India boasts one of the largest number of startups in the world, lagging behind only two other countries — the US and China. Reports suggest that there were around 50,000 startups in the country in 2018, out of which the Department of Industrial Policy and Promotion currently recognises over 24,000 startups. Despite the extravagant numbers, the startup scenario in India looks shaky, especially when it comes to government support, tax benefits and financial stress.
One of the biggest concerns for the startup community has been Angel Tax. The earlier mandate required privately-held companies to give angel tax on receiving funds at a rate higher than its fair evaluation. Currently, India levies a 30% angel tax. It had driven up regulatory and monetary pressure on budding firms, threatening the survival of startups.
However, recent budget by Nirmala Sitharaman cited that startups and investors who file requisite declarations will not face additional scrutiny related to angel tax, bringing some relief, but there is a lot that needs to be improved and there is a long way to go. The startup ecosystem needs to have a clear vision around how the technology industry such as AI and analytics are structured.
This month’s Big Story intends to take a deeper look at what the startup growth scenario looks like in India, especially in the emerging tech sector like analytics, AI, data science and IoT, among others. We interacted with the startup founders to get their take on how does the support system from government and private investors look like, challenges they fact as startup founders, overcoming personal and social pressure, and more.
Need For Tax Benefits
The tech startup community definitely feels that there is a need for government support in terms of tax benefits. Akhil Sikri, CTO and co-founder of Zolostays cites a study suggesting that the financing of innovation is likely to be more successful in situations where the tax policy rewards are long-run investments rather than short-term capital gains. Therefore waiving off angel tax and further provisions for tax exemption on investments above the fair market value and capital gains are steps in the right direction.
“In India, the angel tax has been a major issue thus far, and its withdrawal has definitely come as a massive relief to the startup ecosystem and the investor community,” says Bhavesh Sharma, Country Head, India at Better.com. He hopes that this will remove some of the challenges that were in place earlier and hopefully ease angel rounds going forward. Ajit Kumar, founder and CEO of RupeeCircle believes the same.
Sripad Vaidya, co-founder at Confirmtkt says that there already is a three-year tax benefit for startups, but for tech research firms, tax benefits need to be extended to five years for high risk and high return research startups.
Ankit Mehrotra, founder and CEO at Dineout shares that many countries such as in Singapore, the government incentivises and offers subsidies for restaurants to adopt the technology. It brings larger adoption of emerging technologies which unfortunately lags in India. He believes that while there is a lot of scope for incentivisation by the Indian government, it is not happening.
Support System: Government Vs Private
When asked if there are enough resources from the government and private investors to pad up research in the tech space, founders had mixed opinions. While there were some who believed that there is equal support from the government and private investors, others said that they had more private support than from the government.
“Today the future of startups in emerging tech looks very promising. There is increasingly good adoption of technology across all fronts. Different forums and events in the different subject matter of emerging tech provide a good place for the exchange of ideas and also a validation of our work. A lot of private incubators and government-supported incubators provide right mentoring which is equally essential,” says Kumar.
Vaidya echoes similar views as he said that over the last five years, the government has been encouraging and providing startups with platforms and schemes to benefit them. “This is bound to be more friendly and supportive in the coming years,” he said.
There have also been other government initiatives such as them establishing ₹10,000 crore Fund of Funds for Start-ups (FFS), creating friendly policies, reducing angel tax and more.
“While there has been a lot of support from new programmes such as Startup India and the recently announced FFS, there is still a sizeable gap to be filled, and nowhere near enough resources for research,” says Sharma. There is not enough risk capital and unequal funding.
Mehrotra also shares that the government support system for startups in countries such as the US and UK is quite substantial compared to what Indian startups receive. While in terms of private investors, there are a lot of angel investors, but the funding support from the government lags behind. “The Government’s role in startups in India is non-existent. Over the last few years, there has been a lot of noise around Startup India and other initiatives but the ground reality seems different. There is a huge scope when we talk about the support that should be given to the startup ecosystem,” he said.
Apart from support from government and private bodies, the fact that startups now have affordable data connectivity and a large pool of data engineers, comes as a major motivation for tech startups.
Dealing Red-Tape & Lack Of Infrastructure
The Indian startup market is quite different from that of the US or even China. There is a difference in terms of the business models, government policies and more. Business models that have been successful there may not necessarily bring success here. While there are tremendous opportunities ahead, the ecosystem needs to evolve.
One of the challenges that Mehrotra points out is the infrastructure. As the team size grows and there is a need to shift offices, they have to face infrastructural issues such as changing internet that can get quite overwhelming for the startup founders to deal with on a regular basis.
