Startups: “Winning isn’t everything. It’s the only thing” - Series - I

Innovation and change are the fundamental characteristics of a startup. And, these characteristics of a

startup which leads to disruption in business dynamics are the key drivers of country’s economic growth

and development. Therefore, the whole startup ecosystem plays a pivotal role in changing any country’s

economic condition as the startup ecosystem creates far more direct and indirect jobs as compared to

large firms. And thus, it has worked as a catalyst in boosting economies of mature startup ecosystems

like Silicon Valley, Israel, Europe etc.

Series I discusses how the Indian startup ecosystem is positioned on the global landscape in comparison

to older startup ecosystems of Silicon Valley, Israel etc & insights to the Startup friendly states and cities

in India.

Series II will showcase different reasons on Failure of Indian startup's failure in the country and then

what business strategy should an Indian startup formulate to stay lean and growth oriented?

India’s positioning in the Global Startup ecosystem

In the last four-five years, the condition of Indian startup ecosystem has improved in many ways like

increase in the number of startup incubator centers and workshops, and increase in the number of angle

investors/ VCs for funding Indian startups. These improvements can be seen clearly from the below

figure: 1 which says that Indian startup ecosystem has now emerged as the third largest startup

ecosystem in the world.

Figure: 1 – India – A startup hub for the world

Source: Angle list, Zinnov

Even though Indian startup ecosystem has started picking up the momentum which is clearly visible but

still Indian startup ecosystem is lacking in many ways as compared to established startup ecosystems

such as the no of jobs created, VC investment done, no of mergers and acquisitions (M&A) happened

etc. In these parameters Indian startup ecosystem is far behind than the mature startup ecosystems of

Silicon Valley, Israel etc.

According to U.S. government (2010), startups in US create around 3,000,000 million jobs every year &

government also states “startup isn’t one of the factors which create jobs. In fact it is the single factor”.

Further, without the jobs created by startups, country’s yearly employment growth graph would have

been pessimistic (i.e., startups has created total employment of around 3 percent from the year 1980 –

2005). Whereas according to Kamal Karanth, MD Kelly services India and Malaysia (a renowned

recruitment firm), “Every year, 20,000 to 25,000 jobs are created by startups in India. And this number is

mostly expected to increase”. Below table: 1 clearly indicates that Indian startup ecosystem is far behind

in all the parameters from U.S. startup ecosystem and considering the size, Israel startup ecosystem is

also leading in all the VC Investment parameters.

Table: 1 – VC investments done by region in 2013

Source: Dow Jones Ventures Source, 2014 **All-site Israeli companies

From the below table: 2, we can see that in the developed startup ecosystem of Sili con Valley and Israel,

investors feel blissful in speedy exits from the fund and thus maintains a robust balance sheet, whereas

the Indian startup ecosystem is still in a budding stage. An Indian startup, hence, relatively takes longer

time to give significant ROI to investors, leaving the ventures comparatively riskier than Silicon Valley

and Israel.

While Startup's have spring up like mushroom's in this era, and have bucketed Venture funding, M & A

is yet to find its way.

Table: 2 – Key VC Statistics of India, U.S. and Israel

Source: Dow Jones Venture Source, 2014

2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013

Invested capital (US$b) 0.90 1.50 1.60 1.80 29.20 36.20 32.80 33.10 1.90 1.90 1.10 1.70

Invested rounds 116.00 180.00 227.00 222.00 3161.00 3600.00 3649.00 3480.00 160.00 173.00 141.00 166.00

Median round size (US$m) 7.25 5.15 3.97 4.00 4.16 4.86 4.12 4.20 4.60 5.00 3.50 4.43

Number of VC-bcaked IPOs 6.00 2.00 2.00 1.00 47.00 46.00 50.00 74.00 2.00 2.00 0.00 2.00

Dollars raised (US$m) 532.50 46.40 19.50 10.90 3.20 5.30 11.20 8.20 42.40 24.20 N/S 156.00

