As India and the world recover from the pandemic, the startup community is abuzz with encouraging news of all hues. Last week, 30 Indian startups reportedly raised funding, 25 of them raising a cumulative $320 million. In another corner of the world, Whitney Wolfe Herd became the youngest woman to take a large company public in the US as the 31-year-old CEO of Bumble, a “feminist dating app” earlier backed by Priyanka Chopra. However, India still needs to make some critical changes to its business ecosystem and tax architecture to create Whitney Wolfe Herds at the same rate as advanced nations. Further, we have miles to go before ensuring high-octane startup fundraising actually contributes in full measure to the Indian economy at large.
By providing our so-called “minicorns” (a startup of valuation over $1 million) and “soonicorns” (funded by angel investors or venture capitalists, likely to join the unicorn club), the right regulatory architecture and local sources of funding, India can create an innovative and resilient economy.
Many entrepreneurs today are lured away from our country by startup hubs such as Singapore, Hong Kong and the United States. Besides factors such as ease of doing business and low corporate tax rates, startups are often coaxed into moving base overseas by their investors. In the internet and technology space, many unicorns as well as minicorns and soonicorns continue to be funded by foreign investors who find it more convenient to work as corporate entities registered within jurisdictions where they have a greater influence over rule-making. To build a self-reliant India, our policy makers, funding agencies and public-spirited corporates will now have to create the required climate to ensure greater availability of local funds.
The Commerce and Industries Minister Piyush Goyal has also emphasised at a recent event that Indian businesses should dedicate a portion of wealth to fund domestic startups and mentor them. Some of our enlightened corporate leaders, like Ratan Tata and Sanjiv Mehta are known for their mentoring and help to such startups.
Startups hold the key to increasing foreign direct investment in value-creating assets in the Indian economy. Investments can boost capital expenditure, create jobs and of course, improve government revenues. However, if the trend of Indian startups shifting base overseas continues, a historic opportunity will be missed to realise their fuller benefits accruing to India. We do not have to go far, have a look at the list of our unicorns, analyse their sources of financing and location.
In order to augment the pool of domestic venture capital, the government might further increase the list of institutional investors to invest in startups. As per the K B Chandrasekhar Committee’s report on venture capital, this should include banks, mutual funds and insurance companies. The government could also look into the viability of pension funds to be permitted to invest in Indian startups. Further, the government may consider creating a sovereign wealth fund to invest in startups. Globally, many countries have enjoyed a bonanza of returns recently because of smart investments by the sovereign wealth funds. The idea has attained traction, and in the first half of 2020 alone, sovereign wealth funds participated in $17 billion of venture capital deals, more than the entirety of 2019. Close to 50 countries currently have sovereign wealth funds that play the role of active institutional investors.
Of course, investing in startups can be a risky proposition and investors, both individual and institutional, may have to conduct due diligence before placing a bet. Obviously, investments cannot flow on nationalist sentiment alone. There is a need to strike a fine balance between staying integrated with the global market and responding to the current socio-economic climate. There is a great window of opportunity to catalyse funding for startups that are emerging from India as providers of technology, products and services to ensure their positive multiplier effects are felt by each and every citizen of the country. Besides enabling and deploying local funding, the government and corporates may also have to invest heavily in R&D through our premier academic institutes to de-risk startup investments over the long-term.
One of the most critical steps to creating an Atmanirbhar Bharat will be to ensure our minicorns and soonicorns are Atmanirbhar as they evolve into unicorns. Early-stage funding in India, and subsequently in various funding series is a complex story that is not adequately captured by the numerous positive headlines. Unless the political and bureaucratic leadership raise a call to action for local investors, we may continue to see foreign investors tapping our startup ecosystem for returns that can otherwise contribute to achieving fuller development outcomes in our country. In many ways the current situation is much like a match made on Bumble. Our young startups are bubbling with energy and enthusiasm which needs to be tapped and given the full-throttle rocket-propulsion into the stratosphere of unicorns and decacorns.
The writer is former Executive Director for India at World Bank, and Ex-Chairman, CCI. He is currently the Chairman of Competition Advisory Services, a strategic advisory firm