Startups, Angels, Venture Capitalists and the 2017 India Budget

It is Indian budget season for the new fiscal year starting in April and just like every year, the pundits are all weighing in with what they would like to see and what they expect to see. We’ve seen some very positive moves by the India government in terms of setting up a company and various benefits under the “Startup India” program. However, there’s still a long way to go before the true potential of the Indian market is realized.

This is a very important budget for Indian startups and investors. 2016 was not a very pleasant year for global startups but especially Indian startups and investors. Many startups raised follow-on rounds of capital but most struggled to raise the next round of financing. In 2016, the pendulum definitively swung to favor investors once again. Many investors took advantage of the lack of capital by sticking unfriendly terms into agreements, others, simply battered companies with down-rounds. I hope to see more moderation over the long run and expect increased competition amongst investors to create better terms and pricing in the market.

In 2014, I had written about various initiatives which I felt would be beneficial for startups and investors. We’ve seen some of the ideas implemented in various capacities and there’s no doubt that the overall Indian ecosystem has matured significantly since 2014.

I still maintain that the best thing any government can do to spur innovation is to remove or, at least, minimize regulations, provide for a highly educated workforce, enable a robust infrastructure (physical and digital) and get out of the way so that private markets can move unimpeded. However, I’m pretty sure a laissez faire approach to startups and tech investing isn’t going to be the norm in India anytime soon, so below are some suggestions that can have a high impact with some good planning and execution.

  1. Ease of Doing Business – The Indian government needs to understand that over-regulating any industry will put it into a strangle-hold, even with the best intentions in place. Fledgling industries like tech startups, venture capital and angel investing are no different. In fact, they are more susceptible to dying a premature death because of the high risk nature of the business.

    Startup India and other government initiatives have had an overall positive impact but very few startups have been able to take advantage of the various benefits because of continued red tape and regulations left to interpretation by bureaucrats.

    Solution: Simplify or remove specific regulations that continue to make it difficult to do business or invest in India. A large portion of the focus should be on foreign investors for reasons highlighted in the next point.
  2. Downstream or Follow-On Capital – Additional capital at later stages continues to be a major constraint, even after several new funds closed money in 2016. Perhaps the cooling off by foreign hedge funds, mutual funds and corporate investors has had a larger negative impact than was anticipated.

    Solution: Make it simpler and less onerous from a compliance perspective for startups, angels and VCs. India needs to attract more capital domestically and internationally. Make it easy for these stakeholders to participate in the Indian innovation economy with more speed, thru less regulation and less onerous or duplicated compliance.
  3. Accredited Investors and Qualified Institutional Investors – Define what accredited individual (angel) and qualified institutional investors (venture capital funds, accelerator programs and incubators) are in India. For example, in the US an accredited investor is a person who earns $200,000 per year over the last two years or has more than $1,000,000 in assets, not including their primary residence. In India a similar definition could be used.

    Solution: A one time, online only registration with SEBI should allow accredited domestic and foreign investors to easily fund startups with no additional compliance requirements placed on the startup or the investor.

    For foreign investors, the unique identification number can easily be submitted to the RBI when wire transfers are received from international sources. Thus, removing additional compliance steps (and costs) for a startup when it receives an investment from a foreign investor. Many of these suggestions can easily be used outside of investing in just tech startups.
  4. High tax rates and a complex tax code – The current tax rates are very high. Investors take significant risks when investing in startups which have a very high failure rate. Coupled with a very complex tax code, investors, especially smaller ones providing risk capital, don’t have significant financial benefits when investing in high risk startups.

    Solution: Give accredited investors a zero tax rate on long-term capital gains when invested in technology startups. Perhaps a modest 15-20% flat short-term capital gain tax would be appropriate. Currently, foreign investors are subject to 40% withholding.
  5. M&A – It is still incredibly complex for an international company to acquire an Indian startup. It’s also very expensive for all parties involved. This limits the number of smaller acquisitions or acqui-hires that can take place in India. Smaller companies finding modest exits (less than $25 million in value) also helps turn the wheel of tech startups and needs to be addressed.

    Solution: Regulations should be simplified to allow both domestic and international companies to easily acquire or merge with Indian companies. Specifically, smaller companies. In the worst case, a one-time review by a single window, online, clearance entity to approve international acquisitions with minimal government related paperwork or government compliance can be put into effect. This could be an entity under SEBI with participation from the RBI and Invest India.
  6. Single-window clearance for the Startup India program has been wrought with typical Indian bureaucracy. The program needs a complete revamp. Rework the program to automatically grant “startup” status to any company funded by accredited investors (foreign and domestic venture capital funds and angel investors). Status should be granted via a single online form submission with validation from the investor/incubator/accelerator.
  7. Pervasive users – Digital access is still too expensive for most of the non-english speakers in the country.

    Solution: Make “broadband” accessible and affordable.

    1. By putting more government services like BHIM online, citizens, especially those in rural India, will have an additional need to have Internet connectivity.
    2. Fiber optic infrastructure has been put into place across much of India but it’s been expensive to provide. Consequently, demand has been low because price is high and usage beyond WhatsApp or Facebook for much of India has been unnecessary. TRAI should redefine broadband as, at least, 25 megabits per second preferably, closer to 100 mbps. Anything less that this leaves video and audio content out of the hands of hundreds of millions of people.
    3. Encourage telcos to re-invest into infrastructure and provide minimum broadband speeds of 25 megabits per second over wired and wireless. Provide tax incentives for them to re-invest in India’s digital infrastructure and even bigger breaks if they provide higher speeds in rural parts of India at discounted rates.
    4. Invest in an ultra highspeed national Internet backbone.
    5. Invite international companies (e.g. Google, Facebook, NTT Docomo, Verizon, Deutsche Telekom, Telenor, etc.) to invest in the Indian digital infrastructure and compete on a level playing field while maintaining the fundamentals of Net Neutrality.
    6. Provide subsidies to the poor and rural parts of India to get online. Require an Aadhaar card to be eligible.

