In Order to Create More Jobs, Indian Govt. Allows Startups to Raise $3Mln/Year

In an attempt to boost innovation and create jobs, the Reserve Bank of India has allowed start-ups to raise up to $3 million for a three year term via external commercial borrowing.

The Reserve Bank of India’s (RBI) move comes at a time when India has become the world’s third largest start-up base and is poised to double such ventures by 2020. The growth in the number of start-ups and entrepreneurial ventures is expected to foster innovation as well as augment job creation – a high priority area for the current establishment.

Reserve Bank of India on Startup

India in recent months has taken various steps to facilitate investments in the startups sector. The RBI in February this year relaxed the foreign direct investment (FDI) norms for start-ups. The startups will be allowed to raise funds commercially (ECBs), in Indian rupees, any other convertible currency or a combination of both.

The RBI, however, specified that ECBs can only be raised from a country which is either a member of the Financial Action Task Force (FATF) or FATF-Style Regional Bodies. The guidelines only allow foreign banks to act as lenders, while excluding overseas branches, the subsidiaries of Indian banks, overseas wholly owned subsidiaries, or the joint ventures of Indian companies.

Interestingly, the Indian banking regulator did not fix any interest rate cap on these borrowings; typically RBI specifies the maximum cost financial institutions can charge when lending money via ECBs. Earlier in January, Prime Minister Narendra Modi had unveiled a slew of measures to create incentives in the sector. The government has also relaxed the procurement norms for them.

According to a Nasscom report, the number of startups is expected to double to 10,500 by 2020 and provide jobs to over 200,000 people. A recent Labour Bureau survey said India’s unemployment rate shot up to a five-year high of 5% in 2015-16. More worryingly, World Bank research says increasing automation and the adoption of technology threatens 69% of the jobs in the country. Startups are expected to open new avenues for job creation and take more people in the organized workforce.


DIPP Proposes Collateral-Free Loans For Startups; Only Rs 1100 Cr Disbursed Via Rs 10k Cr Fund of Funds Till Now!

n June this year, Govt. of India had created a special Rs 10,000 crore worth fund of funds for Indian startups, which expected to generate 18 lakh jobs. Under this scheme, Small Industries Development Bank of India (SIDBI) was empowered to allocate funds to various Alternate Investment Funds (AIF) registered under SEBI, which in turn would fund emerging startups in India.

In a recent event organized by World Economic Forum, Govt. has admitted that disbursement of funds via this special scheme has been slow as of now, as only 600 startups have been funded for a total amount of Rs 1100 crore, out of Rs 10,000 crore corpus.

Although Govt. plans to eventually provide Rs 50,000 crore via Fund of Funds scheme, the process of allocating funds to startups have been rather slow. Department of Industrial Policy and Promotion (DIPP) secretary Ramesh Abhishek has assured all investors and entrepreneurs that they are now fast-tracking the process, and more startups would be now funded via Fund of Funds route.

He said, “So far only Rs.1,100 crore has been disbursed. Our aim is to mobilize Rs.50,000 crore of private investment through this fund..”

Collateral-Free Loans For Startups

As part of fast tracking the process of disbursing venture capital for emerging startups, Ramesh informed that DIPP would soon launch a corpus of Rs 2000 crore, which would provide collateral-free loans to startups.

In fact, a proposal has already been sent to the cabinet to create a special ‘Credit Guarantee Scheme’ of Rs 2000 crore, which would empower banks and financial institutions to provide loans to startups without any collateral.

If approved, this can be a game-changing move for entrepreneurs in India, who are stuck at approvals because the current rules and regulations are strict in giving out loans for unestablished businesses. Startups needs money to expand, and banks/financial institutions provide loans only to established businesses with proven track record of generating revenues; and the vicious cycle continues.

Besides, Ramesh also informed that they have written to 100 companies to use their Corporate Social Responsibility (CSR) funds to set up incubators which can groom and help startups in India.

