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

Swathi Moorthy TV Jayan Priyanka Pani Mumbai/ New Delhi | Updated on October 12, 2018

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 start-ups,” 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 start-ups 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 start-ups 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 start-ups, 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)

Published on October 12, 2018

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