There is no country in the world that has a 100 per cent success record of start-ups and the failure or success of any start-up also depends on the idea that drives it. This was the response by Finance Minister Arun Jaitley when asked why several Indian start-ups have failed over the past three years.
The FM may have chosen to answer the question differently had it been elsewhere. But it was at a press conference where a visibly buoyed Finance Minister was addressing the media after the World Bank’s Doing Business 2018 report saw India leapfrog 30 places to make its presence in the list of top 100 countries for the first time ever.
The government is joyed by the World Bank report, and understandably so. The report clearly underlines India’s improvement in as many as eight of the 10 indicators that the World Bank survey uses to rank nations. The indicators include protecting minority investors; getting credit; getting electricity; starting a business; dealing with construction permits; registration of property; paying taxes; trading across borders; enforcing contracts and resolving insolvency.
While the report comes as an endorsement of the government’s economic reforms and policies, India’s start-up story despite the Centre’s push is worthy of taking note.
A study by The IBM Institute for Business Value and Oxford Economics has concluded that close to 90 per cent of Indian start-ups fail in the first five years of their establishment.
The survey, titled ‘Entrepreneurial India’, undertook interviews of 600 startup entrepreneurs (300 were Indians); 100 government leaders along with 100 venture capitalists; 1, 500 leaders of established companies and 22 educational institutions.
As per the report, a majority of the respondents saw lack of innovation and skilled workforce as the primary reason behind the failure of Indian start-ups. Only 65 per cent of the Venture Capitalists saw lack of funding leading to start-up failures.
As of July this year, eight start-ups had shut shop this year alone, while two wound up some part of their businesses. Hotel aggregator Stayzilla, hyper local on-demand home services provider Taskbob, SaaS provider Prophesee, B2B logistics provider Turant Delivery, fintech offering Splitkart, foodtech firm Eatonomics, online hotel booking site Roomstonite, affiliate marketplace Shopo are among those who have shut shop completely.
Among those who continue to operate but have ended some of their services include B2B wholesale and retail platform Tolexo which shut down the latter service and mobile tech firm Cube26 which shut down its Internet of Things wing, leading to several job cuts.
Regardless of the closures, the start-up story appears impressive when one looks at the larger picture. According to Financial Times, India’s domestic startups have already raised upwards of $10 billion in 2017, which is more than double the amount raised in 2016.
While 2015 saw $7.9 billion being flushed into the startup economy, it declined to $4.4 billion the year later, it said.
According to data from startup tracker Tracxn, there were 1,129 individual funding rounds in 2015 with most of the capital being raised as Series C or the third round of venture funding. This year, the number of rounds has dropped to 763, and 71 percent of it was Series D or the fourth round of venture funding.
While the numbers would tell a story of a vibrant start-up space in the Indian economy and markets, there is a catch. Most of the amount mentioned above relates to funding in big-wigs like Flipkart, Ola and Paytm.
SoftBank invested $2.5 billion in Flipkart, making the Japanese conglomerate the single largest shareholder in India’s biggest startup. This was before SoftBank had pumped $1.4 billion in Paytm, that diluted Chinese investor Alibaba‘s stake in the company and also allowed it to shed its ‘Chinese’ company tag.
There was also the Tencent had also pumped in $1.4 billion in Paytm, another leading light in the domestic startup ecosystem. It not only diluted Chinese investor Alibaba‘s stake in Paytm, but also allowed the payments firm to shed its ‘Chinese’ company tag.
Start Up India a non-starter?
January will mark the completion of two years of the government’s much-publicised Start Up India Stand Up India campaign that promised a slew of measures that included simplified regulation, some handholding, tax breaks, and a fund-of-funds to accelerate the start-up scene and enable entrepreneurship, technological progress and innovation.
The highlight of the campaign that the government used to signal its intent in fostering a start-up culture in India was the Rs 10,000 crore start-up fund. This fund, to be managed by SIDBI, was to invest in Venture Capitalists that would in turn invest in start-ups. At the completion of one year of the launch of the campaign, not one penny had been disbursed.
What is interesting is that even in places where the fund has been sanctioned, it has not been withdrawn. In many ways, the rules under the Start Up India programme have restricted the ambit of its cover.
For instance, the scheme initially provided for a bank putting in only 15 per cent of the total corpus as part of its support, while the remaining 85 per cent of the funding had to be borne by the VC. With VCs struggling to raise that kind of money, the scheme hasn’t really taken off.
Another reason is the mandate that VCs could only use the money to fund early-stage start-ups, restricting their investment options severely. This rule was later modified by the government to allow VCs to invest half the corpus in start-ups while the other half can go to relatively mature firms.
Even the tax breaks that the government provides come with certain riders, resulting in only eight of the 502 firms recognized as start-ups reaping the benefits of tax breaks.
The tax break in itself had become a redundant sop as it was assumed that start-ups would start churning profits within the first three years, hence the three-year tax break. The provision was later modified to extend the tax break to five years.
Has govt played its part?
The Finance Minister’s assertion, that the fate of start-ups depends upon the idea driving it, implying that it was neither lack of intent by the government nor the paucity of funds that was leading to failed start-ups, isn’t misplaced.
Several reports have repeatedly pointed to the lack of innovation and the mismatch in the skills and actual proficiencies of those entering the workforce as one of the major reasons why the India start-up ecosystem hasn’t really flourished as it should have.
Nevertheless, the VC funding scenario in India isn’t really encouraging and the complications involved in start-ups benefitting from the government’s measures have only added to the woes.
While starting and shutting down of a business is part of the business ecosystem, there is need for the government to recognise start-ups as a potential contributor to the nation’s economic growth and provide it with the right tools and assistance to help it grow.
Skilling young Indians and simplifying the compliance procedures -- other than the Start Upo campaign -- that any business would find complex, could make up for much of it.