India

Reaping what you sow

We look at the challenges and opportunities present for entrepreneurs within India’s burgeoning start-up ecosystem

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2018 was a good year for Indian entrepreneurs. The world’s third-largest start-up ecosystem saw its base expand by 12-15% and investor funding grow by 108% year-on-year, as well as a rise in late-stage funding, according to a 2018 report by industry association NASSCOM and consultants Zinnov. This boom was last year enough to hand unicorn status – valuations on young tech companies of more than $1bn – to more than eight Indian companies.

Reap-what-you-sow

But just a few years ago, things were not quite so rosy. Despite the success of e-commerce wunderkind Flipkart (sold last year to Walmart for $16bn) and its ilk, investment plummeted from $1.42bn to $583m between Q1 and Q2 2016 (according to CB Insights, October 2016) and businesses started to go under.

‘Investors were investing like anything. The majority of the time it was e-commerce and consumer services, and everyone was putting in money. The field became saturated, start-ups were giving big discounts to gain customers – and that model doesn’t work, because you are not creating customer loyalty,’ says Saugat Dutta, project manager at EY heading a start-up venture scheme operating in the northern state of Himachal Pradesh, dubbed Startup Himachal.

‘The success parameter of a start-up was judged by how much investment it had secured. Now, when I read a start-up story, the story is: “Who’s that start-up which generated this much revenue within these many months?” – not the investment they raised.’

‘With any kind of herd mentality, you often will see a lot of people putting in money speculatively,’ says Dibyojyoti Mainak, consultant GC of Mobile Premier League, a mobile-gaming app start-up. ‘You started seeing cases where investments were made that were valuing companies at far more than what they should have been.’

But rather than collapse, what followed was a process of maturity, building on an established tech community within the country but with a renewed focus on strategy, sustainability and credible business plans to support those eye-catching ideas.

Laying the groundwork

Significantly, the government’s support for the sector has mushroomed, illustrated by the creation of Startup India in January 2016. The flagship initiative was established to encourage start-ups that meet its criteria with benefits such as financial help with patent filing and fast-tracked examination, self-certification under certain labour and employment laws, and an income tax exemption for three years. In addition, Startup India has formed a 10,000 crore fund of funds to make downstream investments in venture capital and investment vehicles that target start-ups, promoted the creation of incubation centres and labs to foster innovation and R&D in education and industry, as well as relaxed public procurement norms, which previously excluded start-ups.

‘India has been an agrarian economy for decades. The new government [formed by Prime Minister Narendra Modi in 2014] wanted to bring a shift to a knowledge-based economy. We have been exporting engineers and doctors abroad, so the goal was to see if we could use the skills and knowledge base in India to achieve economic prosperity,’ says Dutta, who works with state governments on initiatives to support and develop start-up ecosystems.

To drive a culture of innovation, central government devised a framework to rank states on their efforts to support start-ups along several verticals. The government’s push for ‘Digital India’ (which promotes the use of technology in government) and ‘Make in India’ has led to some cross-pollination with state government initiatives. For example, the government of Andhra Pradesh has started to put all land records on a secure, blockchain-based platform, and is also using drone-based solutions for state security and checking municipal infrastructural compliance. In addition, it utilises some online monitoring to inspect the cleanliness of government-supported school toilets. Such initiatives have begun to create opportunities for start-ups to deliver technology tools, facilitated by relaxed public procurement rules allowing state governments to order directly from tech-focused start-ups.

Most start-ups don’t take brand protection very seriously and this is why everybody has a copycat problem.
Dibyojyoti Mainak, Mobile Premier League

Access to innovation is also expanding beyond the usual hubs. The city of Bangalore is synonymous with tech-based development – it is home to 25% of India’s tech start-ups, with Delhi and the National Capital Region, and Mumbai, housing 21% and 14% respectively, according to the NASSCOM/Zinnov report. But the same report notes that an increasing presence of incubators, tech parks and affordable work spaces is allowing start-up hubs to flourish in cities such as Hyderabad, Chennai, Pune and Kolkata, with additional growth in tier-two cities, such as Jaipur and Chandigarh.

But, success has not been unqualified, according to some.

‘For you to be a start-up, you needed to get a certification of sorts from one of the recognised tech institutes in the country, or have a registered patent in your name already,’ says Mainak.

‘That essentially cuts out 90% of everybody in India, because we are not a very patent-savvy nation, not to mention that the patent regime in India is quite restrictive. You can’t expect a 23-year old or a 25-year old who is still in college to have the financial wherewithal, or knowledge, to do something like register. That was a specific problem with the start-up definition, but that’s something the government’s already worked on solving. New notifications brought in during February 2019 relaxed many of these rules and now require, among others, just a write-up justifying how you are innovative/will create jobs, etc.’

‘Secondly, the Indian bureaucracy is a behemoth, which answers to multiple interests and powers. It is not centralised enough for the central government to simply push policy and expect all departments will follow. It’s like fighting like a hydra.’

Clearing the way

To exist in this space means grappling with a particular set of challenges. At the intersection between India as a jurisdiction and start-ups as an ecosystem is the issue of safeguarding ideas: in India, the process for obtaining patents has been sluggish historically, while time is of the essence for a burgeoning start-up economy. Recognising this, Startup India has introduced expedited patent review and rebates on filing fees.

‘India’s IP system has to catch up. People are not getting patents granted for five years in some instances. They file and wait. And the technology loses its edge. We cannot hope to compete in the international market that way,’ says Dutta.

‘The very restrictive licensing and the restrictive patent and IP regime we have in India makes it tougher to protect your brand. And that’s the first challenge I see: brand protection. Because most start-ups don’t take that very seriously and this is why everybody has a copycat problem,’ says Mainak.