All of this aside, I think the government will have more far-reaching issues to address in the budget, some will likely be linked to demonetization and the affect it has had on GDP but we can all hope that Indian startups and investors get some love this year.

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Startup Weekend India – The First Six Months

The first round of Startup Weekend events in India came to a close in March. Startup Weekend Delhi was held at the American Center from March 4th till March 6th 2011 and Startup Weekend Bangalore was held from March 11th till March 13th 2011 at Microsoft’s Signature building.

September 2nd 2011 marked the beginning of the next round of Startup Weekend events across India. Startup Weekend Hyderabad was held at ISB from the 2nd – 4th of September. This was the first SW held in Hyderabad and we honestly didn’t know what to expect. We had only sold 25 tickets in the first 2 months that ticket sales were open. In the last three days before the Friday night pitches, we sold over 50 additional tickets.

I’ve seen lots and lots of “me too” ideas and quite a few “ho-hum” ideas. There are some decent ideas with very little depth prior to SW. Startup events in India need to be about team formation, experience building and experimentation. Between these three events, Startup Weekend has kicked off 39 teams of entrepreneurs, techies, designers, and business people. Granted, out of these 39 teams, probably not even four will survive more than a year but that’s not the point. The point is that these 175 or so people, will be better entrepreneurs the next time around.

I believe these three events did something that no other event in India has done so far. It showed people that they CAN execute their ideas in a very short span of time. With complete strangers, in most cases, they can put together a business case and build a prototype to showcase to potential investors.

In a few cases, teams from Startup Weekend in India have had discussions with investors directly as a result of Startup Weekend. One of the biggest pain points for many entrepreneurs in India has been funding and Startup Weekend in India has helped ease this pain point in a small but important way.

Startup Weekend has also shown investors that entrepreneurs, techies, designers can do some really interesting things in a short period of time if all the ingredients are there. It’s created potential deal flow for early stage investors starved for invest-able ideas teams. Already, Startup Weekend clones are popping up across India.

The confidence and the energy that people have displayed at Startup Weekend in Delhi, Bangalore and Hyderabad has been quite contagious. Techies were pushed to deliver minimum viable products and marketers and business people were forced to come up with viable plans in a very short time span. In just a weekend, many people were able to successfully deliver business cases and prototypes. Having done so has shown them that they CAN, in fact, put together teams of the right people and deliver. Being able to find co-founders that can execute has given people the confidence needed to take their ideas from Startup Weekend and pursue them.

Another very important factor was the presence of great mentors that spent considerable amounts of time with the business, techie and design members of each team, helping them develop various aspects of their ideas and the technology being employed. Many of the mentors present have exhibited interest in helping future teams in the same way. Even some panelists have shown interest in being mentors and working with the various teams throughout the next Startup Weekends in India. However, some mentors and panelists have also been disappointed by the lack of depth in the ideas.

I have found that for entrepreneurs in India finding the right co-founders and having mentors to help guide them through the various pitfalls that they continually faced is a continuous problem. Of course, funding issues are an issue everywhere but in India, it’s far more pronounced. To me, the idea of getting the right people with similar mindsets and mentors, serial entrepreneurs with significant experience in a room with raw ideas and oodles of enthusiasm was what people in India have been missing. Bringing all these components together, mixing them up, laying down some rules and bending a whole lot of others has given people who had very little chance of execution or success an opportunity to try their ideas in a safe and risk-free environment. In essence, the Startup Weekend philosophy is helping Indians try out ideas without quitting their day jobs, find people who buy into their ideas, and have people around to immediately guide them in their execution.

Personally, Startup Weekend has given me an opportunity to return to India and give back something that I’m very passionate and excited about – entrepreneurship. The opportunity to help entrepreneurs, both young and old, realize that they can and should take a chance on themselves and their ideas is a great feeling. Instead of just telling them that they should, Startup Weekend has given me a chance to show them that they can. If my contribution to the Indian entrepreneurial ecosystem can help create even one startup out of each event, I believe I’ve given back more than I could have hoped for.

India is a difficult place to understand, with all of its contradictions, it’s rapid modernization, it’s pathetic infrastructure, it’s volatile stock market, it’s real-estate market that defies all logic, it’s incredible wealth and it’s dire poverty. However, India has been a land of entrepreneurs with it’s small businesses, it’s kinara stores, it’s newly minted multi-national corporations. In the last twenty years, much of the entrepreneurial spirit that’s in India’s blood has been lost. Mostly because better opportunities to make money presented themselves with the IT, ITES, call center and other service businesses. However, I believe a new generation of entrepreneurs is emerging. India is draining entrepreneurial and engineering talent from other parts of the world. It’s not just Indians or people of Indian origin coming to India, it’s the Chinese, the Koreans, the Japanese, the British, the Americans, the French, the Germans, the Italians and everyone else in between who are contributing to a new entrepreneurial culture.

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