‘Need an entrepreneurship mission that can bring industry, Govt together’

N. Ramakrishnan | Updated on September 09, 2012

Jayant Sinha, Partner and Managing Director, Omidyar Network India Advisors.— N. Ramakrishnan

“The moment entrepreneurs realise that they can get access to funding, they will start to see entrepreneurship as genuinely something that is worth doing, as a risk worth taking.”“We have recommended that angel investors get a tax deduction for their legitimate angel investment.”

Jayant Sinha was a member of a Planning Commission committee that looked at what needs to be done to create a vibrant entrepreneurial ecosystem in India.

Sinha is a Partner and Managing Director, Omidyar Network India Advisors.

Omidyar Network is a philanthropic investment firm started by eBay founder Pierre Omidyar and his wife Pam. In this interview in Mumbai, Sinha, an alumnus of IIT-Delhi, University of Pennsylvania and Harvard Business School, talks of the committee’s report and Omidyar Network’s strategy in India.

Excerpts from the interview:

Could you tell us the highlights of the committee’s recommendations?

We wanted a comprehensive view of the entrepreneurial ecosystem in India. We looked at all aspects, including the demand and supply of entrepreneurs, the context within which the entrepreneur ecosystem functions, the tax policies and the academic institutions. We benchmarked India’s entrepreneurial ecosystem against those of other countries as well – the US, Israel, Canada, Australia.

The recommendations covered the gamut of government policies, to what academic institutions should be doing, to what businesses should be doing, how everybody should be working together and collaborating. Our overarching recommendation to the government was the constitution of a national entrepreneurship mission. You need a national entrepreneurship mission that can bring the industry together, enable the government to assist the industry and so on.

There were a number of other recommendations including setting up a Rs 5,000-crore fund-of-funds, matching money that we think the government should make available. These kinds of matching funds have been extremely successful in other countries, like Australia, Israel and the US.

We have recommended that angel investors get a tax deduction for their legitimate angel investment. We have advocated that we have a registration of angels. Once you have registered as an angel then you can avail yourself of these kinds of tax benefits. You can also get the benefits of pass-through taxation, because as an angel you are not acting in a fiduciary capacity for somebody else, you are acting on your behalf. There are different things that need to come into play for angels. These are common in the US and Singapore, where angels get a different kind of tax deduction.

There is no clarity right now on what the tax liabilities on angel investors and even for others…

That is a deterrent to the entrepreneurial ecosystem in India. We don’t really have a domestic venture capital industry in India, which is shocking. All the early-stage venture capital in India comes from external sources – the Norwegian sovereign wealth fund, the Harvard endowment, various pension funds – that are driving innovation in India. We are not driving our own innovation.

Second, we don’t have enough entrepreneurs in India. The numbers are staggeringly low. If you look at formal angel deals in India, we might do 50. In the US, there are tens of thousands. Total early-stage venture capital money when we went through and looked at 500 deals that have been done over the last five years, total venture capital, early-stage venture, deals less than $10 million in size, is $200-300 million a year, that is 0.02 per cent of the GDP. In the US, it is 0.2 per cent of the GDP; 10 times even after adjusting for GDP. The numbers in India after accounting for the fact that all the money is coming from overseas is still incredibly small.

The final thing I would say is that businesses in India are not encouraging entrepreneurs and innovation. Where do we have our Googles, Ciscos and Facebooks that are buying from small companies, buying small companies, fostering spin-offs of various kinds. There are very few companies in India that truly act as entrepreneurial hubs. They don’t see themselves as hubs for entrepreneurship.

If you look at early-stage venture capital in India, about $200-300 million, only 10 per cent of that is coming from domestic sources.

What needs to be done to set that right?

In our recommendations, we have suggested many different things. We have said that financial institutions in India should be investing in venture capital funds.

Why don’t they do that now?

Because there are real restrictions. What got the venture capital industry going in the US were pension funds and endowments investing in venture capital. We don’t have that here.

Would having more India-origin funds help in a significant way in fostering entrepreneurs?

Yes, the moment entrepreneurs realise that they can get access to funding, they will start to see entrepreneurship as genuinely something that is worth doing, as a risk worth taking. Right now as a middle-class person, most people will be saying why should I be an entrepreneur, it is too risky

Without entrepreneurship and innovation, we are not going to be able to solve the challenges that India faces. We have to create 150 million jobs in the next 10-15 years because of our young workforce. Those jobs are not going to be created by large companies. Large companies have not created many jobs, they won’t because they constantly focus on productivity. What we have seen around the world is that job creation really happens with small, fast-growing companies. Which means entrepreneurship and innovation are necessary.

More companies need to come up in the manufacturing space, which is where lot of low-skilled or semi-skilled jobs will get created. What do you think needs to be done for that?

There is tremendous amount of work to be done there. Apart from infrastructure, the regulatory overhead for small businesses, particularly in manufacturing, is extraordinarily high. Part of what we suggested is small business parks, where there will be single point clearance for different types of businesses so that they can get started quickly. You can also shut down quickly.

As long as you are less than Rs 5 crore in revenue and employing less than 100 people, you can be in the small business park, you can get going, you can experiment, innovate, try out new products… Then if you are successful, you can graduate from the small business park. India has to really change into being an entrepreneurial innovative economy.

Could you give us some background about Omidyar and its plans in India?

The idea for Omidyar Network was to have for profit investing as well non-profit grant making and that is what we do.

Over the last seven or eight years, globally we have deployed more than $550 million in capital; 50 per cent on for-profit side and 50 per cent on the non-profit side. Of the $550 million of capital that we have deployed, over a $100 million has been in India, where about 75 per cent has been on the for-profit side and 25 per cent on the non-profit side.

Our goal (in India) is to be able to deploy $100-200 million in the next five years. We are well along that journey to deploy that kind of capital.

What would be your focus sectors in India?

We are in consumer Internet and mobile, healthcare, education, financial inclusion and we support organisations that are supporting property rights and government transparency.

How much would you invest in these companies?

On the for-profit side, we are a Series A investor, which tends to be between $2 million and $10 million over a period of time, through multiple rounds of funding. On the non-profit side, our grants typically range from $1 million to $6-7 million. These are NGO type organisations. We are trying to find wonderful, scalable organisations that can have sustainable impact and improve the lives of millions of people.

In the for-profit investments, what kind of stake do you pick up in the companies?

It can range anywhere from 15 per cent to 25-40 per cent. The goal is to have a meaningful stake so that we can work with the company and have a board stake. But we don’t want to have majority control.

How long do you stay invested in the companies?

We have no exit pressure as such. As long as we can play a catalytic role with the company, we will stay invested.

What is it that you look for in the companies you invest in?

The most important thing is social impact. We see if the business is sustainable in scale and how profitable it is. We have 25 portfolio organisations, of which 50:50 will be for profit and not for profit.

Our current portfolio in India is over a $ 100 million and at the pace we had set for ourselves, which is to invest between $100 million and $200 million over the next five years, we are operating in that pace.

We are trying to run a top-tier early-stage venture capital firm and a top-tier foundation.

Published on September 09, 2012

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