How Startup India Can Smooth Out the Snags

The 2016 launch of Startup India by Prime Minister Narendra Modi captured the imagination of the younger generation and unleashed a wave of startups. There are now more than 30 unicorns (privately-held start-ups valued at over $1 billion) in India, which will inspire the next 30,000 entrepreneurs to tackle coming challenges. Faith is also gaining ground that technology and entrepreneurship can solve the big problems of the country. The shift in mindset towards innovation augurs well for India.

While India has done well considering where it began, it is still punching far below its weight globally. Consider this: Israel, a country of 8 million people, has seen 250 of its companies go public in the US and thousands of its start-ups have been acquired by big US companies. Most of these companies solve problems for big- and mediumsized enterprises. Compare this to the global impact of India—less than five companies have gone public in the US and only a handful have been acquired by global companies.

Indians are second to none in talent, initiative or entrepreneurship. The problems lie elsewhere, and the government can address only a few.

Regulations in India have become a lot friendlier to start-ups over the past few years. But there are still a few areas that slow things down. It has become a lot easier to start companies but shutting them down is still a long-drawnout process. The sooner a company is wound up, the sooner the talent is available for the next challenge. It takes at least two months for a potential hire to leave the present employer, which, for a start-up that competes on speed, is a lifetime. The government should proactively intervene to cut down the notice period commonplace in all employment contracts.

Another problem is the tax regime. As experience with the struggle to remove taxation of angel investment showed, the tax department has an incentive to latch on to and enforce every avenue of tax collection. The perverse incentive comes from the strange practice in India of giving an annual quota for tax collection to the CBDT (Central Board of Direct Taxes). The tax collection quota is passed on from the top to every income tax officer for which he/ she is held accountable. No one should then be surprised with the overzealousness of the tax officer—the incentives dictate behaviour.

But by far the biggest problem is the excruciatingly slow legal system to enforce contracts. Its pernicious impact is hugely underestimated. If your customer does not pay on time or writes a bad cheque, you cannot rely on the court system to deliver quick justice. If your cofounder walks out with your source code, what will a start-up do other than issue a lame legal notice? The wrongdoers do not at all fear being held accountable. The biggest loser of the slow judicial system is the small guy who does not have the resources or the time to pursue long drawn out court cases. Big companies rarely innovate, the small ones do and they suffer the most if contracts are observed more in breach. The ultimate loser is India.

Another reason for India punching below its weight is the nature of entrepreneurship in India. An overwhelming number of start-up founders are young people in their 20s and early 30s with very little work experience. To develop insight to solve complex business problems for large enterprises requires a degree of familiarity with the current state-of-the-art technologies and their limitations. There is no short-cut to getting this insight—you have to earn it the hard way by spending many years immersed in it. But there are hardly any entrepreneurs in India in their 40s or 50s. Unless a large number of professionals with 15-20 years of deep industry experience take the plunge, India will not spawn a large number of companies that become globally dominant. ■

Venktesh Shukla is MD of Monta Vista Capital based in Silicon Valley and a former chair of TiE Global