Qual­ity comes to the fore as start-up en­vi­ron­ment ma­tures, say ex­perts

The num­ber of new start-ups floated in 2017 was just about one-fifth of that in 2015, but that is not nec­es­sar­ily bad


Things may not be hunky-dory if you are look­ing to start your own ven­ture. Though the op­por­tu­ni­ties may be im­mense and the mar­ket large, the chal­lenges are nu­mer­ous.

Hun­dreds of en­trepreneurs dreamt of mak­ing it big, in­spired by a Flip­kart or an Ola or a Paytm. Or, by large global in­vestors such as Tiger Global or Softbank or Alibaba pump­ing in huge sums of money into a num­ber of ven­tures. How­ever, there seems to have been a damp­en­ing of in­ter­est in start­ing up, if data pro­vided by ven­ture cap­i­tal an­a­lyt­ics firm Tracxn is any­thing to go by.

Ac­cord­ing to Tracxn, in 2015, more than 12,000 ven­tures were set up, this num­ber fell to 7,837 the next year and dropped fur­ther to 2,650 new start-ups in 2017.

Busi­nessLine spoke to in­cu­ba­tors, an­gel in­vestors, VCs and founders to un­der­stand the rea­sons be­hind the de­cline. Ex­perts are of the view that while there is no dearth of for­eign fund­ing, it is chal­leng­ing to set up a busi­ness.

The Gov­ern­ment of In­dia came up with a new set of rules for start-ups in 2015-16, in­clud­ing the def­i­ni­tion of a start-up, tax­a­tion struc­ture, an­gel tax, list­ing and exit norms.

Srikr­ishna Ra­mamoor­thy, Part­ner, Uni­tus Ven­tures, a ven­ture cap­i­tal firm that in­vests in early-stage start-ups, says, “in­vestors are more cau­tious and qual­ity of start-ups play an im­por­tant role.”

Anil Joshi, Man­ag­ing Part­ner, Uni­corn In­dia Ven­tures, said the rat race that be­gan two years ago has set­tled to a re­al­ity check. “A com­bi­na­tion of car­bon copy ideas (from the West) and the abil­ity to ex­e­cute these ideas are some of the rea­sons for re­duced num­ber of star­tups,” he said.

Vivek Mans­ingh, Gen­eral Part­ner at YourNest VC Fund, said , “value cre­ation is not hap­pen­ing and that is re­flected in big ticket in­vest­ments not com­ing into the coun­try apart from a se­lect few such as Oyo.” K Ganesh of GrowthS­tory, an en­trepreneur­ship plat­form, feels that the drop in the num­ber of new start-ups in 2017 is cycli­cal. In 2014-15, ev­ery other per­son wanted to be an an­gel in­vestor and that led to cre­ation of ac­ci­den­tal and opportunistic en­trepreneurs, ac­cord­ing to him.

“These are peo­ple who quit their jobs and jumped on to the en­tre­pre­neur­ial band­wagon as they had noth­ing to lose. When the bust hap­pened in 2016, all the an­gels dis­ap­peared, but san­ity came back into the mar­ket, weed­ing out the fluff from the sys­tem, giv­ing birth to a new set of high qual­ity en­trepreneurs who have given se­ri­ous thought to their busi­ness plans with a sharp fo­cus on prof­itabil­ity and unit eco­nom­ics,” Ganesh said, adding that the re­duc­tion in the num­ber of new start-ups is “ac­tu­ally not such a bad thing af­ter all.”

Ravi Narayan, Global Di­rec­tor, Mi­crosoft Ac­cel­er­a­tor, says the days when any­body could get fund­ing for an idea are over. “Now it is about how the ven­ture is try­ing to ad­dress macro prob­lems and in­vestors look at ma­tu­rity of en­trepreneurs in ad­dress­ing these prob­lems,” he said.

Na­ganand Do­raswamy, Man­ag­ing Part­ner, Idea­spring Cap­i­tal said, “.... five years ago it was a fad to in­vest in all kinds of start-ups. I, for in­stance do not worry about quan­tity of in­vest­ments but look for qual­ity in a start-up. If you look around to­day, you will see that the av­er­age qual­ity of start-ups has gone up sig­nif­i­cantly. That to me is a good sign.”

