Why India’s unicorn-studded start-up ecosystem is in dire need of a policy push

Budget 2020 saw the government announce quite a few measures for start-ups, such as allowing those with a turnover of up to ₹100 crore to claim 100 per cent deduction on profit for three consecutive years out of 10 years since their incorporation.

It also deferred tax payment on ESOPs by five years, or till the employees leave the company, or when they sell their shares (whichever is earliest). That apart, the government proposed to provide early life funding, including a seed fund to support ideation and development of early-stage start-ups.

Per recent data, the country has weighed up well in terms of the number of start-ups that have achieved unicorn status. India has the highest number of unicorns in the world after the US and China. In 2020 alone, 12 start-ups became unicorns and experts project the count to increase steadily in the coming years.

But how is the country’s overall start-up ecosystem faring?

According to StartupBlink’s Startup Ecosystem Rankings 2020 report, India was ranked 23, six spots down from 2019. Right on top stood the US, followed by the UK, Israel, Canada and Germany.

Key parameters

The report evaluates the ecosystem in each country based on quantity (number of start-ups and other supporting organisations that provide resources, networking and access to capital, such as co-working spaces, accelerators and start-up events), quality (how well start-ups are driving innovation) and business score (a mix of how successful the local start-up ecosystem is, the infrastructure availability, the business environment and the ability to operate freely as a start-up founder in the country).

Infrastructure woes

The report highlights issues such as low internet speed and frequent power outages among infrastructure problems that hamper the growth of the ecosystem.

“Bengaluru as a leading city for start-ups remains poorly connected, with its airport sucking up half a day for travel to and fro. Compare this to any other Asia city like Singapore or Kuala Lumpur or even Bangkok — the infrastructure is far better,” said Anup Jain, Managing Partner, Orios Venture Partners.

He added that fewer regulatory restrictions for non-profitable start-ups while filing for IPOs, less paperwork involved in running a company on a day-to-day basis, and increased participation of the public sector in the innovation ecosystem are things that set countries such as the US and the UK apart from India.

Data from Tracxn show that India has 73,329 start-ups in total — fewer than the US’s 1,93,452 but more than the UK’s 50,969, Canada’s 21,691, Germany’s 18,879 and Israel’s 9,078. Likewise, the number of companies that have raised funding in India is more than Israel, Canada and Germany figures, but less than the UK and the US.

Budget suggestions

Deepak Gupta, founding partner, WEH Ventures, said that while India has strong entrepreneurs, a decent amount of venture capital firms and good networks in place, what it lacks is perhaps local market depth (the ability of customers to pay good money for technology), the propensity of local firms to do serious acquisitions, and a market which can absorb billion-dollar IPOs (and accept loss-making companies).

For the upcoming Budget, Jain suggested that the government introduce high-speed internet and power-outage-free start-up zones in the top 10 cities, capital gains tax on unlisted companies being equalised with listed companies, and Government of India fund-of-funds taking anchor positions in domestic venture capital funds to further improve the country’s start-up ecosystem.

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