A step by step approach prioritising startup growth that India can emulate

Startups in India: Getting into gear

Startups have been the force multiplier to catapult a country like India to empower more entrepreneurs or problem solvers as they are believed to play a key role in India’s growth story going forward.

Though the Government has announced a few measures to support the growth of the Indian startup ecosystem, there is still substantial ground to be covered to make it more robust.

Missing ingredient

In many cases, Government regulations are unable to keep up with new innovations and ideas that startups present. In such cases, even as the official machinery works to incorporate new regulations keeping in mind the benefit to society at large, and creates an enabling environment for entrepreneurs, the lag can be one of the largest challenges that startups face.

Prioritising tax reforms

To encourage the growth of this segment, there should be a focus on easing or simplifying the processes involved, increased clarity, and the adoption of non-intrusion as a philosophy. We have analysed below the tax incentives provided to startups and their investors in three other countries that host a mature start-up ecosystem. These are examples that India can emulate.

Ease of procurement: Relaxing the procurement process for startups, which includes the requirement of prior turnover and experience, is viewed as a hurdle pertaining to eligibility qualifications for projects across the states and various smart cities. States like Telangana and Karnataka are leading the way by easing such mandates, but a lot more needs to be done to address this challenge. 

Fund of funds and SIDBI: Around 10,000 crore funds set up by SIDBI have not received traction as the disbursement process and programmes are not very accessible and transparent. These funds can be leveraged to play across the strengths of diverse sectors across the country.

Analyses of the pros and cons that dictate the attractiveness of FFS

Recommendations:

1. Currently, the AIFs have to put in twice the amount that the FFS commit to. The option of FFS matching the amount committed by the AIF may be explored. This will help AIF managers to convince investors.

Country: United Kingdom

Programme: Eurostars programme (European Union funded)

How does it work: According to the EUREKA Secretariat (the body that runs the Eurostars program), The Eurostars programme is a European Union funding project lead locally by Innovate UK. Eurostars provides funding for the development and research of innovative services, products or processes. You can work with partners in other European projects to collaborate on funding proposals.

Who is eligible: To be eligible for a Eurostars grant, you must be a small-to medium-sized business in the UK, working in the tech industry, and having the intention of collaborating with other European companies (large companies can still participate in Eurostars projects, but must self-fund).

Funding: 50 percent match-funded grants with up to £ 300,000 in funding.

2.Currently FFS can only contribute 15 percent towards the prescribed AIF corpus. The option of increasing the said limit may be explored.

Country: Singapore

How it works: The Singapore Government co-invests in a startup along with third- party investors. The programme is aimed at encouraging and stimulating private sector investments in start-ups.

Who is eligible: Innovative, Singapore-based technology startups with intellectual property and global market potential.

Funding: According to the government of Singapore (source – SBS Consulting, Singapore), with regard to the co-investment ratio with third-party investors, it is 7:3 up to $250,000, and 1:1 thereafter up to the investment cap of $2 million for general technology companies. The figures for deep-tech companies are 7:3 up to $500,000, and 1:1 thereafter up to the investment cap of $4 million. But the Government only co-invests if the interested third-party individuals or corporate investors are prepared to invest at least $50,000 each, and are able to contribute to the startup’s growth via management experience, relevant business contacts and the necessary technical expertise.

3.In the current state, after the entity ceases to be a startup (after 10 years or if the turnover exceeds `100 crore for one financial year), the AIF can no longer fund the startup using the funds allocated by the fund of funds. We recommend that either the startup or venture capital (VC) funds that have funded the startup have the option of buying out the shares from the AIF.

Country: Singapore

Programme: Early Stage Venture Fund (ESVF)

How it works: According to the National research Foundation, Singapore, ESVF is the biggest equity scheme by the Government which co-funds startups along with the VC firms. The beneficiaries of this startup funding in Singapore are early-stage technology startups based there.

Who is eligible: Early-stage technology startup

Funding: The National Research Foundation (NRF) invests S$10 million on a matching basis, to seed corporate VC funds. The VCs have the option to buy NRF’s share within five years.

4.The funding from the AIF has to stop once the 10-year limit has been exceeded or if the startup has exceeded a turnover of `100 crore in one financial year, and thus ceases to be a startup. We recommend that the funding should not be stopped immediately, and a buffer period introduced.

Rationale

While VFs participate in the scheme, and thus through AIFs fund various startups, these investments are essentially risky in nature. The proportion of successful startups may not be very encouraging. Thus, VFs can only expect returns on their investments from the small proportion of successful startups, which eventually, given their success, would cease to be one. To fully capitalise on such opportunities, VFs should have an option to decide the best time for disinvestment.

Sector-specific policies

Emerging technologies and sectors which need an initial push would require policy intervention like electric vehicle (EV) or e-commerce policies. This rise in purchasing power will directly/indirectly benefit digital/online startups as well, especially fintech, ecommerce, various hyperlocal e-market places, and health-tech startups.

All policies should be available on one platform, in an abridged, easily understandable format, and tagged in an appropriate manner (sector specific, state specific etc), so that an entrepreneur can easily identify which policies are relevant for his or her enterprise.

Information asymmetry across platforms: Create a platform to reduce the asymmetry in information availability and accessibility across the nation. There is still ambiguity in the number of startups registered in India. We need a single window/one-stop platform to address and acknowledge a startup’s needs and demands regularly and track their progress. At present, multiple bodies deal with different aspects of a startup , such as the Department of Industrial Policy and promotion (DIPP) and Central Board of Direct Taxes (CBDT), Reserve Bank of India), (RBI) .

Tier 2 & 3, last-mile connectivity: Representation of the central Government programme at Tier 2 & 3 levels (virtual and physical) – the hub-and-spoke model (mapping the existing infrastructure, leveraging Atal Incubation Centres (AICs) etc to ensure a better connect). Rural incubation hubs should be established to enable increased development towards sectors like healthcare and agritech. A targeted approach can be useful here to attract more investments to these areas of interest.

How to leverage existing infrastructure to ensure a last-mile connect with Tier 2 & 3 cities

Startup cafes would ensure a last-mile connect

Decide on a node for every state (such as the T-Hub in Telangana) and designate the Atal Incubation Centre (AIC)/notable academic incubator (in the absence of an AIC) in Tier 2, 3 and 4 towns in the respective states’ startup cafes. The startup cafes will be the point of contact for entrepreneurs (potential and existing) for any queries and access to resources from the central Government’s start-up initiatives. The startup cafes will host sessions with the intent of:

·       Disseminating information on various initiatives that the Government is taking up.

·       Upskilling entrepreneurs.

·       Hosting mentor sessions according to a pre-decided calendar (sector-specific/generic).

·       Sessions on the various policies, schemes and benefits that entrepreneurs can leverage (in vernacular language).

Interventions among policy/programme matters

Engagement of start-ups across initiatives like Ayushman Bharat can help co-develop many start-ups, a win-win scenario to bridge requirements. For example, currently registering as a startup and applying for a tax holiday are two separate processes.

Softlanding and Ease of Doing Business (EODB) across borders

Setting up businesses across borders or states should be made easier for both international and domestic startups. Support should be provided to leverage programmes like Startup Visa and Exchange Programmes to learn from other leading ecosystems of the world.

Space tech

As a sector, we need to open up and encourage startups with access and support to ISRO and other organisations. In addition to the above, the Government needs to be more proactive when it comes to protecting Indian intellectual property in disputes with global companies, and have expeditious alternate instruments. Such regulations will allow startups the space to grow, prosper, and make a difference to the economy with their innovations and ability to create jobs.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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