Unlocking the real value of India’s start-up ecosystem
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The story of Indian start-ups is not just limited to the current century; in fact it began over four decades ago. Through the 1980s, a handful of pioneering IT services companies, including the likes of Tata Consultancy Services, Infosys and Wipro, put India firmly on the global economic map. These companies invested in technology and leveraged the country’s young, English-speaking workforce to provide cost-effective technology services to clients across the globe. The result is an industry that currently employs nearly four million people, generating $150 billion in revenues for India today. The 1990s witnessed the launch of Bharti Airtel, which today is India’s largest telecommunications company, with over $15 billion in revenues and more than 350 million consumers worldwide. Similarly the 1990s also witnessed the launch of ICICI, HDFC and Axis banks, which are among the top 10 banks in India by balance sheet size (as of March 2016)—in fact ICICI Bank and HDFC Bank are number two and three, respectively, after State Bank of India. More importantly they fundamentally reshaped every element of banking business model in India leading to betterment of the sector as a whole.
Cut to the present and India has seen a dramatic acceleration in both the quantum and diversity of start-ups. Over the last 10 years, India has become one of the top five start-up ecosystems in the world, alongside the US, China, the UK and Israel. The country today is home to a strong angel investor network, with the sector witnessing active participation from every major venture capital or private equity firm. Over the same period, the start-up sector has attracted nearly $20 billion of capital and today employs about 100,000 people, with that number doubling every two years. Furthermore, over a 100 active incubators help entrepreneurs experiment with new ideas by offering them functional expertise and resources.
This recent scale-up of the Indian start-up ecosystem is the result of a confluence of multiple factors. On the demand side, there has been a massive explosion of consumers going online driven by smartphone proliferation. The sheer number of these individuals, their ever-rising income levels, coupled with their desire for consumption makes them a highly attractive captive consumer base. On the supply slide, there has been a massive inflow of entrepreneurial and technology talent. The creation of marquee start-ups in India has made “business” a highly lucrative career beyond the traditional mercantile community. Nearly 40% of India’s start-up founders and leaders come from premier engineering colleges and business schools, such as the IITs, IIMs, and ISBs. This trend has reversed the nation’s “brain drain” by not only retaining the best and brightest in India, but also by attracting top quality talent of Indian origin back into the country. And finally, large capital inflows from global investors has helped ignite the entrepreneurial spark in our country. The vibrant start-up ecosystem we see today is the result of all these positively reinforcing mega trends.
However, some of the euphoria has subsided recently. Funding in 2016 has been much harder than the past couple of years. Investors are marking down the value of many start-ups. They are asking founders to stretch the current funding runway for longer by reducing cash burn, and asking tougher questions around the sustainability of business models as well as profitability. So does this signal that the Indian start-up ecosystem has hit a plateau? Quite the opposite, we think. If harnessed well, this ecosystem has the potential to change the face of the country over the next two decades.
All successful start-ups are based on a potentially disruptive consumer value proposition. Think about the convenience of an e-commerce marketplace, or the ability to call a taxi or book a room at the click of a button anywhere, while paying through a mobile wallet. Or consider the benefit of reducing turnaround times in logistics by 50%. What clearly come through are a wide range of measurable as well as intangible consumer and business benefits.
But what is not so obvious is how the start-ups amplify the economic impact of technology at the grass-roots level. For example, e-commerce companies such as Flipkart, Snapdeal, and ShopClues have put small businesses on an unimaginable platform. Ola and OYO Rooms have helped thousands of taxi drivers and hundreds of small hotel owners achieve significantly higher productivity. Likewise, Rivigo is fundamentally improving the livelihood of its fleet pilots (i.e., truck drivers). It is this ability to inspire transformation at the grass-roots level that gives Indian start-ups a truly unique character. If this innovation and energy can be directed to areas such as literacy, skill development, healthcare and sanitation, financial inclusion, and natural resources, imagine what it can do for India!
Making this dream a reality will no doubt take significant effort, resources, and resilience. More importantly, different stakeholders will need to play their part right to achieve the desired results.
