[Budget 2013] Letter to the Finance Minister – 10 Point Budget Agenda to Boost Entrepreneurship

Dear Mr. Finance Minister,

Hope you are doing well, and burning the midnight oil in trying to figure out the best way forward for Indian economy. Amidst the slowdown in power sector, shrinking margins of telecom sector, postponement of infrastructure projects and social gloom around women’s safety, I would like to draw your attention towards the Indian entrepreneur. The one who, in between all the gloom and despair, still gets up in the morning with all the optimism and energy there can be, and steps out to address unsolved problems that face both our country and the world. I write to you as a venture capital investor in India, having a ring side view of the highs and lows of this eccentric (that’s what society labels him) entity’s life.

In June 2012, the Planning Commission released a report titled ‘Creating a Vibrant Entrepreneurial Ecosystem in India’. Since the report was extremely long and verbose, you might not have had the time to absorb it completely. I would like to point towards some key highlights, quoting directly from the report:

• “India needs to create 10-15 million jobs per year for the next decade to provide gainful employment to its young population”.
• “On an average, existing firms are net job destroyers; losing 1 million jobs net combined every year. By contrast, new, less than one year old firms add an average of 3 million annual jobs in total”.
• “India has the potential to build about 2,500 highly scalable businesses in the next 10 years – and given the probability of entrepreneurial success that means 10,000 start-ups will need to be spawned to get to 2,500 large-scale businesses”.

These, and other data points covered in the report, clearly settle the question that entrepreneurship is critical for India. With 65% of population under 35 years of age, we are sitting on a potential demographic time-bomb, unless we can create adequate jobs for them. And then, there is the issue of living up to Goldman Sachs projections of India becoming the third largest economy globally in next 3-4 decades!

Mr. Finance Minister, there is clearly no way out except boosting entrepreneurship, and this deserves due attention in the upcoming Budget 2013-14. Here is a recommended 10-point Budget agenda to boost Indian entrepreneurship:

1.      Let’s make it easier to start a business in India; running it is a damn tough job anyway!

According to the World Bank’s ‘Ease of Doing Business Report 2010‘, India ranked #165 amongst 183 economies globally in terms of ease of starting a business. In order to compete with the likes of Silicon Valley, Singapore and Shanghai in terms of venture development, the Budget should institute measures to simplify starting a business in India. Also, we can learn from countries such as Singapore and Australia, and institute bodies that provide budding entrepreneurs with resources for business plan preparation,understanding legal structures, navigating regulations, capital raising, access to relevant business networks etc. It’s important though, that this isn’t just another government department or a mere online portal, but a formal, empowered and accountable body on the lines of Small Business Administration (SBA) in the US.

2.      Consciously create an entrepreneurship hub in the country

India can learn from the Silicon Valley experience, wherein multiple sectors such as software, hardware, Internet, mobile, healthcare, medical devices, energy and clean tech etc. have risen and grown together over last 5 decades, powering the overall US economy. A focused eco-system in the region has helped immensely in terms of rallying and deploying venture resources more efficiently and effectively. The Budget should propose the vision and roadmap to create an entrepreneurship hub in India similar to the Silicon Valley. Bangalore seems to be the most obvious choice for this, with presence of large talent pool, serial entrepreneurs, risk capital, educational institutions such as IISc and IIM-B, and global tech majors that are both spawning new ventures and acting as customers of existing startups.

3.      Institute formal initiatives to take ‘early’ Indian entrepreneurs to global markets

In a world that is getting increasingly connected and flatter by the minute, a key success factor for Indian founders will be their ability to scale up across the border, penetrate international markets and learn from their global counterparts. Over last few months, I have witnessed the zeal with which the UK Government has bought multiple delegations of British startups to Indian shores to expose them to emerging markets and help them grow. The Budget would do well to formulate similar initiatives, and not at the level of large NASSCOM/ ASSOCHAM members, but for early entrepreneurs where this can have an exponential game-changing impact.

4.      Make the Government an early adopter of startup offerings

One of the most crucial phases of a startup’s lifecycle is early adoption and feedback on its offerings. To help startups navigate this successfully, the Budget should mandate Government departments and PSUs to give preference to startup products and services during procurement (subject to quality guidelines, of course)? Similar measures have been widely instituted in other contexts in the Indian economy, from the defense offset policy to mandatory local procurement requirements in retail FDI.

