IT entrepreneurs and IT professionals-turned-entrepreneurs in the bigger cities have been actively nurturing and hand-holding the new-age startups. 

On the contrary, startups in smaller centres have been largely deprived of the privilege, with a high mortality rate in the first two-three years of formation. It is here that the interventions by central and state governments play a critical role, stakeholders said.

Hiranmay Mahanta, CEO of i-Hub, a startup incubator of Gujarat government, set up under the Student Startup and Innovation Policy (SSIP), noted that the Startup India Mission and associated policies by various state governments led to creation of pre-incubation and incubation systems, providing co-working spaces, government grants, access to industry mentors, investment, support for creating and protecting Intellectual Property and a host of other measures. This ensured that the startups in smaller centres survived the critical initial years. 

Jatin Chaudhary, Founder of eChai, a networking community of startups active in 14 Indian states and 17 countries across the world, highlighted that large companies typically play an active role in growing the startup ecosystem. It is imperative for these larger companies to now focus on startups that come up in smaller centres. A startup from minor cities always finds it more difficult to access funds, mentorship, and other support, and compete with its peers in tier-1 hubs. 

Chaudhary said that the government should nudge the private sector to increasingly fund startups and also buy their goods and services. The bullish stock market often drives investors away from startups and directs them to equities. 

With support from governments, early-stage funding, however, is now adequately available. But, of these startups, how many are getting the next stage of funding from the private sector? Growth stage funding is still a problem. States like Gujarat have a huge capacity in the manufacturing sector

– Jatin Chaudhary, Founder, eChai

It is now key for large companies to also support startups. “Almost all large companies benefit from state incentives, but are less keen to support startups. At least, they should support startups in their sectors. They can also set up sector-specific incubators and accelerators, which can go a long way in creating a mature startup ecosystem in the country,” he said. 

Government Push For Startups

The government is doing its bit. Aniket Talati, former national president of The Institute of Chartered Accountants of India (ICAI), said that the recent steps that have been taken are an indication of the government’s commitment towards strengthening a startup ecosystem in the country. 

Recent measures announced by the Central government will increase the flow of funds for startups, improve their capital situation, and reduce litigation. Thus, they will contribute to the long-term sustainability of startups. Many Family Offices and investment firms will now actively think of investing in startups, as they are no longer required to be registered with the RBI

– Aniket Talati, former national president, ICAI

No Debt Funding For Intangible Assets

Many startups, despite being profitable, lack scale, which dents their prospects of equity funding by venture funds that prefer high-growth startups. 

Unlike the traditional manufacturing sectors, most startups do not have a plant, machinery, and land; so, banks and NBFCs also do not fund them, significantly denting their growth. According to an individual associated with startups, “Central government has a Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme to provide funds to smaller companies. Startups qualify for the scheme. Since they do not have tangible assets, banks and other financial institutions do not fund them. Hardly any money is flowing to startups under this scheme."

There is a mechanism for cash flow-based funding, but hardly anyone benefits.

Adequate Data Are Key

Stakeholders say that despite the evolution of the startup ecosystem, adequate data are still not available. The creation of facilities for prototyping, testing of the product, field validation, and certification require urgent attention. “These gaps delay the take-off of the startup and prolong the growth curve. Adequate access to these facilities can encourage startups to develop innovative products and services. This can in turn build capacities within the country for corporates and even in strategic sectors like defence and aerospace,” said a source, on condition of anonymity. 

Further, attracting and retaining skilled talent is difficult, especially when competing with larger companies offering higher salaries and better benefits. Jatin feels that with professionals wary of job security due to the evolving role of artificial intelligence (AI), there could be a migration of professionals towards startups. “They may either work for startups or become startups themselves,” he remarked.

The Long Journey

Rajiv Vaishnav, Co-Founder and Managing Partner, Cornerstone Ventures, recalled the IT boom in the country in the late 1990s. It was in 1999 that The Indus Entrepreneurs (TiE) was established in Mumbai. Microsoft’s $440 million takeover of Hotmail, which was founded by Sabeer Bhatia, was also a watershed moment, as it was the first instance when Indians realised that being a startup founder was more lucrative than an IT job, he says. 

Fast forward to 2016, Prime Minister Narendra Modi launched the Startup India Mission, bringing startups to the mainstream at a national level.

Earlier, we had to explain what startups were. But now, digitisation accelerated, resulting in the startup boom

– Rajiv Vaishnav, Co-Founder and Managing Partner, Cornerstone Ventures

Addressing concerns that startups are "high risk, high reward", Vaishnav highlights, “This is an evolutionary process. There can be no miracle overnight. However, startups are more confident now than before. Results will take time,” concluded Vaishnav.