Wednesday, June 6, 2012

Five major challenges faced by Indian startups

One keeps coming across conversations that focus on when would India provide or start producing the next Googles or Facebooks? After all, many Indians have played a key role in turning the Silicon Valley as the global innovation- hub. While nobody may have a conclusive answer to the question posed above but nevertheless many startups have recently emerged in India, especially in the field of internet commerce.

Despite frenetic activities (by the Indian standards) on the startup scene, it hasn’t been a smooth ride for the entrepreneurs. In this blog I will focus on major challenges being faced by startups in India. I have tried to incorporate views of some of my friends who did give entrepreneurship a try. While some of have them have returned to become private naukars again, others are still part of the former breed.
The five problem areas are:

Skilled Manpower: A "few good men" can came up with a great business plan with an excellent business model but for the sustainability of the enterprise and the scalability of the idea, you need people with the required skill-sets at all levels. If experiences of my friends are anything to go by, it’s the foremost challenge being faced by them. They come across “job seekers” rather than “sought after” candidates. While manpower may be cheap in India but the quality leaves a lot to be desired. I would attribute this to the stage of evolution of the mindset of the Indian youth. Not too long ago, safety and security of goverment sector was the driving factor followed by lure of the bucks offered by private sector. So the youth don't just lack the required skills, rather they aren't mentally prepared either to work in a startup. 

Mentorship: One comes across many pass-outs or even dropouts from Ivy League business schools pioneering innovative startups but can the same be said about the IIM-grads? My answer would be a plain but emphatic No. In fact, my interactions with people in this field suggest that IITs may be way ahead of IIMs in incubating startups. While I can vouch for the quality of education being provided by IIMs but during my stay I found little mentorship available to budding entrepreneurs. I am not sure if IIMs are even worth considering a platform for entrepreneurs though they may still be relevant for job seekers. A few city-based angel networks have emerged off-late in India but not sure if they are in a position to provide the much needed mentorship yet. 

Funding: I won’t say that this aspect necessarily paints  a bleak picture as there has been decent amount of activity recently on the funding-front. According to research firm Venture Intelligence, 64 startups - companies that are less than three years old - have together received nearly $242 million (around Rs 1,351 crores) of venture capital funding (Link to the article). But, is it enough? According to industry experts there is need for at least 10-fold increase in early stage risk capital. Given the high interest rates and lengthy process invloved; debt, as a source of funding, in not even an option for these startups. Also there is every reason to suggest that the euphoria of the past year and half has made way for a more circumspect “funding environment”. Blame it on the economic scenario or the investors adopting the “wait and watch” policy.

Uncertainty: India is a developing country and unlike its developed western counterparts, it carries more risk. While an entrepreneur is one who is geared up to take risks and deal with unceratainity but systemic risks may simply be too hot to handle even for them. Take the case of e-commerce firms in India; positive changes on the FDI as well as GST front would have given them a major fillip. But in the existing scenario, they are forced to spend money on vertically integrating the entire value chain which makes resource allocation less than optimum.

Regulations: Some of you may have across the JOBS act passed recently in the US. As per the new law, entrepreneurs can now raise money from any and all. Though startups are limited to $1 million per year, and must stick to portals approved by the SEC but these aren't major concerns. On the other hand, the Budget 2012 saw a proposal requiring firms to pay income tax on the premium they have charged over their fair market value while selling shares to unregistered investors, including private equity or venture funds. While the proposed rule aims at curbing money laundering but there are every chances that it would negatively affect the investment scenario for the startups. So the contrasting impacts are all but obvious. 

According to research funded by the charitable Kauffman Foundation, in 1980-2005 firms less than five years old created 40m net new jobs—equivalent to 100% of the net new jobs created in the entire American private sector. So it goes without saying that India would need startups to be the growth engine in the coming years. Now it’s for the country to decide whether it wants to “nurture and incubate” them or “neglect and destroy”. Whatever option do they choose, the ramifications are going to be huge. 


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