05-Jan-23

Startups
Unit-V : Aspects of Start-Up • startup company ("startup"): A company, partnership, or temporary
organization designed to search for a repeatable and scalable business
model.
• became very popular during dot-com bubble
• often a company poised for rapid growth
• must be able to reach many people, and make money from them
What is Start-Up, Start-up Policy, start-up • a new/small company != a startup, ... but most are
strategy, Progress of startups in India, Principles of • often based on technology
• low cost to enter market
future organizations, start-up sectors, action plan • easy to reach many people
for start-ups by Govt. of India. • high risk, high reward

• ... Could you make a startup??

Startup Ideas Goals Developing Startup Ideas

 Opportunity Recognition
 Distinguish among the different types and sources of startup ideas.  Identification of potential new products or services that may lead to
promising businesses
 Use innovative thinking to generate ideas for high-potential startups.
 Entrepreneurial Alertness
 Describe external and internal analyses that might shape the selection of
 Readiness to act on unnoticed business opportunities and to pivot quickly
venture opportunities. away from flawed initial ideas.
 Explain broad-based strategy options and focus strategies.  Which Product or Service?
 Screen business ideas to identify those with the greatest potential.  Serves important consumer needs
 Assess the feasibility of a startup idea.  Has readily recognized utility and user benefits
 Is affordable to a large group of potential customers
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3.1
Types of Ideas That Develop into Startups
Using Innovative Thinking to Generate Ideas
1. Borrow ideas from existing products and services or other industries.
2. Combine two businesses into one to create a market opening.
3. Begin with a problem in mind.
4. Recognize a hot trend and ride the wave.
5. Explore ways to improve an existing product or service’s function.
6. Adapt a product or service to meet customer needs in different ways.
7. Imagine how market for a product or service could be expanded.
8. Offer products through a subscription service.
9. Study a product or service to see if you can make it “green.”
10. Keep an eye on new technologies.
3–5

Evaluating Market Opportunities

Using Internal and External Analyses to Assess Ideas
• Inside-Out Analysis
 Assessing the firm’s internal competitive potential
• Outside-In Analysis • Resources
 Studying context of venture to identify and determine business ideas that  Basic inputs that a firm uses to conduct its business
qualify as opportunities.  Tangible resources: visible and easy to measure.
 General Environment  Intangible resources: invisible, difficult to quantify
o Encompasses factors influencing business in a society. • Capabilities
 Industry Environment  Routines and processes that can coordinate the combined use of
o Factors that impact a firm and all of its competitors.  Routines and processes that can coordinate the combined use of productive assets in order to
 Competitive Environment achieve desired outcomes.
Focus on the strength, position, and likely moves and countermoves of competitors in an
o
industry.
• Core Competencies
 Capabilities that provide a firm with a competitive advantage over its rivals and reflect its
personality.

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Advantages of Startups
Integrating Internal and External Analyses • Sky is the Limit When it Comes to Innovation
• Create Your Own Rule, You’re the Boss
• No Dearth of Seed Funding if the Start Up is Promising
• Strengths, Weaknesses, Opportunities, and Threats (SWOT)
Analysis • Start Ups Better at Pricing then Corporations
 Provides concise overview of firm’s strategic situation. • Availability of Start Up Eco System
 Helps identify opportunities that match the venture. • Availability of an Incubator
Disadvantages of Startups
• Higher Cost, Tax and Regulations for a Start Up in India
• No Seed Funding Unless the Start Up is Exceptionally Promising
• Ecosystem Still Not Very Developed
• Hiring New Employees Could Be a Challenge

A startup timeline
Funding sources
• friends and family funding ("fff"):
asking friends to borrow/donate money

• grants or government funding

• bank loans: taking out a standard business loan to be repaid

• public equity: Selling stock in the company

• IPO (initial public offering) often comes after VC funding

• crowd funding: Asking the public for donations

• e.g. Kickstarter
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Working at startup - pros Working at startup - cons

• motivation • compensation (short-term)
• work on something you believe in • somewhat lower pay than at big company

• autonomy • fewer perks

• smaller team; you get to make decisions • less free food, games, toys
• ownership
• you may be given stock in the company • job security
• company might fail
• compensation (long-term)
• chance to get rich if company becomes a hit • long hours
• entire company's fate rests on short-term milestones;
• casual workplace atmosphere may have to work long days and/or weekends to meet them

Development of India through Startup initiative

Startup failure
• Up to 75% of startups fail. Why?