Indian Entrepreneurs Share Their Ideas For Helping Startups

At the event, some of the most successful Indian entrepreneurs shared their ideas for improving startup eco-system in India and to groom future entrepreneurs.

Mahesh Murthy, managing partner of Seedfund, said that a shift in culture and mindset is required to provide better assistance for Indian startups. As per him, till now, Indian startups have been copying Western ideas, but now, we need to think out of the box.

He said, “Only now they are beginning to have original thoughts in this generation. It is culturally very difficult for us to be innovative,”

Vijay Shekhar Sharma, Founder of Paytm, emphasized on ‘Make in India’ drive, as he said,

“Japanese built Honda, Toyota, Nissan when Germans and Americas had built their largest auto companies. We have to build products, built in India, made in India, made for India in Indian context. The world needs lower cost, higher scalable built out of countries like India..”

Ritesh Agarwal, Founder of Oyo Rooms said that laws related to startups and entrepreneurship needs to be changed if Govt. wants to truly help them. He said, “It is our responsibility as entrepreneurs to proactively go out and converse with the lawmakers and explain to them what the problems are..”


Digital startups will disrupt businesses: Study

According to the findings of a new global study done by Dell Technologies, 78% of businesses believe digital startups will pose a threat to their organization, either now or in the future, while almost half fear that they may become obsolete because of competition from these startups.

"India is considered among the most digitally mature economies today and credit to the Indian government and India Inc. on driving our country's digital transformation agenda," said Alok Ohrie, President & Managing Director, India Commercial, Dell EMC.
“India is considered among the most digitally mature economies today and credit to the Indian government and India Inc. on driving our country’s digital transformation agenda,” said Alok Ohrie, President & Managing Director, India Commercial, Dell EMC.

Further, 73% admitted that digital transformation could be more widespread throughout their organization while over half have experienced significant disruption in their industries over the past three years. The global study was conducted by Vanson Bourne across 4,000 business leaders across 16 countries and 12 industries, 300 from India.

“With a vibrant startup ecosystem, keen government focus on digitally transforming India, and a tech-enabled consumer base, it’s not surprising that Indian enterprises have sensed the urgency to transform digitally. While transformation is not pervasive, it is critical for organizations to follow the leaders and adopt practices that can enable them to ride the wave of the fourth Industrial Revolution. India has high potential to lead the world in digital transformation, and at Dell Technologies we are in a unique position to accelerate this progress,” said Rajesh Janey, president & managing director, India Enterprise, Dell EMC.

Specific to India, another complementary study by Greyhound Research found that nine out of ten companies had experienced disruption while 26% (compared to 48% globally) don’t know what their industry will look like in three years. Most enterprises in India who are digital leaders are being driven to this by customer demands, while 42% are feeling the pressure from their own C-suite. The executives surveyed said the biggest barriers to progress included immature digital culture (33%), and lack of right technologies to work at the speed of business (32%). Nearly half (43%) don’t measure their digital transformation success.

“India is considered among the most digitally mature economies today and credit to the Indian government and India Inc. on driving our country’s digital transformation agenda. Dell Technologies, will collaborate with customers, partners and consumers to drive human progress and create a technology enabled future. With a proactive government, digitally inspired business leaders and an advanced partner ecosystem, India has the required potential to lead the world’s digital transformation journey,” said Alok Ohrie, President & Managing Director, India Commercial, Dell EMC.

Going ahead, 62% companies said that they would be investing 30% of the 2016 IT budget in transformation projects. This would be in areas like converged infrastructure (80%), analytics, big data and data processing (78%), ultra high-performance compute technologies (82%) and next generation mobile apps (76%) in the next 12 months. About 93% are investing in company-wide data-driven decision-making and 88% are focused on equipping themselves with always-connected,sensor-enabled and location-awar technologies.