Median time to exit (years) 4.30 N/S N/S N/S 8.00 6.40 7.40 6.80 N/S N/S N/S N/S

Number of VC-bcaked M&As 16.00 6.00 16.00 13.00 593.00 562.00 490.00 436.00 19.00 18.00 19.00 10.00

Median M&A valuation (US$m) 27.00 N/S 18.40 46.50 37.80 60.00 60.00 57.50 35.00 30.00 24.90 143.10

Median Time to M&A years 3.50 4.10 4.00 2.60 5.30 5.30 5.20 5.00 9.70 6.70 7.50 5.90

India U.S. Israel

Parameters

Below Table is taken from the study released by Startup Genome and Telefonica Digital (2012), &

noticeably Bangalore is the only Indian city to secure it's place in Top 20 cities of The Global Startup

Ecosystem Index.

The study also reveals that despite India being one of the fastest growing countries in the world but still

India’s world ranking is 140th in terms of nominal GDP per capita. However, the study is optimistic about

India’s growth which in result will be provides a strong foundation for startup ecosystem to flourish.

Therefore, the study suggested that the government should formulate startup friendly aggressive

policies to give room to startups to flourish and prosper. Moreover, they also recommended that for this

path of growth and development, Indian educational system (i.e., together tier A, B and C b-schools and

technology institutes) should also mould his curriculum structure to encourage entrepreneurship and be

ready to play an important role in helping their pupil to become aspiring entrepreneurs.

Startup friendly states and Cities in India

Since 1960, Indian government has taken many steps to promote entrepreneurship and encourage

startup ecosystem such as the formation of NISIET (National Institute of Small Industry Extension

Training) and the formulation of many startup friendly policies etc. Further, in 1991, the year in which

Indian government started the era of liberalization and opened the doors of its economy for foreign

investment and thus India has seen the rise of first generation of highly successful entrepreneurs like

Mr. Nayaran Murthy, Mr. Sunil Mittal etc and their entrepreneurial ventures like Infosys, Bharti Airtel

etc. And now in 2014, under the headship of Prime Minister Shri Narendra Modi, India’s Finance Minster

Mr. Arun Jaitley has declared a startup fund of INR 10,000 crores. However, the degree of execution of

policies and encouragement of entrepreneurship in all 29 states and 7 union territories are not identical

due to various factors like historical, political, law and infrastructure etc. Some of the startup friendly

states and cities are listed below:

1. State: Karnataka; City Focus: Bangalore: In the world canvas, Karnataka governments

is eyeing to make Karnataka specifically

Bangalore a hub of IT innovation and startup

ecosystem thus drafting a new Startup Act,

the first of its kind in the country, in the next

2-3 months. Other initiates taken by

Karnataka government such as under

‘Karnataka New Age Incubation Network’

Karnataka government has approved INR 5

lakh each to all nine colleges to fund their projects to investigate and resolve local problems, plug-and-

play space with internet access at a nominal rate of Rs 5-15 per square feet for budding startups, future

scheme of free incubation space for the first six months from the inception of the startup for women-

founded companies, a partnership between the United Kingdom Trade and Investment board and the

Karnataka Information Technology Venture Capital Fund to mentor and provide international exposure

to the promising startups, the NASSCOM has also opened its warehouse in Bangalore under 10,000

startups initiative program to mentor and encourage startups. Karnataka government has also

announced many regions as special economic zones (SEZ) to give subsidies, rebates and incentives such

as power tariff subsidy, tax refunds etc to encourage and promote MSMEs.

2. State: Kerala; City Focus: Trivandrum Kerala government has started many initiatives to promote entrepreneurship and encourage startup

culture like Investment of 1% of the state’s budget (approximately INR 500 crore) to be made to help

and encourage the budding startups, formation of Kerala Institute for Entrepreneurship Development

(KIED) to cultivate and encourage the spirit of entrepreneurship in the youths of the state, under the

Student Entrepreneurship Scheme relaxation of 20 percent attendance and 4 percent grace marks for

the students who are pursuing studies in the area of entrepreneurship and innovation, building of

incubation center for around 10,000 product based startups over the next 10 years under establishment

of ‘Startup Village of Kochi’ through public private partnership (PPP), formation of ‘the Kerala State Self

Entrepreneur Development Mission (KSSEDM) ’ at Panchayat-level to give training and to provide soft-

loans of up to INR 20 lakhs to 10 chosen entrepreneurs in every Panchayat to start their own enterprise.