Sikri adds that apart from the usual funding challenges, bureaucracy and red tape reduces the efficiency and speed of scale for Indian startups. Furthermore, unstable and short term focused policymaking also add to the challenges.
As Singh points out, one of the best ways to deal with coming up with the best business models is to understand customer behaviour. “The idea is to develop and design the solutions keeping in mind the various hurdles, set-backs and inculcate all of the barriers that you might face while deciding on a solution,” he says.
Another thing that needs to change is judging entrepreneurs based on their work and not pedigree. “We need to put in the work to identify entrepreneurs across diverse geographies, socio-economic backgrounds and thematic areas, and nurture the diversity that characterises the Indian enterprise ecosystem,” says Swapnil Shekhar, Director and Co-founder, Sambodhi Research and Communications.
Financial And Other Pressures
Availability of funds remains one of the major challenges. For running a startup there needs to be a judicious use of cash to ensure steady business. “The cash flow ultimately decides a startups fate, that leads to either success or failure. Most startups always underestimate the challenges of the business and overestimate the success of their product or service. This mismatch has led to uncountable heartaches, tears, and bankruptcies,” says Sharma. There is a need for founders to manage the regulatory aspects of things such as marketing, sales, hiring the right people and more.
While there are financial schemes that provide assistance to startups under Startup India, the process is not smooth and time taking, shares Vaidya.
“As a startup founder, it can be quite draining to keep bootstrapping and involve in angel rounds. It is a huge challenge and most of the help comes from private organisations. There is little or no support from the government. Though there are talks of them allocating funds or schemes for startups, we do not hear them being implemented,” says Mehrotra.
Not just the financial pressures, but startup founders have to deal with many personal and social pressures. For instance, solving a customer problem can be emotionally draining.
Another big fear is the fear of failure. “Most venture capital investors in the Valley area, have, at some point in time, been startup founders. They know the highs of growth and the pain of failure. The majority of partners, associates in India have never actually built a company. A lot of theory breaks down between a spreadsheet, and having the grit to turn up and hustle,” says Sharma.
Inability to attract the right talent or market and promote the products may further pressurise the founders.
Challenges Of Scaling Up The Startup
“An emerging tech space is usually very fast-paced. For a tech startup, it becomes a challenge to hire a set of quality people who are well-versed with the technology that you need for your business to run. Access to cutting edge research teams and academia plays an important role in scaling up a tech space start-up,” says Gaurav Singh, CEO, Verloop. India still has to build a steady relationship between academia and businesses. This allows the newly recruited employee to be familiar with the tech jargon.
Sharma believes that oftentimes, entrepreneurs get sidetracked from building a solid product pipeline creating massive challenges when it comes to thriving in a highly competitive marketplace. Some of the other challenges are making end customers adopt the technology.
Sikri shares some of the challenges faced by Indian emerging tech startups while scaling up such as the absence of software development ecosystem for AI and ML, absence of regulations around AI, absence of good quality datasets, privacy concerns, among others.
“Technologies like machine learning and AI not only need technological expertise, but they also need thematic knowledge of the industry for the product or services to work well,” adds Shekhar.
Most companies also fail to scale up due to the lack of short-term and long-term planning. Many enterprises receive funding in the early stage, and in the initial cash-swell, they overestimate cash flow or underestimate how much money they will need to fund the expansion while keeping the business operational.
Trouble-Shooting Non-Tech Issues
It is no surprise that startups may face many non-business and non-technical issues while running the company. For instance, recently, Zomato delivery guys refused to deliver pork. How do they deal with it?
Singh shares that conducting periodic reviews to understand employee needs is the key. Sharma echoes similar views that one should be willing to hear out the point of views and be humble.
Shekhar stresses on the importance to invest in a well-composed advisory board or approach seasoned mentors for troubleshooting problems. Whereas Sikri’s advice is to believe and follow the moral compass.
Making The Tech Startup Ecosystem Conducive
“Ease of doing business remains a top priority for entrepreneurs and, building on this spirit, drawing up strategies at the policy level to build an enabling ecosystem wherein government, businesses, policy and academics work together is important for innovation to flourish,” says Sharma.
Mehrotra shares that the government needs to get more involved in the startup space. While the government has launched many programmes not many startups are being benefited from it. There is also a need to bring government-funded awards or initiatives to encourage startups in India. More collaborative efforts by the government will also boost the startup community,” says Mehrotra on a concluding note.