In June, Commerce and Industry Minister Piyush Goyal announced the start-up rankings of States for the year 2021. While Gujarat and Maharashtra are the best performing States, Meghalaya received the top honours among the North-Eastern States.
These rankings are based on access to market, capacity building, enabling environment for incubation, fostering entrepreneurship and innovation, funding and institutional support to start-ups in India.
India has been doing relatively well in the start-up space during the last one decade, thanks to various policy initiatives from the government.
However, Indian start-ups typically face numerous hurdles such as severe competition in the market, change in customers’ preferences, evolving technology, scarcity of skilled personnel, market linkages, lack of funding support, etc.
Out of all these, absence of free access to finance and market linkages are the major stumbling blocks of start-ups to survive and thrive. Out of 61,400 start-ups launched in India, nearly 93 per cent could not raise funds from angel investors till date. Further, very few agri start-ups have mobilised funds through this channel.
In fact, the start-up ecosystem in India is skewed in favour of big data, edtech, fintech, logistics and supply chain activities, rather than agriculture. The main reason for this could be low purchasing power of the target segment: farmers. Over 86 per cent of them are small and marginal farmers.
India has over 1,000 start-ups that offer agri-tech innovations. However, they lack scale due to high cost of serving small/marginal farmers.
While start-ups are offering innovative and emerging technological solutions due to their domain expertise, they are not adept in financial management.
As finance is oxygen to any business, more so in case of agri start-ups, their financial health can be improved by adopting the following:
Maintaining proper records: Start-ups don’t have easy access to finance due to their opaque books of accounts and inadequate business related information (Kaplan and Stromberg, 2001). Agri start-ups can attract more investors by maintaining proper books of accounts that reflect true and fair view of business operations.
Other stakeholders, namely, customers, employees and suppliers also expect maintenance of proper records of start-ups. Multi-user software through cloud accounting system, tax planning and automated return filings powered by artificial intelligence may come handy to agri start-ups.
Opening a separate business bank account: By following ‘business entity’ concept, every agri start-up entrepreneur needs to maintain a separate bank account for his/her business in order to distinguish it from the owner’s personal financial transactions. As per the landmark case law on Salomon vs Salomon Co. Ltd., a business entity will not only ensure payment of a justified claim, but also defence against wrongful claims.
Developing affordable and climate smart technologies: Agri start-ups may have better success rate, if they focus on SDG13 — that is, climate action while developing their products and services. Agri start-ups Gold farm, Khethinext, Oxen raised $13 million by making their services affordable to small and marginal farmers.
Preparing a realistic budget: Agri start-ups have to prepare their budget in a pragmatic manner by validating their financial projections. Further, they need to monitor their performance by using the CEO dashboard (sales, expenses, profit, etc.) at quarterly intervals to ensure that things are in order.
Optimum utilisation of factors of production: Agri start-ups may enhance their total factor productivity by adopting asset-light approach and mobilising funds from internal sources. For instance, instead of buying sophisticated machinery/equipment during infancy stage, start-ups may opt for leasing of the same to reduce costs and maximise returns.
Managing cash flows: If profit and loss account scans the start-up’s business operations, cash flow statement x-rays its financial health. Essentially, lean inventories and quick receivables improve their cash flows.
Therefore, agri-preneurs have to manage their cash flows, short term as well as long term, in order to meet the demands of suppliers, bankers, investors, and the like.
Generally, firms follow the ‘Pecking order theory’ to mobilise their financial resources (internal finance, debt and equity in that order), however start-ups resort to equity after raising internal resources, perhaps due to their disruptive business models.
Tapping angel investors: The perceived ability of a start-up goes well beyond its track record, past achievements and is generally measured as the internal rate of return of investors (Gompers and Lerner, 1998). Angel investors, among other things, look for valuation mismatches, exit opportunities, regulatory and tax issues before investing in agri start-ups.
Further, information asymmetries on start-ups will result in moral hazard and adverse selection. By addressing these, Ninjacart, an agri start-up involved in supply chain, mobilised $164 million from angel investors.
Building strong networks: Network is net worth of any entrepreneur. Though the agri start-ups work in small teams, they need to network with a host of agricultural researchers, financial experts, and technology wizards.
Agri start-ups such as Stellapps and Sid’s farm digitised dairy supply chain by relying on advanced technologies and networking apps to establish market linkages.
Managing risks: Every day is a new day for any entrepreneur. Being seasonal ventures, agri start-ups face new challenges and embedded risks — credit, market and operational — which need proper measurement and deft handling.
Factoring ESG in the business model: As ESG (Environmental, Social and Governance) has been gaining momentum in the marketplace, agri start-ups may develop their business model in a sustainable manner. A case in point is Licious, India’s first D2C unicorn, that bagged the Thought Leadership Award for its ESG compliance in 2021.
In sum, apart from delivering quality goods and services to the customers at a reasonable price in a timely manner, agri start-ups need to concentrate on their financial health by banking on skilled youth and digital technologies.
If agri start-ups manage innovation, finance, and marketing properly, they will become unicorns/decacorns within no time.
Srikanth is Associate Professor, Registrar and Director (Finance), and Syamala is Research Officer, NIRDPR, Hyderabad