Indian startups lack domestic capital, warns Mohandas Pai, urges regulatory reforms citing US, China models

Former Infosys Chairman and Aarin Capital Chairman Mohandas Pai said that one of the major challenges for Indian startups is a lack of adequate domestic investment due to restrictive regulations, while citing examples of China and the US. He called for policy reforms and investment in research and development to strengthen the ecosystem.

In an interview with PTI, Pai highlighted his concerns regarding Indian startups.

"The biggest issue for startups is the lack of adequate capital. For example, China invested $ 835 billion in startups and ventures between 2014 and 2024, US invested $ 2.32 trillion. We just put in USD 160 billion, out of which possibly 80 per cent came from overseas. So local capital is not coming in," Pai said.

“We have 1,65,000 registered startups, 22,000 are funded. They created $ 600 billion in value. We got 121 unicorns, maybe 250-300 soonicorns,” he added.

Although India ranks as the third-largest startup hub globally, Pai warned that the country may lag in global innovation if these challenges remain unaddressed.

Regulatory challenges

While comparing to the US, where insurance companies and university endowments are sources of funding for startups, Pai highlighted that endowments in India are restricted from investing in startups, and insurance companies are largely absent due to inadequate regulatory reforms.

He called for regulatory changes that would enable insurance companies to engage in fund-of-funds, advocating for increased flexibility in their investment frameworks. Pai also recommended expanding the government's fund-of-funds programme from ₹10,000 crore to ₹50,000 crore.

He highlighted that pension funds in India with a ₹40-45 lakh crore corpus are not able to invest in startups due to regulations and a conservative approach.

Importance of R&D funding

Pai stressed the importance of substantially increasing R&D funding in Indian universities and encouraged organisations like DRDO to make their technologies accessible to the private sector.

He noted that current R&D expenditure in public universities is lower than international benchmarks and insufficient to foster innovation.

“We need to remove barriers for startups to sell business to the government and public sector units...even though the government has reformed it, it doesn't work in actual practice. It must be opened up, and I think that has to be a mind shift,” Pai said.

He also blamed big companies that buy startup technologies for less money.

"The problem in India is that all the big companies try to beat down the small startups and give them less money, and force them to sell the technologies and use them, and often don't pay them on time. This culture of hurting the small people should change," Pai said.

(With inputs from PTI)