Founders must build start-ups that solve problems that are unique to this subcontinent, in addition to adopting proven global business models relevant to this part of the world. Start-up teams in India are much younger than elsewhere in the world. As a result, founding team members typically lack the experience of having worked in a mature organization, and believe in learning by doing. This entrepreneurial culture can result in start-up teams making wrong choices with respect to organizational structure and roles, business processes, sales, marketing, and branding, often proving fatal for the venture. This is particularly crucial when they are transitioning from getting the “product-market fit” right to scaling up the business. These teams have a lot to learn from Israel—widely known as the “start-up nation”. Like Indian entrepreneurs, their Israeli counterparts also want to build the “next big thing”. But the latter are more successful in their pursuits as they do a few things differently. They spend a disproportionate amount of time on research and development, resulting in unique ideas with a global appeal. Further, they follow a “lean-start-up” strategy and carry out extensive market experiments before raising large amounts of capital. Apart from being typically older than their Indian counterparts, Israeli entrepreneurs also often have prior professional or military work experience. While some of these traits are cultural, many of them can be imbibed by Indian entrepreneurs to script their own success stories.
The start-up journey also needs continual support from the government. Setting up a Small Industries Development Bank of India-run electronic development fund that makes the Indian government a limited partner in a fund for the first time ever, is a great example. However, more is needed. The country’s administration needs to create a more progressive policy framework to nurture new ventures, especially encouraging them to address the country’s unresolved problems. While the long-term commercial viability of any business is non-negotiable, start-up businesses will likely have different maturity cycles depending on the sector they are in. For example, start-ups with a social impact bias may take longer to reach self-sustainability, but have the potential to create significant eco-social value. Without an appropriate enabling environment, there will be disproportionate emphasis on near-term commercial viability, leading to crowding out of start-ups that want to focus on longer-term innovation for the social good. The government can provide higher incentives for investment in sectors that are most crucial for India. These incentives can take different forms, with several precedents such as generation-based incentives for renewable energy, tax and depreciation benefits, capital subsidies, priority sector banking norms, etc., already been set. Consider an example. If the government creates norms mandating partial allocation of priority sector lending requirements towards social impact start-ups, a massive amount of capital could be channelled to deserving sectors. Having said this, it is important to remember that subsidies alone cannot create solutions that are sustainable over the long term. Subsidies should be directed towards “turbo-charging” start-ups in the social impact sector, while holding these new businesses accountable for creating long-term sustainability. The government could also do more to foster the creation of a larger number of start-up cities. While India has joined the league of the top five global start-up ecosystems, only one Indian city—Bengaluru—ranks among the top 20 start-up cities of the world. Therefore, much like the creation of special economic zones to promote the growth of IT services, the government can facilitate the creation of 5-10 start-up focused centres across the country. Indian academics can further provide a boost to this endeavour by contributing novel ideas based on their deep technical and functional expertise.
And finally, corporate India can play a big role in shaping the future of this landscape. They should fully embrace corporate venturing, providing new companies with the capital to compete on a global platform. There are clear early signs of this happening with companies like Infosys, Wipro, etc., seriously investing in start-ups through venture capital funds. But a lot more can be done. Indian corporates are today sitting on Rs13,500 crore of cash. They all aim to embrace new digital technologies such as mobile, cloud, Big Data and analytics to transform their existing businesses, but often lack the mindset and skill set to do this. The way around this challenge is for the firms to acknowledge this capability gap and use their capital instead to establish independent start-ups employing external talent.
Ultimately, the combination of progressive government policies, capital assistance from corporates, guidance from academics and the sheer brilliance of Indian entrepreneurs can create the secret sauce for unleashing the true potential of our start-up ecosystem.
While India is a land of many unique problems, its greatest assets include its brainpower and resilience. By harnessing these, it can overcome a wide range of challenges through innovative solutions. Start-ups provide an excellent environment to nurture talent as well as to leverage the power and scale of the latest technologies. In doing so, some of them hold the promise of transforming the country and potentially becoming the next set of Indian technology giants. Now is the time for all stakeholders to come together to make this vision a reality and to unlock the real value of Indian start-ups.
Rishab Gulshan and Yashraj Erande are partners and directors at BCG India. The views expressed are personal.