Easy availability of capital and democratic funding have helped India become one of the fastest growing start-up ecosystems
In 1994, a couple of years into liberalization, Prabhat Agarwal decided to launch Parsec Technologies, an enterprise software company, along with two friends, both non-resident Indians living in Silicon Valley. Their venture quickly ran into hurdles.
According to Agarwal, in the mid-1990s, there were virtually no angel investors or venture capitalists in India willing to invest in a company without a proven track record. Attracting talent was also a problem. No one wanted to work for a start-up, where the initial pay might only be stock options. There was also professional risk to the entrepreneurs. “There were no safety nets. So, if the venture failed, it was always looked at as a black mark on your résumé," Agarwal said.
Today, funding is more readily available and despite the red tape, start-ups are booming. According to the National Association of Software and Services Companies, India ranks third globally in the number of start-ups and is among the fastest growing start-up ecosystems.
In the last financial year, according to the ministry of corporate affairs, around 100,000 new companies were registered. And since 2008, more than 4,500 venture capital (VC) and private-equity deals totalling a shade over $100 billion have been struck, according to data compiled by Bain & Company.
Availability of capital is not the only driving force; start-up funding has become more democratic. “Today, any entrepreneur who has a reasonable business model or product can easily get access to multiple funding options, irrespective of their educational qualification or references," said Ankit Oberoi, co-founder of AdPushup, which enables online publishers to optimize ad revenue.
Platforms like LetsVenture, which connect start-ups looking for funding with angel investors and VC funds, break down barriers such as the need for a recommendation or investing experience. For Utsav Somani, Delhi chapter lead of LetsVenture, the platform was an equalizer: It democratized the process and opened the floodgates. In fact, some entrepreneurs such as Isaac John Wesley, who co-founded online print marketplace Inkmonk, ran into a problem of plenty. “The actual fund-raising was just a matter of minutes," he wrote on LetsVenture’s blog. “At a point, we realized that we had to turn down a lot of investors, instead of it being the other way around."
Many believe that with start-ups awash with money, there is a valuation bubble waiting to burst—similar to what happened in the US at the turn of the century. When will that happen is tough to predict, but boom-and-bust valuation cycles are part of the game.
It is uncontested though that the high-profile successes of Flipkart, Delhivery, Zomato and Ola have helped foster a more favourable attitude towards entrepreneurship. Founders have even overcome the most formidable Indian challenge—parental approval. Apurv Agrawal, founder of distributed workforce platform SquadRun, recalls that when he graduated from VIT University in Vellore in 2012, he decided to join a start-up instead of an established company. Even though his salary was at par, his recruiter had to “face an interview" with Agrawal’s father to convince him of the decision.
“As compared to my dad’s generation, I feel my peers are far more open to new ideas and ventures," agrees Sai Srinivas, founder and chief executive of Mango Man Consumer Electronics. “There are many who are seeking the unconventional route and with good intent. Hence, there is money also that is coming in to support young entrepreneurship. I believe our generation has moved beyond the idea of just procuring the basics. We want to build and do more, and make better products and experiences for ourselves and the generations to come."
But it is largely the technology sector that is drawing the money. According to Tracxn, a research platform for private market investors, around 95% of start-ups founded in India since 2008 have been in the non-manufacturing space. It is obvious why: With nearly 870 million active mobile connections and 350 million Internet users, the user base is huge.
“Everybody is interested in investing in tech start-ups. Even service companies are positioning themselves as APIs (application programming interfaces)," said Abhishek Gupta, co-founder of Frankly.me, a video microblogging platform. “The pace of growth of technology companies is unprecedented."
WhatsApp, he points out, sold for $19 billion within five years of starting up.
The manufacturing ecosystem has been slower to evolve, even as the government prioritizes Make in India. Licences are still mired in red tape; land acquisition and labour management present challenges. Add to this, complex taxation procedures and lengthy insolvencies, inadequate incubation centres and research and development facilities, as well as the lack of hardware expertise among venture capitalists. However, the government’s start-up action plan, announced this January, could change all this for the better.
For Srinivas, an attempt to manufacture Teewe hardware in India was “a learning process", with the company subsequently moving production to China.
“The problem we faced with regard to manufacturing in India was that there was lack of knowledge and experience in terms of resolving technical issues that can happen with hardware," he said. “Whereas in China, the turnaround time for resolving a technical issue is much faster as there’s always someone right next door who’s working on something similar. That kind of knowledge only comes when there’s a lot of manufacturing happening around similar products."
India lags behind China on other parameters, too. On the recent World Bank’s annual Ease of Doing Business index, the country ranks a lowly 130 of 189 countries, compared to China’s 84 and Malaysia’s 18. It fares particularly low on the metrics of starting a business and resolving insolvency. In competitiveness, India is ranked 55 of 140 nations on the World Economic Forum’s index, with China at 28 and Indonesia at 37.
Indian start-ups have much to learn from other start-up hubs such as Israel. Israeli start-ups straddle technology, healthcare, finance, media, entertainment, etc. The Israeli government-backed Yozma (initiative) fund has helped establish a strong VC industry since 1993, while angel investors are supported through tax credits on investments.
There is, however, reason for cheer. India is climbing up the business and competitiveness indices, and there are more initiatives in the works. For the first time, states are being rated on implementation of business reforms. Company registration is being fast-tracked with a single integrated incorporation form available online. And the Insolvency and Bankruptcy Bill, 2015, is a step towards improving the process for dissolving businesses. Other reforms have come via the start-up action plan; these include self-certification for non-risk and non-hazardous businesses, fast-tracking of patent applications and income tax exemptions.
Given this encouraging backdrop, India’s start-up system is kicking into high gear, encouraging more entrepreneurs to pursue this path. Opportunities are only poised to increase as India claims a bigger role on the world stage.
Gopal Sarma is a partner with Bain & Company and leads the firm’s infrastructure practice in India. Prateek Majumdar is a principal in the firm and a member of the technology, media and telecommunications practice in India.
Next week in the Mint-Bain series on 25 years of reforms: An alternative framing of Indian states after liberalization.