecosystem. Only 9% of the Start-Ups have female founders/ co-founders. 6Most of the startups as well as their backers and financiers are located in Delhi NCR, Bangalore, and Mumbai. In fact these three cities along with Hyderabad, Pune and Chennai account for more than 90% of the Start-Ups in India. Furthermore, majority of these are B2C ventures with their focus largely limited to information technology enabled products and services including e-commerce, aggregators, analytics, Internet of things , health-tech, and online payments.7

All is not Well with this Start-up Movement in India !

Amongst all this, the product start-up sector has been largely ignored. In fact, India’s startup successes are mostly about software enabled firms such as Flipkart and Ola , and rarely about hardware product companies. The reason for this can be attributed to the lack of funds. Products have to evolve from being a concept to a physical prototype and undergo various iterations before they can hit the market. But unlike software ideas where even simplistic ones that can find ready backers, products have to climb a steep arc to prove their worth in a market not known for its manufacturing prowess. Without initial investment, product stat-ups would find it extremely difficult to sustain themselves.8 Thus, while there is clearly a great deal of capital flowing into the startup ecosystem, only a very small amount reaches these startups. This problem is further compounded by the lack of Early Stage Funding – Angel and Seed Funding.9 Venture Capital funds in India generally invest in firms that are already generating revenues, therefore investing relatively late in the startup cycle. Likewise, India-based investors prefer to make a few relatively large investments of around Rs. 3 crores to Rs. 5 crores rather than spreading smaller investments across a large number of firms. Startups looking for funding of less than Rs. 50 lakh therefore often struggle to access investors. In fact, startups in India spend five times the amount of effort to raise funds as compared to US startups.9

Calling for Government Intervention…

  • This is where the Government intervention is required through the provision of alternate sources of funding and through partnership between the Industry and Academia.
  • Alternate debt financing instruments will help Start-Ups and other small enterprises to overcome the problem of lack of adequate collateral, limited cash-flow and the high risk involved. Some of these alternate sources include Non-Banking Finance Companies and Refinancing Agencies such as Intellegrow, Kinara Capital, MUDRA (Micro Units Development and Refinancing Agency), etc.1
  • Moreover, mentorship needs to be provided by the educational institutions in order to foster innovation and entrepreneurship, especially in the Product Start-Up Sector. Lately, several leading educational institutions in India have started incubation cells to help entrepreneurs in areas like building a business around an idea, creating and testing a prototype and understanding the market. Some examples are Society for Innovation & Entrepreneurship (SINE) – IIT Bombay, NS Raghavan Centre for Entrepreneurial Learning (NSRCEL) –IIM Bangalore and Rural Technology Business Incubator – IIT Madras.10 Such mentorship will also help in addressing the huge failure rate amongst Start-Ups.
  • Lastly, while direct support of start-ups and the right kinds of skills to start & run a business are important, the ease of doing business in the country also matters a great deal. This includes ease of starting a business, obtaining relevant permits, accessing credit, paying taxes, etc. India still ranks at a dismal 130 in the World Bank’s Ease of doing Business Index11 and an equally dismal 85 in Transparency International’s Corruption Perception Index.12
  • The Labour laws in India are out-dated as well. Thus, appropriate government policies and are required to make the Indian Start-Up Ecosystem reach its true potential.

This piece is the first in the series of articles published at the conclusion of a policy review project on PM Modi’s Start-up India Plan undertaken by Praneeth Rao, Vaibhav Goyal, Agrima Singh and Simrat Singh.

References:

  1. Confederation of Indian Industry, “A Snapshot of India’s Start-up Ecosystem”. http://okapia.co/wp-content/uploads/publications/235/Sonne%202016%20CII%20Snapshot%20Start-Up-ecosystem.pdf
  2. Ministry of Corporate Affairs http://www.mca.gov.in/MinistryV2/CompStat_IFCompLLP.html
  3. http://www.nasscom.in/startup-india-%E2%80%93-momentous-rise-indian-startup-ecosystem
  4. http://www.innovationiseverywhere.com/the-state-of-india-startup-ecosystem-here-comes-the-growth-and-10000-startups/
  5. http://thenextweb.com/in/2015/07/05/india-the-worlds-fastest-growing-startup-ecosystem/#gref
  6. http://economictimes.indiatimes.com/small-biz/startups/india-ranks-third-in-global-startup-ecosystem-nasscom/articleshow/49341735.cms
  7. Compass, “Startup Ecosystem”.http://startup-ecosystem.compass.co/
  8. http://articles.economictimes.indiatimes.com/2016-05-13/news/73063981_1_ather-energy-indian-institute-product-entrepreneurs/
  9. NitiAayog, 2015, Report of the Expert Committee on Innovation and Entrepreneurship
  10. http://usf.vc/wp-content/uploads/2015/10/Unitus-Seed-Fund-2015-Global-Best-Practices-Survey-of-Incubators-and-Accelerators.pdf
  11. http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Chapters/DB15-Report-Overview.pdf
  12. https://www.transparency.org/cpi2014/results

IPAN Research Team

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