Despite much regulatory relaxation for start-ups, penalties for non-compliance in some areas can be prodigious. Nevertheless, labour and employment, Goods and Service Tax, the Shops and Establishments Act and Registrar of Companies compliance, as well as regulatory requirements to combat sexual harassment, can be areas that those at the most nascent stages might be tempted to neglect.

‘Contrary to how the situation was 15 or 20 years ago in India, when it was easy for somebody to miss out on certain compliances and the law doesn’t catch up with you, today it has become extremely stringent. The fallout of not doing compliance is way higher than the money that you spend getting compliance done,’ says Janhvi Pradhan-Deshmukh, lead legal counsel at Startup Box, a firm that provides legal, consultancy and secretarial support to start-ups.

‘For bootstrapped start-ups, it’s a little difficult to convince them of certain things. But in a start-up, time is more important than money because the start-up world is so dynamic. You can’t be wasting time on answering legal notices and replying to queries.’

Running the farm

In recent years, India has experienced a cultural shift – doing away with past attitudes towards entrepreneurialism.

‘When someone wanted to start their own business, you were looked down upon. If you had not secured good marks and were not academically qualified, that’s when you were starting something of your own,’ says Dutta. ‘But now, having a start-up – even having a failed start-up – has started to become a badge of honour.’

This has attracted not just young and ambitious minds but also experienced executives into the field, and start-up adviser Pradhan-Deshmukh has found that her role is to handle not only legal issues but to understand the psyche of all types of co-founders.

‘The young generation – they are fresh out of university and have an amazing bunch of ideas. Unfortunately, they are a little blindsided by the Flipkarts of the world and they cling to that: “Oh, I’m going to become a billionaire in a short period of time when I sell off the shares in my company, and I will then become a serial entrepreneur and use that money to invest somewhere else.” It doesn’t work like that,’ she says.

When someone wanted to start their own business, you were looked down upon. Now, having a start-up has become a badge of honour in India.
Saugat Dutta, EY

‘But there’s another set of co-founders who have worked in huge corporates at high levels and then they decide: “OK, I don’t want to work for someone else anymore.” These are the people who are mature. They understand the importance of compliance and legal, the importance of having the right professionals on board [as advisers]… Unfortunately, they are extremely fixated on certain things – they sat in senior positions in their companies and think that they can treat the new business in the same way, or they can tell professionals what to do. Again, it doesn’t work like that because the start-up world is extremely different to a company which has been in the market for a hundred years.’

Home-growing innovation

Despite the burgeoning popularity of entrepreneurialism at both ends of the career spectrum, Dutta believes there is work to be done to embed a culture of innovation, particularly among schools and the academic community.

‘The government of India has started funding to create small spaces called Atal Tinkering Labs in schools. So the infrastructure is getting there, but who will give the soft learning part? That’s missing. The hardware is sitting under lock and key because no one is actually there. In the colleges, also, the curriculum needs to be revised, and the professors need to lead from the front in being innovative and entrepreneurial. We will soon have bullet trains, but our curriculum is still stuck at steam engines!’

Incubators, accelerators and innovation spaces are popping up across the country, but although the tech scene is flourishing, some believe that a world-leading innovation marketplace is a way off.

‘Many Indian start-ups are essentially copycats of foreign start-ups. These are not home-grown basic ideas, they are essentially very good copies of what is already listed in the market,’ says Mainak.

‘We are aiming to be on par with Silicon Valley or, now, China. China is now a very serious contender to become a global start-up giant. Everyone is now heading to China because of a lot of unique innovations – they used to replicate, now they are innovating. India is still stuck at the replication stage,’ agrees Dutta.

‘Things are coming, but I wish the growth trajectory would be steeper, because I am amazed by how China is doing – they are first pushing money into R&D and now it has started bearing fruits. India needs to do that; India is not pushing money into R&D. Mostly, we are trying to replicate and customise ideas to our socio-economic contexts. To have an edge over other countries, you need to pursue radical innovations and aspire to be inventive.’

A lawyer in the mix

For most embryonic companies, absorbed by passion for a new idea and the pitfalls of establishing a company, hiring in-house legal support has not been a priority. But Mainak advocates greater diversity on core teams, including lawyers.

‘In India, the legal system is extremely pyramidical. We have a phenomenon called “grand lawyering”, where essentially there are a very small group of senior advocates who corner most of the influence. You will often not have access to these guys when you are a very young company and you can’t afford their rates, which then means that established clients will always have an advantage going into any kind of litigation. This is why it is important for most start-ups in India to ensure they never get into litigation.’

However, he adds: ‘Most still wait till their first run-in with the legal system or bad/unfair contracts – in other words, whenever the first crisis hits.’

In a fast-growing company, investment in company culture and good policymaking often falls by the wayside, and a toxic environment can emerge, incubating issues that further iterations of the organisation will have to face.

‘When you try to raise your third round of funding, or later on when you are listing and trying to raise a huge amount of funding, and they are trying to do a due diligence assessment, a lot of these issues come to the fore. At this point, it’s a huge pain trying to solve all of these problems. Maybe four years down the line the company realises that it hasn’t signed a non-disclosure agreement, or even employment agreements. That is when they would bring in somebody legal,’ says Mainak.

‘It’s not the best strategy, particularly with a system that is so regulation-heavy (India remains one of the most regulated economies in the world), so you would do well to have a legal mind right at your board stage, right when you are trying to strategise. Lawyers tend to bring logic and structure, and are able to play devil’s advocate.’

Alex Speirs is editor-in-chief of GC
Greg Hall is managing editor at GC
Catherine Wycherley is features writer at GC

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