In­vestors say the drop in the num­ber of new start-ups has more to do with the fact that

the ecosys­tem is ma­tur­ing and less to do with a wan­ing of en­tre­pre­neur­ial spirit.

This is ev­i­dent from the in­creas­ing value of PE and VC in­vest­ments. Ac­cord­ing to Tracxn, the first half of 2016-17 saw an in­vest­ment of $3.23 bil­lion whereas fund­ing for the same pe­riod in 2018-19 was $5.77 bil­lion.

KS Viswanathan, Vice Pres­i­dent (In­dus­try Ini­tia­tives), NASSCOM, ex­plained that prior to 2015, most start-ups were in the B2C space.

In the last two years there has been more fo­cus on en­ter­prise ori­ented so­lu­tions, which take a long time to ma­ture and get funded as op­posed to con­sumer cen­tric busi­ness. Ac­cord­ing to Viswanathan, this could ex­plain the drop in the num­ber of start-ups. A Tracxn re­port shows that on­line re­tail and hy­per-lo­cal ser­vices star­tups ac­count for over 6,000 be­tween 2007 and 2017.

Ra­jarshi Mukher­jee, CEO, Foun­da­tion for In­no­va­tion and Re­search in Sci­ence and Tech­nol­ogy, a Sec­tion 8 Com­pany of IIT Kan­pur, said,ear­lier get­ting an an­gel tax ex­emp­tion was easy. The mod­i­fied rules say a start-up needs to get it vet­ted by a mer­chant banker. “This is prob­lem­atic on two counts. Firstly, most mer­chant bankers are not in­ter­ested in such mi­nor trans­ac­tions with fees in the range of ₹1—2 lakh. Be­sides, start-ups will find it dif­fi­cult to raise funds, even if it is a small amount.

Even though the star­tups work­ing with gov­ern­ment recog­nised TBIs are ex­empt from pay­ing GST, they may have to pay GST up front when they raise in­voices. They can get the re­fund. But when the or­ders get can­celled mid-way, they lose the money which is paid as GST. They may be rare cases, but they do hap­pen.

De­lays in IPR recog­ni­tion is an­other chal­lenge. Un­like China, which has ex­pe­dited grant­ing of patents to star­tups, get­ting patents takes close to seven years in In­dia. There is a real need for fast-track­ing patents for start-ups in the coun­try. More of­ten that not, the Gov­ern­ment it­self doesn’t recog­nise in­no­va­tion quo­tient of these start-ups. He cited an ex­am­ple of a start-up in­cu­bated at IIT Kan­pur, which has been told by a gov­ern­ment agency that “why should it go for its ser­vice as an or­gan­i­sa­tion like NIC can de­velop the same ser­vice. The guy had de­vel­oped a tech­nol­ogy that makes it pos­si­ble for track­ing the at­ten­dance of school teach­ers and chil­dren and mon­i­tor­ing qual­ity of a va­ri­ety of ser­vices such as mid-day meals pro­vided even in ar­eas where Net con­nec­tion is not avail­able. And some­body is sim­ply say­ing that they can copy it,” said Mukher­jee.

How­ever, Mum­bai-based in­cu­ba­tor Ven­ture Cat­a­lyst is of the view that the drop in num­ber of new start-ups could not be en­tirely true.

Apoorv Ran­jan Sharma, founder of Ven­ture Cat­a­lyst, said, “Many an­a­lyt­ics firms col­lect data only for the met­ros and ig­nore the start-ups com­ing from small towns. Since 2016, the en­trepreneur­ship spirit in Tier 2, 3 towns like Jodh­pur, Raipur, Lucknow, Su­rat, Bhub­haneswar has gone up tremen­dously.”

He said that the peo­ple in these towns have money and want to solve real prob­lems. Ven­ture Cat­a­lyst has six in­cu­ba­tors in cities such as Su­rat, Ahmedabad and Jaipur.

With in­puts from Venkatesh Ganesh and Sangeetha Chengappa in Ben­galuru, KV Kur­manath in Hy­der­abad

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