3. State: West Bengal; City Focus: Calcutta As per the claims made by the current Chief Minister Ms. Mamta Banerjee, West Bengal is the number

one state in India in terms of acknowledgment achieved by micro and small scale Industries (MSME)

sector. Together with IIM-Calcutta, West Bengal government is training government officials to reach

each district to promote entrepreneurship and set-up an objective to generate 4000-5000 new

entrepreneurs. In fact, West Bengal government has started a single window website (i.e.,

myEnterprise.wb.gov.in) to accept online all the applications, forms and also to provide information,

formation of Enterprise Development Institute with the cooperation of the state government and

Bengal National Chamber of Commerce & Industry to promote entrepreneurship and to provide

certification programs and diplomas etc to budding entrepreneurs like Executive Masters of Business

Creation & Administration (EMBCA). Furthermore, NASSCOM has also offered state government to

establish incubation centre in Calcutta for young aspiring entrepreneurs.

4. State: Maharashtra; City Focus: Mumbai and Pune

Even though Mumbai is mainly known as Financial and entertainment capital of India but now Mumbai

and Pune are increasingly gaining the status of technology and business hub due to the increment in the

entrepreneurial activities in these areas. IIT-Bombay e-cell serves as one of the India’s largest business

incubator center formed by an educational institute, state government promotes MSME culture by

providing many incentives such as power tariff subsidy, tax refunds etc and thus investing up to INR 5

lakh crores to generate employment for 20 lakh people, formation of ‘Maharashtra Centre for

Entrepreneurship Development’ to offer different training programs on entrepreneurship and other

sector centered programs such as like banking, agri-tech, food technology etc. Some other incentives

offered by state government such as exemptions from stamp duty on the land purchase, semi-

reimbursement on purchase of equipments for power and water conservation, subsidies and

reimbursement of expenditure done on energy and water audit.

5. State: Delhi; City Focus: Delhi NCR Delhi NCR region is known for its world class infrastructure and transport facilities. In fact many

investment funds are based in Delhi NCR. Mainly non-tech startups are growing in this region. Unlike

above states, Delhi NCR does not have much needed government support and policies to promote

entrepreneurship and encourage startup culture. Furthermore, IIT-Delhi entrepreneurship cell runs

many small informative programs on entrepreneurship and startup.

6. State: Gujarat; City Focus: Ahmadabad Under the excellent guidance of former Chief Minister Shri Narendra Modi, Gujarat government has set-

up a ‘Center of Excellence in Entrepreneurship & Technology’ and started many incubation centers for

promoting entrepreneurship and encouraging startup ecosystem thus became the most eye-catching

state among young aspiring entrepreneurs on the global landscape. The center is getting all the

guidance under the brilliant mentoring and advisory of Mr. NR Narayana Murthy. Gujarat is also known

for its excellent infrastructure and business culture for the startups. Under this advisory, Young

enthusiasts are getting picked-up at the college level to get trained and groomed at the next level. Other

initiatives such as the establishment of non-profit institute in 1983 called Entrepreneurship

Development Institute by the Gujarat government. The institute runs two year full time residential

program PGDM-BE for aspiring entrepreneurs and managers. IIM-A and Center of Innovation, Incubation

and Entrepreneurship (CIIE) both are serving as a global platform for young entrepreneurs to flourish

and grow. Gujarat government has also announcement many regions as special economic zones (SEZ) to

give subsidies, rebates and incentives such as power tariff subsidy, tax refunds etc to MSMEs.

So, now what are reasons for the failure of Indian Startups and what business strategy should an Indian

startup formulate to stay lean and growth oriented? Read the second part of the article - Startups:

“Winning isn’t everything. It’s the only thing”, for our insight on this.