In my last post I shared my thoughts on building a tech startup in Hong Kong. Now, let’s turn our attention to India. Often called the Silicon Valley of Asia, India is now the third largest tech startup hub in the world (behind only the US and UK). Its startup ecosystem (which extends well beyond high tech) is estimated to almost quadruple, from 3,100 startups in 2014 to 11,500, by 2020.
High tech startups in India cover almost every industry from healthcare to education. Click To Tweet While consumer and e-commerce encompass the lion’s share of investment, health insurance and payment platforms are emerging as key areas of growth. As per usual in my posts, there are as many positives regarding doing high tech business in India as there are concerns about whether India has the environment to accommodate such rapid growth. While I generally believe India represents a great growth opportunity for tech startups there are a few challenges you should keep in mind.
Government and legal support is outstanding
In August 2015, Prime Minister Narendra Modi announced the Startup India Movement. Focused on supporting startups and growing ecommerce , it provided a Rs 2,000 crore (over $300m) funding boost. There are 3 key initiatives it puts forward:
- Creating a Credit Guarantee Fund that provides funding support at a regional level. This is aimed at encouraging innovation and supporting communities who would not normally have access.
- Establishing up to 75 new technology startup hubs (including innovation parks and research hubs) with the intention of supporting new businesses in getting off the ground, and encouraging job creation.
- Launching the Atal Innovation Mission which is focussed on establishing new incubators and sources of seed funding. It also promotes innovation through industry recognition, state councils, trade workshops and conferences.
This initiative also includes regulatory measures that make “starting-up” easier as well as clearing barriers to entry. The 5 key measures worth noting include:
- Establishing a business portal designed to reduce government bureaucracy by enabling 14 regulatory permissions at one time.
- Introducing capital gains tax exemptions for people investing their own wealth.
- Exempting startups from income tax for the first 3 years.
- Reducing royalty tax to entrepreneurs from 25% to 10%.
- Offering greater protection to patent holders, and improving the speed of patent filings.
The initiative has been met with a positive response from both entrepreneurs and business leaders as it also demonstrates Prime Minister Modi’s dedication to innovation and growth in the market.
Funding / Venture capital is plentiful
Venture capital funding, private equity and angel investment is booming in India. Funding for startups grew from $2.2b in 2014 to $4.9b just a year later, with the number of startups being funded growing rapidly. As the charts below demonstrate, VCs, Private Equity, angel investors and incubators are also growing exponentially. Seed funding is also growing, while small in value, has increased from $15m to $99m in the space of one year.
Image courtesy of Nasscom, Start-up India – Momentous Rise of the Indian Start-up Ecosystem
The money is coming from both local and international sources, with many serial entrepreneurs such as Ratan Tata of Tata Group and Kunal Bahl of Snapdeal getting in on the action. VC companies are also throwing cash into the ecosystem, including several international firms such as TGM, Tiger, DST Global, SoftBank, Sequoia Capital and Accel Partners.
While initial valuations in India are lower than their US counterparts ($2.3m compared to $4.2m), there have been some major investments in companies such as Flipkart and Ola that show the potential for large D, E and F funding rounds.
Startup enablers are many
Business has also jumped on the startup bandwagon, with incubators, shared workspaces and advisors creating their own booming industries. There are now over 100 incubators and accelerators supporting startups with resources, mentoring and seed funding. Chief among them is NASSCOM’s 10,000 startups which is providing direct support. This initiative is supported by the likes of Google, Microsoft and Intel.
Language is not an issue
English is one of the official languages in India and the prevailing language of business. While there are challenges for businesses targeting customers in regional India, due to the wide variety of dialects, this is an operational issue rather than one of strategic impact.
Talent is readily available (with a few caveats)
Skilled talent is one of India’s strengths, but it may soon be a weakness. Click To Tweet The majority of startup founders are young, with 73% under the age of 36. This is a reflection of the general population. By 2020 India’s average age will be only 29 years. When coupled with a burgeoning middle class that is educated and ambitious, it sets the stage for the country to become a global talent powerhouse. Unlike their parents and grandparent, the new generation will be more willing to take risks, seek out new challenges and relish the blue sky opportunities offered by startups.
While brain drain was once a major sore point for India, talent is now returning home. With many returning with valuable experiences in some of the world’s top blue chip technology companies (i.e. Peeyush Ranjan left Google to take a position at Flipkart, Namita Gupta swapped Facebook for Zomato, and Rushil Goel left Boston Consulting to join Ola).
These ex-expatriates can now assume a mentor role to support their younger counterparts and foster an exciting community of innovation and growth.
The legal environment is daunting
While the Startup India Movement contains several initiatives to reduce regulatory hindrances, as outlined above, many doubt that that the new policy will work as planned. Progress in the sub-continent has been historically plagued by both the slow wheels of bureaucracy and high levels of regulation and corruption. While there have been moves to change this, many businesses are still reporting obstacles.
Last year, approximately 65% of tech startups that had raised Series A funding were looking to move out of India due to legal and regulatory issues, with many opting to relocate to the US, Singapore and the UK. Issues such as capital gains tax, conducting IPOs and facilitating international payments are slowing these businesses down. Navigating the maze of paperwork and red tape would be challenging enough for large businesses, for startups it’s a distraction they don’t need.
Infrastructure continues to be a significant barrier
Infrastructure in India still has a long way to go before it can meet the needs of a developed nation. Digital infrastructure is just one area that requires support, with major cities still experiencing daily electricity outages. While growth is occurring at an exponential rate, it is unclear whether India will be able to keep up with the growing demands of its burgeoning technology ecosystem. This is a risk factor that would be hard for any founder to ignore.
While startups are booming across the sub-continent, I believe that there are many reasons to be equally optimistic about the long-term potential of the India marketplace. If you can go in armed with the knowledge regarding the challenges I discussed, I have every confidence that you will be able to build a successful tech startup in India.Arm yourself with knowledge of the challenges in India before you build your tech startup Click To Tweet
Now that I’ve spoken my mind, I’d love to hear your thoughts and experiences on tech investing and working in India. Do you believe it can someday surpass the US as the startup hub of the world?