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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Geeks on a Plane India 2013: Big Opportunities, Optimistic Investors, and a Government that’s Finally Waking Up

Gateway of IndiaThis post originally appeared on the 500 Startups blog

Geeks on a Plane is a 10-12 day trip to various parts of the world with 20-25 “Geeks” (entrepreneurs, techies, designers, angels, VCs, mentors). The trips are planned and run by 500 Startups and have been going on for a few years now. The first Geeks on a Plan (GOAP) to India was in December 2011. That’s when I first met Dave, Paul, Christen, George, Anu, Samir, and a bunch of other really awesome geeks. Fast forward 14 months and I got a chance to be a “geek” on the February 2013 GOAP India trip.

GOAP India 2013 also had some really awesome people on the trip as well as hosts across India. Here are some of the things that I learned from these people during our visit to Bangalore, Mumbai and Delhi with Geeks on a Plane.

India: A Land of Contradictions

The poor are all over India. It’s still one of the poorest countries in the world. However, the rich are obscenely rich. Driving a $200,000 car is no big deal in a city like Mumbai. On your way to a swanky hotel where you’ll pay $900 for a single malt, you may drive by open sewage, dirt piled up on the side of the road for impending construction, barking stray dogs in packs, etc. However, you will also pass by massive skyscrapers, gorgeous temples, educational institutes galore, and many people hustling to make a buck. You can feel the buzz in the air and the excitement of young people who see multiple opportunities all around them.

I didn’t witness these contradictions being any more pronounced than they have in the past. Instead, I saw young people that are hopeful and welcoming of bright future for their country, their families, and themselves. As risk averse as their parents are, more and more people are willing to take significant risks to enact change and get rich while trying. For example, at Startup Weekend Bangalore, we saw many ideas pitched, of which, two of which stood out in my mind.

  • Ghati, to enable safe and clear passage of ambulances.
  • Garbage-busters, which uses mobile phones to alert civil authorities of garbage that hasn’t been cleared.

Two years ago, very few people would have considered quitting their jobs to pursue ideas that will make life better for people while at the same time, having a real chance at making money. Instead, most of them wanted to build the “Twitter of India” or the “Facebook of India”. More and more Indians are cognizant of the problems surrounding them in their daily lives and they are taking the first steps at solving them.

Great Raw Entrepreneurial and Tech Talent

Flipkart
There’s no question that India is full of geeks with great raw entrepreneurial and tech talent. Look at the number of Indian engineers in the Valley, doctors and Wall Street quants that flourished in the US. In India, having their chidren go into the “IT” industry has been the hope of many middle class Indian parents since the 90’s. That usually meant working at Infosys, Wipro, TCS, HCL, etc. Then came along PWC, E&Y, Accenture, Goldman Sachs, JP Morgan, Dell, Microsoft, Google, etc. Today we have Facebook and LinkedIn as well as hundreds of other great US tech product companies. Most tech entrepreneurs in India prior to 2005 built their fabulous businesses selling services to companies big and small around the world. These successful tech entrepreneurs built businesses to be envied and made India the outsourcing capital of the world.

What they didn’t do was build an ecosystem that fostered entrepreneurship or creative thinking.

ZipDial

All that started changing sometime in 2010. Some amazing companies have been built in the last few years by incredible people (some of the companies go back to 2006/2007) – Druvaa, Slideshare, FusionCharts, InterviewStreet, ZipDial, Flipkart, SnapDeal, InMobi, Innoz, ZoHo, Freshdesk, Wigify and Komli Media.

Some of these companies have exited. Some are incredibly cash rich. Some are growing like a weed and continue to raise larger amounts of growth capital.

Beyond some of the marquee names above, quite a few amazing founders are building great companies. A few are InVenture, WebEngage, UberLabs (gazeMetrix), Ketto, InstaMojo, ChargeBee, and Practo.

Founders’ Communication & Confidence Need to Improve

Rajat, Kavin, Aloke at 91 Springboard
Most first time founders in India still lack confidence and it shows in their pitch and their communication style. Paul has mentioned this before in his Observations on India and he also talks about gaining confidence. I continue to see this being a problem and a tremendous opportunity for founders. The founders that can communicate the most effectively, will have a much better chance at selling to their customers, their investors, and prospective co-founders, employees, mentors/advisors and importantly, in India, to their families. The good news is that in the last 7 years I’ve been here, I’ve seen pitches and communication styles get better. Although the ecosystem is still nascent, it’s maturing and giving young entrepreneurs the shot in the arm they need.

Investors are Optimistic

The Bombay Stock Exchange (BSE)
Investors across India that I met during GOAP continue to remain bullish on the long-term opportunity. Ecommerce, education, travel, personal finance, Universal ID (UID), family tech, rural tech and, of course, tech built in India for a global market are some of the broader themes that investors expressed significant interest in. Sorry folks, “social media” just wasn’t at the top of anyone’s list.

However, as bullish as investors are, most of them still aren’t very founder friendly. Some of the deal terms being offered are still quite onerous. Doing an investment in tranches is another favorite past time of Indian investors. Most founders still complain of angels behaving like series A VCs and VCs behaving more like private equity shops.

The bright side is that a few founders I met with and spoke with during GOAP, mentioned two VCs by name who work more like startup founders than VCs. They make decisions quickly. They present terms that are fair. They tell founders when and how much they should raise to minimize dilution. They make themselves available by not hanging out in their ivory towers. You might say that two VC firms in a country of 1.2+ billion people is statistically insignificant. However, if you said that, you would be wrong. It’s quite significant. VCs running their funds like real startup founders is a massive mindshift and their success will only inspire more to do the same (or lose deal flow).

Investors are also Cautious

Geeks on a Plane at the BSE
During some of the investor events at GOAP, I spoke to investors about things that concerned them. Investors are a little bearish about the short-term. Macro-economic conditions, the lack of exits, corruption in the government, the bureaucracy, rising costs all play an important part in dampening the spirits of investors. However, these also present considerable opportunities for daring entrepreneurs. Investors realize this and continue to hunt for deal where they can deploy funds in India.

The Indian Government is Finally Waking Up

During our trip, the Indian Government announced its budget. Though, not a big deal in most western countries, in India, the budget makes or breaks economic sentiment for the year. No one was terribly excited or distraught over this year’s budget. However, there were a few things added that raised the hopes of startups and early stage investors.

  • Preferential tax treatment for angels when investing together or “pooling” their capital and registering with the government.
  • Corporations are required to spend 2% of their income on CSR (Corporate Social Responsibility) investments or donations. Incubators at government or recognized universities qualify for claiming the 2% spend.
  • Startups can potentially find some liquidity by listing on the SME exchange. The BSE (Bombay Stock Exchange) runs one and had 11 companies listed as of December 2012.

A much more detailed analysis of the budget and some opinions can be found on VCCircle.

For more information on Geeks on a Plane and when they are heading to your region, check out the website and also some of the videos from GOAP South America Summer 2011, GOAP Asia 2011 and GOAP India 2011.


Geeks on a Plane India 2013

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