A large majority – 87%- said that they face an ongoing need to invest in reskilling their internal IT teams, yet only half rated available internal training resources as fair/ average. Less than 10% rated the internal skills for digital transformation as excellent. Most companies are turning to external help to bring about this transformation, with 86% saying that they are working with system integrators, value added resellers, consultants and other partners to help them on their journey. About 66% of respondents felt that partners add value in explaining the offering, while 39% seek external assistance for training.


Entrepreneurs head to Uttar Pradesh for the national startup fest

Poll-bound Uttar Pradesh has one more thing coming its way from the Centre — it has emerged as top contender to host the national startup fest.

Originally planned to be held in Hyderabad, the industry department is now considering Uttar Pradesh as its preferred choice, with the industrial city of Kanpur the likely venue.

The government wants to take the startup drive to tier II and tier III cities, where the infrastructure and ecosystem for entrepreneurs still needs to be created.

“We want to strengthen entrepreneurial activity in tier II cities…There should be many more Bengaluru- and Hyderabad-like cities for startups in states like Bihar, Jharkhand and Uttar Pradesh,” said Commerce and Industry Minister Nirmala Sitharaman recently.

Uttar Pradesh government officials, too, have stepped up activity to woo startups and budding entrepreneurs.

The date for the event — initially planned for August — is yet to be finalised by the Department of Industrial Policy and Promotion, which is spearheading the Startup India initiative.

“We are working out various details of the event…there has been a delay. It could be held by March 2017 now,” a senior government official said.

DIPP plans to invite over 10,000 startups to the event. The fest is being planned to provide a platform for matchmaking startups and venture capital funds and angel investors, besides discussing key issues facing budding entrepreneurs. The focus will be on sectors such as education, health, manufacturing and agriculture.

The agenda of the grand event will range from funding to mentoring. DIPP proposed to organise a national and an international fest enabling all stakeholders of the startup ecosystem to come together on one platform. The Startup India action plan announced by Prime Minister Narendra Modi in January this year mentioned that such an event would provide national and international visibility to India’s startups.

The government wants to use the national startup fest as a platform to find innovative solutions to on-ground problems. Various government departments have been asked to suggest areas where startups can pitch in with ideas.

The exercise will be undertaken as part of the Grand Challenge in the startup national fest. Problems of social and environmental nature such as water conservation can be posed to startups and they would be given a few months to see if they can come up with solutions.


Shared Workspaces Hit the Indian Startup Scene

Every weekend, the partiers flood into a New Delhi restaurant and dance club called Social, a three-story destination on the edge of Hauz Khas Village, one of the city’s most popular nightlife neighbourhoods.

After nightfall, the bar is busy and the dance floor is full. The lines regularly stretch out into the street. The dancing goes on until 1am.

But just a few hours later, the watering hole will be clean, the tables will be cleared of silverware and plates and the nightclub will have been transformed into a cozy office where no one gets fired for drinking at work.

Everyone shares desks at Social: photographers, designers, journalists, software programmers. They bounce ideas off one another, hire one another and collaborate to expand their businesses. Everyone is either a freelancer or working for a small startup.

As India emerges as one of the biggest markets in the world for tech-based startups, workspaces are transforming from traditional and hierarchical to relaxed and bar-like.

“It’s the millennial personality,” says 29-year-old Dinsa Sachan, a freelance journalist who works out of Social. “People don’t want to bow down to random bosses in their offices. They are seeking more meaningful work. So, I think co-working spaces are like a melting pot for individuals like these.”

The first co-working offices began springing up in India about three years ago. Today, there are at least a dozen in New Delhi – though Social is the only one that also functions as a restaurant – with similar numbers in Mumbai, Bengaluru and Hyderabad, where most Indian startups are based.

With more than 4,200 new technology companies, mostly phone apps or websites, by the end of last year, India now has the third-largest startup industry in the world, behind the United States and United Kingdom, according to The National Association of Software and Services Companies, or Nasscom, an Indian industry research company.