• can't raise enough initial angel/VC funding • Announced by PM Narendra Modi on 15 August 2015
• wasting too much money at early stages
• company doesn't begin with the best people • Launched on 16 January 2016 at Vigyan Bhawan, New Delhi
• doesn't produce something people want • Organized by Department of Industrial Policy and Promotion (DIPP) and ministry
• hires too many people too quickly of commerce
• hires the wrong people, or people with the wrong skills Inaugurated by FM Arun Jaitely
• doesn't produce a working product in a timely manner
Chief guest - PM Narendra Modi
• not able to successfully monetize the idea
• beaten out by a competitor Attendees- top 40 CEOs and startup founders
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Benefits of an Initiative Eligibility Criteria to get Benefits of

• SELF CERTIFICATION and compliance under 9 environmental & labor laws Initiative
• STARTUP PATENT APPLICATION fast track & 80% rebate in filling patents
• A startup is an entity, private limited Company (The Companies
• PUBLIC PROCUREMENT fast track under the criteria of "prior experience/ Act,2013), Registered Partnership Firm (The Indian Partnership
turnover" for startups in all Central Government ministries/ departments. Act,1932), or Limited Liability Partnership (The Limited Liability
• WINDING UP COMPANY in 90 days under insolvency & Bankruptcy code Partnership Act,2008) that is headquartered in India.
• INR 10,000 CRORE FUND of funds for investment into startups through • Opened less than five years ago.
Alternate Investment Funds. • Annual turnover less than Rs.25 crore.
• INR 2,000 CRORE CREDIT guarantee fund for startups through National • The entity should not be formed by splitting up or reconstruction and
Credit Guarantee Trust Company / SIDBI over 4 years. its turnover should not have crossed Rs.25 crore during its existence.
• TAX EXEMPTIONS on Income tax for 3 years
• TAX EXEMPTIONS on capital gains & on Investments above fair market
value.

Findings
Impact of Initiative on India
• India is a home for almost 3100 startups starting per year standing just behind US, UK
and Israel according to the NASSCOM report of 2015. If the growth is continued on the • Creation of jobs
same pace then it is expected that Indian tech startups will generate almost 2.5 lakh jobs in • Increase export
the next five years. • Increase production will lower the price of goods and
• The Small Industries Development Bank of India (SIDBI) has approved Rs 930 crore in services
disbursals from the Rs 2,000 crore fund-of-funds it launched in August to support venture • It will increase multiplier effect
capital funds for startups.
• Increase per capita income
• It is anticipated that by 2020 India will be a home to 112 million working population
• Standard of living will rise
falling in the age bracket of 20-24 years as compared to that of 94 million workers of
China. • Marginal propensity to consume(MPC) will go up
• Boost gross domestic product(GDP)
• Bring revolutionary technology
• Industrialization
ADBI Working Paper 1146 V. K. Singh

I see startups, technology and innovation as exciting and effective instruments

for India’s transformation.
(Narendra Modi, Prime Minister of India)

