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Avoid handouts at start-up stage

Avoid handouts at start-up stage
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First Published: Sun, Mar 14 2010. 08 41 PM IST

Updated: Sun, Mar 14 2010. 08 41 PM IST
Time and again, I am asked questions by young people about why the government doesn’t do more to help start-ups. Why, for instance, doesn’t the government fund start-ups?
This question is usually asked by people who have some sort of a sense of entitlement—they believe it is their right to get funding from the government for their enterprise. This sort of attitude is a throwback to 20 or 30 years ago—to the days of nationalized banking. There are enough private sources of risk capital available now for the government to not do this. Apart from venture capitalists (VC), there is even a category of angel investors. Admittedly early-stage capital is still somewhat scarce, but it is there if you knock on enough doors.
The easiest thing to do is to ask the government for a dole or subsidy. However, actually extracting it from the government is usually a very bureaucratic and time-consuming process. And taking money from the government does require skills that are not the same as those required to build world-class products for customers. If your start-up really deserves funding, chances are that you will get it faster from private sources than from the government.
And if after trying at many places, you still fail to obtain funding, then the market is giving you feedback—listen to it. Perhaps your project actually isn’t the sort that will get funding, or perhaps you need to reach some more milestones before you approach an investor. Whatever it is, the fact is that every start-up will not receive VC funding. Less than one in a hundred business plans get funded. It must also be remembered that most successful companies did not receive venture investment. So the belief that you cannot succeed without venture capital is somewhat misplaced.
Believe in your ideas: A start-up will succeed if your concept is good
The entrepreneurial ecosystem is Darwinian in nature—and that is the way it should be. Only the fittest will survive. Some start-ups will die—sounds harsh, but that is good for efficiency. The ones that do make the cut, however, will go on to become large, valuable businesses.
The mindset of those who want government funding for start-ups hasn’t changed even 20 years after economic liberalization—we want free markets when it benefits us and we want government intervention when we are at the receiving end of free markets. There is no such thing as risk-free entrepreneurship. It is a requirement of entrepreneurship to bootstrap, sacrifice, do more for less, and struggle for financing. That experience creates a mindset of frugality and a laser-sharp focus on only that which is essential. It is scarcity of capital and the accountability that a free market imposes that leads to capital efficiency.
The role of the government should be limited to creating the right environment for a healthy entrepreneurial ecosystem, rather than taking direct financial risks in commercial enterprises. This would mean creating the right regulatory framework.
One useful rule for the government to follow is to let markets work when they are doing a good job and intervene only when markets fail.
There could be a case for the government to intervene where private venture capital or angel money does not reach rural areas, in underdeveloped regions of the country, at the bottom of the pyramid, or in other sectors where there could be a large social impact. However, even these projects—in order for them to scale and affect the lives of a large number of people—would necessarily have to be financially viable and generate a positive return on capital. Therefore, even where the government does intervene, the filters deciding what projects should be backed and which should not, should be very discerning and the process well managed.
The author is co-founder and chief executive officer, InfoEdge (India) Ltd, which runs the Naukri.com website. He writes a monthly column on careers and enterprise.
Write to Sanjeev at onthejob@livemint.com
Note: Career Coach will run next week.
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First Published: Sun, Mar 14 2010. 08 41 PM IST