Foreign-based investors are opening their coffers, and now comprise most of the money being pumped into Indian startups, Nasscom says. Funding for Indian startups is growing at more than 125 percent a year, with an additional $700 million (roughly Rs. 4,680 crores) estimated to be invested before February 2017, according to a 2016 report by InnoVen Capital, an Asian venture capital firm.

Riyaaz Amlani, the owner of Social and a powerful force in the changing Indian restaurant scene, said he noticed a demand for cheap office space in prime New Delhi locations and decided on a fluid concept for his restaurants. There are now 14 Social outlets across India, all of them also co-working spaces.

“Increasingly, offices started becoming more like cafes, right? Google, Yahoo, Facebook, Twitter,” the 41-year-old says. “If you get into a traditional office environment, you know, it’s all very cut-and-dried. It’s all very hierarchical. Your importance is measured by the amount of square-foot” your office has.

The co-working spaces are also very young places.Most Indian startups are created by people under age 28 who often cannot afford skyrocketing rents in big-city office districts.

Membership fees at most Indian shared offices are usually less than $100 (roughly Rs. 6,700) per month. They also come with free access to networking events, investors’ conferences and even parties. At Social, members also get lockers, free internet and can redeem their monthly fees for food and drinks.

Rishi Jalan, a 25-year-old who started a sports management company for student athletes two years ago, said the free flow of ideas and inspiration is one of the top reasons people choose to work at a shared office space.

“I know so many of my friends who actually went to a co-working space and found their co-founders,” says the Cornell University graduate. “Everyone, I feel, in these kind of co-working spaces in Delhi, is a guy who’s motivated. Firstly, because you have to do that if you’re an entrepreneur. And secondly, they’re all ready to share their ideas.”

Like Jalan, many young Indians are moving away from traditional low-paying, entry-level jobs and want to do something of their own.

“In my day, we didn’t have this opportunity available to us,” says Amlani, the Social owner. “Our heroes were rebels and rock-and-rollers, and the millennials’ heroes are people like Mark Zuckerberg, and Elon Musk, and people who want to change the world with an app,” he said. “They’re blazing their own trail. And that’s amazing. And we’re just happy to facilitate it in a very small way.”


The endgame for venture investing in India

The future of India’s nascent venture capital scene hinges on the outcomes of the battles between homegrown start-ups like Flipkart and Ola and American rivals Amazon and Uber

Venture capital firms and other investors have poured roughly $6.5 billion into Flipkart, Snapdeal and Ola (and their units), since 2010, betting that they will be able to keep their American rivals Amazon and Uber at bay.

The investors reckoned that the headstart that online retailers Flipkart and Snapdeal and cab aggregator Ola enjoyed, their superior local knowledge, nimbleness, and the passion and ability of their founders would keep them ahead of the American technology giants. Inc. and Uber Technologies Inc. were perceived to be slower in taking decisions and hesitant in giving too much power to the management of their local units. Unlike “pure-tech” businesses like Google Inc. and Facebook Inc., which are dominant in India, any operations-heavy tech business such as e-commerce and cab hailing would favour Indian start-ups over US firms, the investors believed.

But the speed at which Amazon and Uber have expanded over the past 18 months or so has shocked venture capitalists (VCs), putting their investment thesis at grave risk.

The transformation has been so sudden that Snapdeal, whose CEO Kunal Bahl predicted in August 2015 that it would become the largest online marketplace in the country, is now already considered an also-ran in the market share battle.

Consequently, the future of the country’s nascent venture capital scene, in its current form, hinges on the outcomes of the market share battles between Flipkart and Amazon and Ola and Uber, according to VCs and entrepreneurs.

Flipkart and Ola didn’t respond to emails seeking comment.

If Flipkart and Ola list their shares or sell out at attractive prices, it will usher in a golden period for VCs; if, however, either one or both of them fail to generate investment returns, some VCs may have to shut shop and investor sentiment towards Indian start-ups will take a serious hit.