5.      IITs and IIMs should be better utilized in the context of entrepreneurship

Not to over-rate their infrastructure and overall academic quality, but the IITs and IIMs are still our best bet in terms of technology and business competence. However, they have been thoroughly under-utilized in the entrepreneurship context, and the Budget needs to propose measures to reverse this. The best management/ technology talent should be hired to run their incubators, with their accountabilities and incentives aligned with standards set by commercial incubators globally. Best practices should be adopted from universities like Stanford and MIT in terms of technology licensing and venture spinouts. Finally, increased autonomy in this respect will help these centers realize their potential in the field of entrepreneurship.

6.      Indian HNI’s should be incentivized to invest in startups

As per Kotak Wealth and CRISIL Research, the total net worth of Indian Ultra HNHs (High Networth Households) is expected to grow from an estimated INR 45 trillion (across 62,000 ultra HNHs) in 2010-11 to INR 235 trillion (across 219,000 ultra HNHs) in 2015-16 . Even a few basis points of this wealth can potentially unlock billions of dollars of domestic risk capital for Indian entrepreneurs. The Budget should take steps to incentivize Indian HNIs to become angel investors. An effective way to achieve this would be to provide tax breaks at the Personal Income Tax level, similar to several states in the US which provide tax deductible component of 25% of the annual amount invested in Angel equity risk capital, with the claimed tax deductible amount capped at an appropriate level.

7.      Encourage Corporates to contribute more to the startup eco-system

Right from being potential customers to equity investors, Indian corporates can play a high-impact role in providing support to Indian startups. It’s ironical that though founders of several of these companies were struggling entrepreneurs once, the involvement of their companies in the startup eco-system is negligible. The Budget should provide for tax breaks, infrastructure incentives and other support to encourage venture activities such as establishment of corporate venture capital arms, in-house incubation, early adoption and preferential sourcing from startups etc.

8.      Promote Venture Debt as a mainstream financing mechanism for Indian startups

Venture Debt is essentially a collateral-free loan that comes with an interest payment, with the lender also getting a warrant that provides rights to buy equity at a pre-determined time and price. This essentially compensates the lender for higher risk of default in case of entrepreneurial ventures. Young companies are usually constrained in terms of providing collaterals, and therefore, venture and growth equity ends up being the only viable option of risk capital in most cases. In order to make it easier for venture-backed companies to raise money through diverse sources, the Budget should mandate existing financial institutions such as State and Cooperative banks, as well as Non-Banking Financial Companies (NBFCs), to provide venture debt. This will require creation of an enabling and constructive regulatory framework around this aspect.

9.      Attract Rupee denominated Limited Partners (LPs) for VC Funds

A great way to drive more venture capital investments into India is to make the country into a strong Limited Partner base. The Budget should incentivize Rupee denominated domestic capital pools such as commercial banks, pension funds, insurance funds and family offices to invest in VC funds looking to invest in India.This will encourage both homegrown fund managers as well as global funds to increase their activity in the country.

10.  Generate awareness and sensitization around entrepreneurship... that’s half the job done!

The Government has successfully run mass media campaigns around issues such as Polio eradication, HIV, voting in elections etc., and with great results. If you ask me, sensitization around entrepreneurship is an equally important issue facing the country today. The Budget should create a ‘venture awareness corpus’ for running mass TV and radio campaigns glorifying entrepreneurship, introducing compulsory entrepreneurship projects as part of graduate courses in India, running venture competitions at the grassroots level etc. These will go a long way in educating Indian society about the value of entrepreneurship and creating an aura of respect around it.

Mr. Finance Minister – if the Government is serious about education, about healthcare, about energy, and about manufacturing, then it has to be serious about entrepreneurship. The upcoming Union Budget 2013-14 is a great opportunity to demonstrate this commitment. On the lines of Women’s Reservation Bill and Lokpal Bill, I think the time has now come for a path-breaking‘Entrepreneurship Bill’.

Best Regards,

(A small cog in the entrepreneurship eco-system)