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THE INDIAN START UP STORY


Shubham Singh
May 25, 2016, 5:30 p.m.

Introduction

Report by:- Shubham Singh

�Startups' is a word we hear very frequently these days. We come across many articles where students from top B-schools and technical institutes give up lucrative salaries offered by multinationals to start their own company and give wings to their entrepreneurial ambitions.

The youth in India has moved beyond the idea of a safe and secured government job to that of a risk taker. Starting up brings a sense of pride of owning a business in them.

The Startup ecosystem found its roots in Silicon Valley, California where chips were manufactured.

It later became the invention hub of the microprocessor, personal computer, video games and a lot of high-tech products such as pocket calculators, cordless telephones, lasers or digital watches, etc.

Today it is home to many technology giants like Google, Facebook etc. which were once start-ups.

The Startup fad is not only budding in India but also China is trying to transform itself from a manufacturing hub to a knowledge based economy.

According to the Economic Survey of Government of India our country is home to 19000 tech startups!

So let's have a look at the start up ecosystem of India.

Overview

India is home to:

  • 19000 plus tech start-ups lead by e-commerce companies like Flipkart, Ola, Snapdeal
  • 8 unicorn club startups that have valuations worth $ 1 billion plus.

Total funding for venture capital backed startups reached $ 12 billion dollars accounting to about 1220 deals till 2015.

2015 has been a year in which approximately $ 7 billion dollars of funding was received by various startups.

The Eight Unicorns of Indian Startup Industry

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2SU

With slow down being predicted in the worldwide startup ecosystem, will investments keep pouring in India? This is the question on everyone's mind.

Why Did India Embrace The Startup Culture?

A couple of decades ago, having a government job was the key to a safe and secured future in India.

Even today many young minds take various competitive exams to grab an appointment letter from government organizations in order to enjoy the perks and security of a government job.But as the above numbers, India has its own set of entrepreneurs who believe in innovating and enjoy the thrill of running a company and are willing to take risk for big rewards.

The change did not happen overnight.

In the early 2000's, the demand for IT professionals spiked. Being a computer engineer and going to the United States became the goal of many.

However, the recession in 2008 reduced the demand for human resource in the US and many IT companies in India were not hiring because of low demand in the key market i.e. The U.S.

With no mouthwatering packages in the job market, a breed of entrepreneurs emerged, especially in the tech space and this laid the foundation of startup culture in India.

Today, India has emerged as one of the startup hubs of the world

Big names in the game

Here are the top investors who are placing big bets on Indian startups:

1SU

What Is The Government Doing For Startups?

The current BJP government and Prime Minister Modi have tried to support startups financially and otherwise. Mr. Modi launched the Startup India action plan in January this year.

The budget session of 2016 allocated Rs. 500 crores for startups founded by people from backward classes.

Other benefits provided in the current budget for startups include:

  • Completion of registration of startups in one day.
  • 100% deduction on profits for 3 years for startups that are involved in innovation, development, deployment and commercialization of new products
  • Funds of funds to be established to raise Rs. 2500 crores annually for 4 years to finance startups.

Pradhan Mantri Mudra Yojana

Pradhan Mantri Mudra Yojana is a scheme of Government of India under Micro Unit Development and Refinance Agency bank. It is started for financing non-corporate small businesses.

Under this scheme following loans are provided-

  • Shishu- loans provided up to Rs.50000
  • Kishore- loans ranging from Rs.50000 to Rs.500000
  • Tarun- loans ranging from Rs. 500000 to Rs. 1000000

This scheme is going to be beneficial for startups looking for seed capital. Loans worth RS. 1 lakh crore have been sanctioned under the scheme. This scheme is beneficial for micro enterprises, no startup with millions and billions of valuation will benefit from the mudra yojana

Slowdown in Global Venture Capital?

In the past few months there has been a growing concern about the slowdown in global venture capital funding. India and China, the global hot favourites of venture capitals have also experienced a slowdown in the flow of funds.

3SU

One important reason for this slowdown is that the valuations of many startups are not justified by their profits.

In India, e- commerce giants have not been able to generate any profits till date. This is a concern amongst the venture funds.

Another concern amongst the investors of these startups is non-availability of exit options. As many of these firms have not been generating profits, initial public offer is something that cannot be achieved as of now.

Case Study: Zomato

HSBC slashed valuations of one of the unicorn of Indian startup industry from $ 1 billion to $ 500 million. The reason given by HSBC for this move is as follows:

  • Zomato has not been able to generate profits in any of its markets where it has existence and the company will need to invest in these markets to grow its business.
  • The company will have to raise more funds, so the valuation of $ 1 billion is not justified.

However, the promoters and investors of Zomato have a different story to tell. According to them they have broke even in many markets and will soon be profitable.

Nevertheless, this slash in valuation of Zomato has triggered a sense of caution among venture capitalists about startups in India and potential investors.

Exit Options

As discussed, many major startups are not generating profits, so as of now IPO is not an available exit option for people invested into these startups.

There is however, a break-through for this issue. Many small scale startups can raise funds by listing themselves at BSE SME Market which is a market where small and medium enterprises are listed.

Some criteria for listing on this exchange:

  • Net worth (excluding revaluation reserves) of at least Rs. 3 crore as per the latest audited financial results.
  • Net Tangible Assets of at least Rs. 3 crore as per the latest audited financial results.
  • Track Record
  • Distributable profits in terms of Section 123 of the Companies Act 2013 for at least two years out of immediately preceding three financial years (each financial year has to be a period of at least 12 months). Extraordinary income will not be considered for the purpose of calculating distributable profits.

OR

  • The net worth shall be at least Rs.5 crores.

But, large tech start-ups may be too large for the BSE SME Exchange. Another viable option could be the development of a new market.

Indian Pink Slip Market- An OptionTo Consider

Pink slip market is an over the counter market that exists in United States. This market does not have a floor. It is a market which exists only through computer networks.Many small companies/ companies with no provable track recorded are traded in the pink slip market.

Such markets act a good exit option for venture funds in the United States.Such kind of market does not exist in India. Over the counter market in India has been de-recognized by SEBI.

If compared to BSE SME exchange this market does not have stringent norms for listing.

India should think about a pink slip Market as the one in United States which will provide a good exit platform for venture capitalists.

Conclusion

On the end note, India is a country which is home to many startups and this number is going to grow in future.

However the lack of exit options and valuations of many startups is a cause of concern. The government should try to provide some exit options for the investors of startups as well as try to introduce certain laws which brings some transparency in this world of startups, because if some big startups collapse in the future , it would send sudden shock waves in the country as well as investor community around the world.

Transparency will also help many new startups to raise funds easily thus bringing more investment in the country and will help avoid a startup bubble in the country.



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