Big names, Big money

The numbers are staggering: Together, Flipkart (valued at $15 billion) and Ola (valued at $5 billion) along with online marketplace Snapdeal (valued at $6.5 billion) accounted for a mammoth 55% of the cash raised by all Indian start-ups in the go-go years of 2014 and 2015. Their combined valuations constitute 65-70% of the valuations of all Indian Internet start-ups, according to Mint research.

These three firms are backed by practically all the best-known venture capital firms operating in India: Accel Partners, Kalaari Capital, Sequoia Capital, Matrix Partners and Nexus Venture Partners.

Apart from traditional VCs, three of the most influential bulge-bracket start-up investors in India, Tiger Global Management, SoftBank Group and DST Global, have poured huge amounts of money into Flipkart, Snapdeal and Ola.

Flipkart, Snapdeal and Ola are at the top of the list of the handful of Indian start-ups that have gone through all the stages of the venture capital investing model: angel investors fund a potentially great but nascent idea, VCs provide early capital to convert the idea into a mid-size start-up, then growth-stage investors pump in large amounts of capital to try and turn the start-up into an established company.

“There’s a lot riding on Flipkart and Ola,” said Sharad Sharma, an angel investor and co-founder of iSPIRT, a software products think tank. “If these two companies can deliver returns above the watermark, then we will have a soft landing for B2C (business to consumer) sector. If, however, in the worst-case scenario, they don’t deliver basic returns, the investor sentiment towards Indian consumer start-ups will turn bad.”

Until the 2015 surge of Amazon and Uber, investors believed all the three firms were on track to listing their shares in the near future and deliver the hard-earned blockbuster returns they craved for.

SoftBank, Kalaari, Nexus and Tiger Global declined to comment. Accel and Sequoia didn’t respond to emails seeking comment.

Lure of big exits

VCs have been investing in India for a decade or so, but they have struggled to deliver good returns to their backers, called limited partners (LPs). Typically, a venture fund is said to have performed well if it returns four or five times the capital invested. For this to happen, the fund needs to make one or two investments that will deliver an exit of 10-50 times the capital invested.

For VCs in India, Flipkart, Snapdeal and Ola are those bets, along with a handful of others such as payments and e-commerce firm Paytm, online marketplace ShopClues and enterprise software provider Freshdesk.

Many VCs including Accel Partners, Kalaari Capital and Nexus Venture Partners have raised new funds over the past 18 months, partly on the back of selling some of their shares in Flipkart and Snapdeal at attractive prices.

In general, most VCs even in the US fail to return the funds invested to their LPs, studies have shown. Since 1997, venture capital firms in the US have returned less cash to LPs than the invested amount, according to a 2012 report by the Ewing Marion Kauffman Foundation, a think tank.  What keeps LPs coming back, however, is the lure of big exits such as those of Facebook, LinkedIn Corp. and Twitter Inc. in recent years and those of Intel Corp., Apple Inc., Microsoft Corp. and hundreds of others in the early years of Silicon Valley.

Indian VCs haven’t seen any such blockbuster exits, which is why Flipkart, Snapdeal and Ola are so important.

And it’s not just that Flipkart, Snapdeal and Ola have raised disproportionately large amounts of cash. Their founder duos—Sachin Bansal and Binny Bansal (Flipkart), Kunal Bahl and Rohit Bansal (Snapdeal) and Bhavish Aggarwal and Ankit Bhati (Ola)—are considered to be the best entrepreneurs in the country and role models for start-up founders.

“The likely scenario is that Flipkart will exit through a big IPO (initial public offering); then, the funding market will go through the roof,” said Abhishek Goyal, co-founder of Tracxn, a start-up tracker. “In the worst-case scenario, if Flipkart’s valuation dips to $5 billion or below, opportunist investors will flee India for the short term and a few venture capital firms may close down. But there’s so much interest in the India growth story that it will continue to be one of the most attractive start-up markets.”

IPO or sale?

