The Plight of The Indian Startup Industry

Also Published on The Market Mogul

India has seen a remarkable change in the growth and the funding process of its startup industry. But the quick cropping of tech startups in such little time has made many investors cautious. Venture capitalists have started putting smaller bets in the Indian startup industry and are looking at more mature firms to put their money in. In 2015, the Wall Street Journal reported that according to Goldman Sachs India’s e-commerce market in 2030 would still be $228 billion, well below that of China’s ($328 billion) and the U.S. ($281 billion).

Recently, the Indian government initiated a long-awaited plan that comes in the best interest of the startups that are facing complex and lengthy compliance issue. On January 16, 2016, Indian Prime Minister launched $1.5 billion for fund startups with series of tax breaks and 80% rebates on patent costs. The billion-dollar fund will be supported by the Indian government and the Life Insurance Corporations (a state-owned life insurance). The fund will focus on investing in venture capital funds for about four years. The thought behind the mission is to improve the job scene of India. In his speech, Mr. Modi made it clear that creating unicorns was not the prime motive but “employing even five people” was the agenda. But it’s the fine print in this billion-dollar plan that may seem a bit too generous to many, especially when there are no specific regulations and none is listed on any stock exchange.

· Start-ups will get 80 percent rebates on the cost of patents.

· A mobile app would allow companies to be set up within a day.

· They will be exempt from income tax for the first three years in which they make a profit

· Recognized funds of funds could see exemptions from capital gains tax

The outsourcing market in India has been thriving for years now and most of the entrepreneurs of some of the biggest Indian startups like Ola and Flipkart happen to be ex-employees of the US tech giants like Microsoft and Amazon. But the future prospect of tech startups in India may not be as optimistic as the ambitious Startup India Movement. According to an article in the Wall Street Journal, the total amount raised by tech firms was nearly half in the last quarter of 2015 than in 2014. The report highlights the slowdown in the funding by many venture capitalists. Many tech startups are shutting operations so as to make their businesses more profitable. In such a tight business environment, government funding should be a boon for many startups looking for funding. The startup industry has received the new initiative of the prime minister with a great motivation for increasing jobs and providing young minds with hassle free process. On November 5, 2015, TinyOwl, a two-year-old, Mumbai, India-based food ordering software startup held one of its founders as a hostage for two days after the firm announced its plan to lay off 112 employees as a part of a restructuring program. The startup TinyOwl had earlier that week announced $7.67 million in fresh funding from earlier backers Matrix Partners and Sequoia Capital. Layoffs are becoming common in startups as it helps in scale back their spending. According to a report by Techcrunch, Zomato, headquartered in Gurgaon (India), is also laying hundreds of employees.

However, according to some analysts, the e-commerce market in India is “artificially inflated” and new global entrants like Amazon are creating fierce competition amongst the Indian startups. Many products are sold at a discount on festivals and online e-commerce giants are even ready to compete by selling below wholesale prices. The Wall Street Journal reports that the business dynamics are slowly changing in India since the reduction in prices is leading to losses, making investors nervous. With the new government plan, the tax breaks will lower the value of losses and boost profits in many cases.

In another story, salaries for skilled employees are becoming increasingly competitive but the number of such workers is very few when compared to the growing number of Indian startups. The Wall Street Journal reports engineers of varying levels of experience have seen their annual salary increase from 10% — 15% just a few years ago to 30% — 40%. While the top founding members and executives are skilled, the hiring process of skilled workers is difficult. The layoffs of employees add to the difficulties of sustaining the ones who are being hired.

While India has giant startups with large valuations, ironically few have gone public yet. Market regulators like SEBI have been trying hard to include startups on their IPO wish list. On June 24, 2015, Securities Exchange Board of India made the process simple for the startup industry. Some of the ease in norms was allowing paperless IPOs, easier listing, shareholding and disclosure norms. These were intended to attract start-ups to list in the country rather than looking for funds outside the country.

Whether India is in a startup bubble or not is difficult to fathom but in a country with a billion dollar startup scene, it’s distressing to note that an overwhelming majority of 73% live in villages, of which 35.7% can’t even read or write.

© 2016 Deena Zaidi. All rights reserved. Any republishing requires permission from the Author