1. INTRODUCTION
Entrepreneurial initiatives, as a factor of production, are central to the economic
development of any country (Tripathi 1971). Traditionally, the majority of the population
in India followed the Varna system (Brahmin—the priest, Kshatriya—the warrior,
Vaishya—the trader, and Shudra—the artisan). The Vaishya community was generally
associated with commercial activities. The concept of the Hindu undivided family (HUF)
as a business entity is unique to India, where family members are coparceners with the
eldest member of the family as the decision maker, called Karta. The colonial rule in India
and the influences of industrialization in Europe changed the social and economic
dynamics of commerce, making inroads into the Varna system and enabling the
permeation of non-business classes into commercial activities (Tripathi 1971).
India has mainly been an agricultural (including animal husbandry, fishing, and forestry)
economy. In the 1850s, the textile industries of cotton and jute, and subsequently tea,
coal, and paper, sowed the seeds of the modern factory system (Medhora 1965). The
literature on the history of industry in India has highlighted divergent perspectives ranging
from social and economic to political factors influencing the entrepreneurial spirit (Ray
1994). While discussing startups, one should not forget the rural artisans, self-
entrepreneurs like potters, blacksmiths, weavers, cobblers, stone workers, carpenters,
engravers, and so on. However, policy making has generally overlooked them, clubbing
them together with non-farm workers (Solanki 2018).
The brunt of colonial rule introduced a socialistic pattern of governance in India, and the
Indian government opted for a planned economy balancing social and industrial
development. The regulations became tighter and sometimes onerous for private
enterprises, which led to decelerated growth, inefficiencies, and corruption (Jang,
Kim, and Cho 2013). Tight controls and skewness toward public enterprises guided
the industrial policy resolutions (Burange and Yamini 2011). While progressive
liberalization was apparent following the industrial policy of 1956, significant reform came
in 1991 when the government decided to take a series of measures to unshackle the
industrial economy from unnecessary bureaucratic control. These measures, among
others, aimed to reform the trade policy, foreign exchange policy, industrial licensing
policy, competition policy, and so on.
Professor Redlich (1948) reported a tripartite division of entrepreneurial function, that is,
capitalist (provider of funds), manager (to manage the nuts and bolts), and entrepreneur
in a narrow sense of the term, specifically planner, innovator, and ultimate decision
maker (startup owner) (Hoselitz 1952). Broadly, it is possible to categorize entrepreneurs
into “imitative” (who follow the beaten track) and “innovative” (who adopt new and
improved business methods) groups. Startups focus on these innovative entrepreneurs
and their ability to come up with a replicable and scalable business model (Blank 2013).
The “startup” ecosystem emerged globally in the United States (US), in what people
popularly refer to as Silicon Valley, mainly constituting information technology (IT)
companies such as Google, Apple, HP, Oracle, Cisco, Facebook, Twitter, and so on.
Silicon Valley has the highest concentration of startups in the world (Ester 2017). India
makes its own contribution to this success through its software engineers who found an
abode in Silicon Valley in the 1970s and 1980s. However, it is paradoxical to note that

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India could not arrest this “brain drain” due to a lack of policies promoting “innovator
entrepreneurs.” However, this trend has changed in the last decade with the vitality of
the globalizing cities in India and the prospects that they offer (Chacko 2007). India is
one of the largest consumer markets.
One of the significant steps that the Government of India (GOI) took was to launch, in
January 2016, the Startup Action Plan (SAP), popularly known as the “Startup India”
initiative. The SAP transformed the way in which the markets, potential entrepreneurs,
and investors view startups. This transformation included a slew of policy measures
intending to promote a startup culture and allow younger population members to take
risks with their ideas and become “job creators” rather than “job seekers.” India’s
demographic dividend required a suitable channelization of human resources with a
focus on handling issues of unemployment and creating first-generation entrepreneurs
(Venkatapathy 1989).

1.1 Startup Growth Stages

Defining the stages of startups’ growth could be tricky, as various startup experts have
suggested different numbers of stages ranging from three to six (McGowan 2017). In
India, it is possible to divide the startup life cycle into four major stages (Department of
Industrial Policy and Promotion (DIPP) 2018). However, there are no strict boundaries
between these stages, and often there is a twilight zone between them.
Stage 1: Idea Validation—This phase involves having an idea to address a problem or
identifying an opportunity with business potential. Entrepreneurs produce a robust
business plan and obtain validation from mentors by developing a “prototype” for a pilot
run. Until this stage, self-financing (bootstrapping), government grants through
universities, or potential investors meet the funding requirements. The potential of a
patent or design may attract investors at this stage.
Stage 2: Seed Funding—This is a crucial phase wherein, based on the feedback from
the pilot in the validation stage, the startup seeks seed funding from angel investors,
crowdfunding agencies, incubators, or government grants. Funding at this “early traction
stage” is essential for startups to escape the “valley of death.” The “valley of death” is a
term that refers to the difficulty of adjusting the negative cash flow during the initial stages
of a startup. This phase continues until there is a regular flow of revenue from actual
customers (Osawa and Miyazaki 2006).
Stage 3: Growth/Scaling Up Stage—By this stage, the business has a good grounding
with consistent consumer acquisition. There are identified channels of growth and
expansion. This is the stage when the business can gain funding support from venture
capital (VC).
Stage 4: Maturity Stage—This stage consists of either exit by way of partial or full sale
of startups to existing players in the market through M&A deals or an initial public offering
(IPO).

Table 1: Startup in Different Stages in India (as on 17 December 2019)

Ideation Validation Early Traction Scaling Total
19,407 22,871 20,361 6,668 69,307
Source: www.startupindia.gov.in.