The endgame for Flipkart, Ola and Snapdeal is far from clear. Though analysts say Amazon and Uber currently are favourites to emerge winners because of easy access to large amounts of capital, Flipkart and Ola have formidable strengths while Snapdeal has changed its strategy to focus on cutting costs and growing net revenue rather than boosting gross sales through deep discounts and extensive advertising.

“We have a clear strategy to build a long-term oriented, profitable e-commerce business and have been making tremendous progress in that direction over the last year. The decision to go for an IPO rests with the board of the company and they will take it up when appropriate,” a Snapdeal spokesperson said in an email response. “We have witnessed a clear shift in investors focusing on revenue market share and growth vs GMV (gross merchandise value) market share over the last few quarters. Hence, we are witnessing significant inbound interest from investors who believe this is the right strategy for Indian e-commerce going forward. That said, we are currently well-capitalized and have no immediate needs to raise a round.”

Flipkart is still India’s largest e-commerce firm, has a near-monopoly in online fashion (a key category) and a large- enough cash war chest to keep up with Amazon’s spending power, at least over the near term.

Ola is a clear market leader and it has shown it can hold its own against Uber.

Even if Amazon and Uber were to overtake Flipkart and Ola at some point, as long as the Indian firms remain within touching distance of their US rivals, the chances of successful exits are high.

“I am certain that Ola and Flipkart will certainly be among the largest Indian Internet companies a number of years down the road,” said Avnish Bajaj, managing director at Matrix Partners India, one of Ola’s largest investors. “The likes of Bhavish (Aggarwal) and Sachin (Bansal) have the ability, the staying power, personal will and the financial backing to carry their companies to an eventual IPO, and not be forced to sell. They will inspire future Indian entrepreneurs.”

And if there are IPOs, India’s start-ups would’ve achieved their holy grail, he said.

“The biggest challenge will be for the first one to get to an IPO. Once that happens, the floodgates will open for others. But I expect an Indian start-up to do an IPO within two-three years,” added Bajaj.

Others believe some sort of consolidation among Indian e-commerce start-ups is inevitable. China’s Alibaba Group, which is already an investor in Snapdeal and Paytm, is believed to be one of the only suitors which can drive consolidation. In case of such consolidation, it’s difficult to predict what will be the financial outcome for investors.

Copycat investing

This year, investors have already started diversifying away from consumer Internet investments. Apart from taking more time to strike deals, investors have also turned more demanding.

Last year start-ups in hyperlocal groceries, food delivery and hyperlocal services attracted large amounts of capital partly on the basis that they were replicating similar business models from the US or China. That has changed to a large extent so far this year.

In the first half of the year, start-ups in enterprise software, financial and automobile technology, and online pharmacy were popular with investors, according to data from Tracxn.

To be sure, investors and entrepreneurs will always keep an eye on the US and China for start-up ideas. Some of the investments in fintech, for instance, are inspired by start-ups that have come up in the US and China.

But what may change is that start-ups and investors will have to be smarter in adopting these ideas in India and even come up with ones designed specifically for the Indian market.

“Investors will focus more on the uniqueness in operating models and not just on how these models have worked in other markets across the globe,” said Deepak Gaur, managing director at SAIF Partners, a venture capital firm. “We too have started to look for business ideas that are not easily replicable and are trying to solve problems unique only to India. Even entrepreneurs will witness this change and you would see less of business ideas that are me-too of US or Chinese companies.”

In consumer Internet, investors are looking for sustainable business models beyond pure-play marketplaces and niche verticals, said Sanjay Nath, managing director at early-stage fund Blume Ventures. “Redbus and Freecharge have shown India-specific models can create differentiated value vs simply replicating Chinese and Valley unicorn models. The best founders are building a strong technology and operations moat rather than just a capital moat. Another interesting area is enterprise-for-global markets or SaaS (software as a service). Here, start-ups can yield higher margins and gain global customers while leveraging India’s cost advantages,” he said.