From Idle to Light Speed: Calibrating the Start-Up Environment in India

By Kartik Das –

Open shutter view of streetlights in Dehli, India. Source: Saad Akhtar’s flickr photostream, used under a creative commons license.

In November India will host the 2017 Global Entrepreneurship Summit in Hyderabad. This piece is the fourth in an occasional series exploring the climate for entrepreneurship in India, what the Modi government has done to promote entrepreneurship, and best practices for promoting entrepreneurship in other countries.

“Sir, we will be the ‘Uber’ of commercial transportation!” Ajay and Anand confidently proclaimed when they met me at a recent conference. They came seeking advice on how to fund their start-up. To nurture this dream, they were considering dropping out of college. I was astounded. Ajay’s parents eke out a livelihood making and selling cow dung cakes, a rural bio-fuel. Millions of underprivileged Indians aspire to achieve a college education to better their lives, yet these destitute boys wanted to quit. From bullock carts to commercial vehicles, today’s aspiring Indian youth are racing towards becoming ‘job creators’ rather than ‘job seekers.’ India’s start-up boom is now old enough to have produced large-scale failures as well as successes. The next cycle will benefit from the lessons already learned, but building a robust start-up environment requires continued policy innovation on the part of the government.

It is in this change that great opportunity lies for India. Problems in everyday life are crying out for new business ideas. Capitalism is beginning to be democratized, with start-ups emerging from all sections of society, not just traditional business families or big industrial houses. The emergence in the last decade of successful entrepreneurs from modest backgrounds who have built billion dollar businesses has inspired not only the young – it has motivated mid-career moves by restless employees, and offered retirees follow-on careers. Start-ups in India are nurtured by several simultaneous developments: real time access to contemporary technology, the ease with which brick and mortar businesses can get online, the growing coverage of wireless broadband networks, the explosion of smartphones, the emergence of cloud storage, the rise in supply chain sophistication, and the growing pool of trained engineers.

The first step in promoting start-ups has been to ease the operating environment and to make resources readily available to entrepreneurs. Prime Minister Modi himself launched the Start-Up India initiative with the mandate to: simplify red tape for start-ups and walk them through the process, provide funding and incentives, foster industry–academia partnerships, and encourage the establishment of incubators. The Start-Up India Hub was made the single point of contact for the entire ecosystem, and the initiative received a budget allocation of one billion dollars in January 2016. Besides the central government, state bodies, educational institutions, large corporations, and family business houses have set up both venture capital funds and incubation centers where fledgling businesses are being offered desk space, as well as mentoring in building business plans and technology models, scaling up, and also interacting with the investor community.

A first cycle has already completed. Despite the success of some ‘unicorn firms,’ with the influx of entrepreneurs a much larger percentage of start-ups have faced shutdowns prompted by poorly-crafted ideas, immature market understanding, low differentiation, breakdown of supply chain models, technology obsolescence, and inability to attract a critical mass of users. Investors, including private equity firms, have also erred by succumbing to trends in a ‘high sentiment market’ (i.e. irrational exuberance) and have been stuck irreversibly with businesses that collapsed with hardly any salvageable value, leading to unprofitable exits. Businesses targeting small and medium traders are struggling as they are still coping with demonetization and changes following the introduction of the Goods and Services Tax.

This process has in a sense been good as it has corrected the market and brought some prudence and rigor to both start-ups and the investor community. The steepest learning curve has been in e-commerce, where the goal was to replace the neighborhood shopkeeper, whether he was selling essential commodities, pharmacies, or even handyman services. Here the defining line between success and failure was clearly the quality of the physical delivery systems. Some entrepreneurs addressed the conflict with a traditional system, creating a ‘win-win’ environment by both aggregating demand and supply. Nevertheless, poor management skills and lack of systems to deal with unorganized trade caused these start-ups to fail. Another category has been companies that introduce a pre-existing service or product in an area of the country where it did not already exist and failed to scale geographically.

While the current policy offers benefits such as tax exemptions, reduced patent fees, sector specific incubators, and self-certification compliance options, challenges still exist. Investors remain hesitant; the Indian government needs to fast-track commercial disputes, develop better mechanisms for enforcing contracts, and improve foreign exchange and tax regulations to reap the undoubted potential of start-ups.

India holds great promise as a nation. Nearly three decades after watershed economic reforms, its progress has been staggering, with a rise in foreign direct investment, strong foreign exchange reserves, and a consistently high rate of gross domestic product growth over several years. Start-ups are a crucial component of India’s current and future economic growth. While there is strong political will to step on the gas, there are still lacunae in the government’s understanding of the entrepreneurial ecosystem. The government will need to manage the agenda carefully and quickly acquire relevant policy tools if it is to deliver on its grand plan.

Mr. Kartik Das is a Wharton-Lauder Candidate for the Class of 2019 at the Wharton School, University of Pennsylvania. He is a former consultant, and worked as Assistant Vice President for Invest India including key initiatives on the “Make in India Campaign”, as well as the “Start-Up India” campaign, State Mission Plan, and a Perry World House Associate.

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