Consumer Protection Act, 2019

Start-up Ecosystem in India

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Start-up Ecosystem in India

‘Startups’ are understood as “entities, which are in the early stages of setting up their operations, and work towards innovation, development, deployment, and commercialisation of new products, processes, or services driven by technology or intellectual property”.

Key Points:

  • The number of Startups in India and worldwide is on the rise, and they are now being widely recognised as important engines for growth and jobs generation.
  • In 2018, startups accounted for 64 percent of the total jobs created in India that year.
  • The Indian startup ecosystem has evolved dynamically over the last two decades. In the 2000s, the ecosystem was still immature due to limited number of investors and support organisations, such as incubators and accelerators.
  • In the last ten years, the number of startups increased fast and more support has become available in all dimensions. 

Opportunities and Growth Drivers for startups:

  • Growing Economy of India: led to increase in incomes and purchasing power. Therefore, the Indian market offers an abundance of opportunities for startups.
  • Demographic Dividend: Half of the country’s population is below the age of 25 and carries material ambitions.
  • India’s huge diversity in culture, language, ethnicity and religion offers great potential for growth of regional startups, which can meet local needs.
  • Given the scale of India and its resource constraints, low-cost, high-impact solutions are required. Technology startups play a crucial role in accomplishing this, because of their potential for scalability and exponential growth.
  • Over the last few decades, technological change has reduced the cost of building digital products, and has provided access to consumer markets; for example, the largescale broadband penetration in India.
  • Increased political will and government support through programmes like ‘Aadhaar enrollment’, ‘digital India’ and ‘Startup India’, is creating a new social infrastructure. This will promote financial inclusion, and offer an environment for growth of start-ups.
  • Due to increasing uncertainty and fast-moving business environment, large companies face pressures to innovate ever more rapidly. For this, they rely on ‘open-innovation’; where they are reaching out to startups to increase their own innovativeness. They enter into exchange and strategic partnerships with startups, offering them corporate-specific resources. These engagements can be mutually beneficial.

Challenges faced by startups:

  • Poor skills and high training costs: Many job applicants are not sufficiently skilled. Hiring fresh graduates requires high training costs. While qualified specialists often move abroad for jobs. And Indian startups are yet to attract international talent.
  • Complex regulatory environment: Though the government has introduced policies that aim to ease the business environment for startups, the regulatory environment is still complex, difficult and unpredictable. 
    • The World Bank Ease of Doing Business index ranks India 77th of 190 countries; the country is 137th of 190 countries in the World Bank Starting a Business Ranking index. Closing down a business is equally difficult.
  • Unfriendly tax policy: The tax policy and its enforcement are considered unfriendly for startups. They are required to file their taxes regularly, even if they do not yet generate any revenue.
  • Flawed valuations: Most tech startups today, unlike traditional core-sector companies, do not have enough consistent cash flows to cater to the cost of operations and investment needs. Their valuations mostly rely not on free cash flows, but rather on assumptions of growth.
  • Debt traps: Amid uncertainty of free cash flows, founders bank on future rounds of fundraise (debt or equity) to meet their financial liabilities. This leads to more fundraising to repay the debt, leading to a “debt trap"
  • Founders lack business knowledge: Many Indian founders have a technical background and lack business knowledge.
  • Lack of resources: For running a startup, a significant amount of working capital is required, but finding the right investor and raising funds is often difficult.
  • Limited scalability of regional startups: Small startups are often limited to certain regions, making it hard to scale their products to customers across the country.
  • Entrepreneurial drain: Startups with successful pan-India solutions venture in to markets abroad; for instance, the United States, where the user base has a much higher ability to pay.
  • Disconnection between founders and consumers: Most startup founders come from well-off backgrounds in urban metro cities, while the customers of the mass market come from low-income backgrounds in villages. This creates in startups an insufficient understanding of the customers and their needs.
  • Market access barriers: Indian markets are difficult to penetrate and largely dominated by large firms who are more capable of dealing with bureaucratic regulations.
  • Low willingness to pay: Despite increasing incomes, the Indian customer base continues to be price-sensitive, and has low willingness to pay for products and services. Often customers expect discounts, or buy cheaper versions with low quality. Thus, startups find it difficult to find a market for their new innovative products.
  • Untimely payment collections: For those startups which do not charge customers through means of digital payment, collecting and ensuring timely payment can be another issue.
  • Non-lucrative career option: Hiring Qualified Employees is often difficult for startups. For many job-seekers, joining a startup as an employee is not an attractive career option. There is risk of failure; most employees prefer more stable, reputed and high-paying jobs.

Need to do:

  • Policy reforms, improving general economic conditions, as well as investments in digital and physical infrastructure can benefit startup ecosystems in India.
  • Implementation of existing startup policies and removing inefficiencies within the bureaucracy will ease doing business for startups.
  • Need to help the younger and new startups: investors tend to fund mature startups which already have some market validation.
  • Needs more field research and greater exposure to people on-site:To overcome the disconnection between startup founders and mass customers, especially in rural India.
  • Startups must widen their hiring net and be prepared to train first-hires. 
    • Fostering a good work culture can be helpful to attract and retain talent.
  • More inclusive and innovative environment:eradicating the male-dominated “bro-culture” will also help attract qualified women. 
  • Promote innovation and scalable technology:which help startups to generate impactful solutions, and thereby act as vehicles for socio-economic development and transformation.
  • Governmental approaches like setting up a seed fund and giving grants to startups can be effective initiatives.
  • More startups should be acquired and nurtured by large, established companies.
  • Support must be extended to entrepreneurs in smaller tier 2, 3 and 4 cities: as Most support organizations and startup ecosystems are geographically concentrated in metro cities.