Startups: Between the Devil and the Deep Blue Sea

In a massive startup environment like India, which is also the fastest growing in the world, there is just not enough money to go around. The present attitude in India towards startups is positive, but is too laissez faire, writes Joseph Rasquinha

India’s startup scenario is beginning to look like a musical note. High on entrepreneur confidence against a decline in investor and venture capital (VC) funding.

In the first quarter of 2016, investments in Indian startups declined 24% to $1.5 billion, according to a report  by CB Insights and KPMG. In contrast, 2015 was a bonanza for Indian startups. Between January and December 2015, capital worth $9 billion was invested in Indian startups across 1,005 plus deals.

A major part of the problem is that both these groups are from different planets. Entrepreneurs very much follow Nelson Mandela’s dictum of  ‘it always seems impossible until it’s done’. Investors and VCs however, live instinctively by Rockfellers opinion of ‘give up the good, if you can go after the great’.

The basic problem is pure economic scarcity. In a massive startup environment like India, which is also the fastest growing in the world, there is just not enough money to go around. A Nasscom Zinnov report states that India has the third largest startup ecosystem  after the USA and UK, with three-four new companies starting up every day.

So, in spite of the doubling of investors from 220 in 2014 to 490 in 2015, investment is disproportionate to the mushrooming of startups. The decline in investor money in the first quarter of 2016 is extremely worrying. The general public and many industry experts feel it is a natural course correction after the over-the-top valuations going around.
Yes, many would agree that the valuations that many startups achieved were not grounded in economic reality. But, a small percentage of startups receive funding. The majority do not get funding (though they live in hope!). We cannot ignore how crucial startups are for India today, and how they can actually transform the Indian economy if they survive.

The best comparison I can give on the importance of startups is the industrial revolution. For 4,600 of 5,000 years or, for 92% of human history, India, China, and parts of the Middle East were the richest countries in the world. Along comes the industrial revolution, and the ‘startups’ that came from the industrial revolution dominated the world. Although it is almost unimaginable to think of the East India Company as a startup, that is exactly what it was when it negotiated with the Emperor Jahangir for concessions.

Today, it is impossible for an East India Company to exist. But startups growing into massive conglomerates are seen everywhere. Apple at a $742 billion net worth is almost 2 times bigger than Karnataka’s GDP, and 1.5 times bigger than India’s largest economic state — Maharashtra.

The present attitude in India towards startups is positive, but is too laissez faire. It is akin to Mao Tse Tung’s idea of ‘let a thousand flowers bloom’. True, there are a number of organisations that provide help and mentorship to startups. The National Entrepreneurial Network (NEN) and The Indus Entrepreneurs (TiE) are some examples that help startups. Nasscom has a startup programme to create 10,000 startups by 2020.

ISPIRT (Indian Software Products Round Table) has a more proactive approach through its SAI (Software Adoption) initiative, which seeks to convince business to adopt software. But, the number of startups are so large, that even with the best intentions, more than 80% of the startups are left to their own devices.

The Indian government has recently announced a lot of measures from a Rs 10,000 crore startup fund to tax concessions. Unfortunately, by the time these measures reach ground zero the situation would have changed, or as is most likely, it would be curtains for most of the startups in industry.

90% of startups fail

What is of concern is that the majority of the startups are out of the loop. And these are India’s premier resources. The Nasscom report estimates that over 72% of founders are below 35 years old. Startups today employ around 85,000 people. Another report indicates that 43% of Indian startups are looking at the global market.

However, the statistical reality is that 90% of startups fail! An opportunity to transform the Indian economy will be lost if we lose so many startups. We don’t need a massive conglomerate like Apple. 20,000 minuscule Apples will generate a bigger result. The important lesson of a startup adapting its products to survive is not being absorbed. When a startup is facing failure, it is critical to use resources innovatively to impact the market.

The best example is AstraZeneca. In the mid 1980’s, Astra was a minor Swedish company. In the 1990’s it launched a slight variation of a stomach ulcer drug called Losec. This variation made Losec the largest selling drug in the world, and propelled AstraZeneca into the fifth largest pharmaceutical company. And all it took was a slight variation of an existing product!

The example above indicates why startups need help more than money. The government’s Rs 10,000 crore fund though well meaning is very badly thought out. The disbursement of funds will be through SEBI recognised investment entities which is wrong.

Government funds are not to generate profits, but to encourage startups to survive and make an impact on the Indian and international market. Imagine, if we ensure that a major chunk of our startups survive instead of closing down.

India will dominate the world in technology and the internet just like China has in manufacturing. It would have been better to allocate these funds towards bodies like Nasscom, ISPIRT and others to ensure that they were able to develop mentorship programmes to prevent startups from failing.

One guarantee of mentorship is that it will generate course corrections in a startups business. China is now targeting its manufacturing towards the domestic market. Just imagine, a Rs 1,000 crore from the Rs 10,000 crore fund towards ISPIRT’s Software Adoption initiative to persuade Indian industries to adopt software will ensure the survival of a few thousand startups.

Google estimates that out of 52 million enterprises in India, only 5% have computers. So the market is waiting. All we need is concerted action from the government and pressure from the various associations to create a catalyst to enable startups to survive. As a Japanese proverb says, ‘Action without vision is a nightmare’. Let us get the vision right.

(The author is a Ph D in Economics from St Andrews, Scotland, and Co-Founder and CEO of Blueleaf Software, which has the cloud business system, Weballigator)