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It is notable that these numbers are on a self-declaration basis. The recognized number
of startups is about 25,000.
Alphalogic Techsys, a Pune-based software consulting firm, was the first to float its IPO,
which enabled it to raise growth capital from a group of investors instead of selected
VCs. The SEBI, the Indian securities regulator, has relaxed the listing norms, providing
an exclusive institutional trading platform (ITP), now called the “Innovators Growth
Platform” (IGP). The SEBI has further provided for norms whereby, after a year of being
on the IGP, startups may move to the main stock exchanges by expanding their
shareholder base to 200 (the minimum required for going public). They further require a
profitability/net-worth track record of three years or at least 75% of their shareholding as
qualified institutional investors.

1.2 Startup Ecosystem

The creation of a startup ecosystem and a culture of promoting entrepreneurship are
essential to create a startup revolution. As the SAP appropriately mentions, “the word
FAIL needs to be redefined as ‘First Attempt In Learning’ to inculcate the culture of
risk and failure.” The following important stakeholders could help to build a startup
ecosystem.

1.2.1 Government Policy and Regulatory Framework

This is the starting point for a robust startup ecosystem. Government processes are the
greatest decelerators otherwise, unless there is a specific focus on and effort toward
Ease of Doing Business (EODB). The GOI has taken a slew of measures to create a
positive ecosystem of collaboration and progress. This paper deals with this aspect in
greater detail.

1.2.2 Incubators and Accelerators

The primary difference between an incubator and an accelerator is that the latter
provides equity funds in addition to space, a network, and mentorship (Wise and Valliere
2014). Accelerators, as the name suggests, act for a short period with a focused
approach. There are many mentor groups that provide new entrepreneurs with training
and mentorship, encouraging them to work on their startup ideas. The easy availability
of infrastructure, like co-sharing workspace, cloud services, and IT services, is
particularly important.

1.2.3 Universities and Schools

Universities and schools in India are now focusing on the need to promote a culture of
entrepreneurship by creating a climate of teaching and learning, introducing courses on
entrepreneurship, opening up incubation facilities, providing scholarships and means of
seed funding, internships, break years, early release, and so on (DIPP 2018).

1.2.4 Funding and Finance

To address the funding needs of a startup, the role of investors is pivotal. Cardullo (1999)
portrayed the startup financing cycle as follows:

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Figure 1: Startup Financing Cycle (Cardullo 1999)

As noted above, there are angel, early stage, and late-stage investors in startups.

1.2.5 Competitive Markets

Startups must have competitive markets available for launching and selling their products
and services. India has a large consumer market with an increasing disposable income
conducive to startups.

2. STARTUP ACTION PLAN (SAP) OF 2016

The Government of India launched the SAP, which addressed various aspects of the
startup ecosystem and provided innovative entrepreneurs with a launch pad and support
system, in 2016. The driving objective behind the action plan was to fast-track the spread
of the startup movement from the digital/technology sector to a wide array of sectors,
including the social sector, manufacturing, agriculture, education, and healthcare, and
from existing Tier-1 cities (like Delhi, Mumbai, Bengaluru, etc.) to
Tier-2 (Agra, Lucknow, Nagpur, etc.) and Tier-3 cities, including semi-urban and rural
areas (Kothari 2016). The SAP contains 19 points bifurcated into three key major areas
for empowering potential startups: (i) handholding and simplification; (ii) funding support
and incentives; and (iii) incubation and industry–academia partnership (StartupIndia
2016).

2.1 Definition of “Startup”

According to the notification that the Government of India issued (19 February 2019,
originally issued on 11 April 2018), when an enterprise meets the following conditions, it
will treat it as a startup:
(i) It has been incorporated/registered for not more than 10 years (previously
seven years, except in the biotechnology sector according to the notification
dated 11 April 2018) in any of the following forms:

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a. A private limited company under the Companies Act, 2013 (including one-
person companies);
b. A partnership firm under the Partnership Act, 1932;
c. A Limited Liability Partnership (LLP) under the LLP Act, 2008.
(ii) Its turnover has not exceeded INR 100 crore (previously INR 25 crores) for
any of the financial years since incorporation/registration.
(iii) It is working toward the innovation, development, or improvement of products
or processes or services or it is a scalable business model with high potential
for employment generation and wealth creation.
However, “an entity formed by splitting up or reconstruction of an existing business shall
not be considered a ‘startup’. An entity shall also cease to be a startup on completion of
10 years from the date of its incorporation/registration or if its turnover for any previous
year exceeds INR 100 crore.”
The above definition lays down a clear parameter on the basis of the age of the entity,
its turnover, and its objective, which necessarily focuses on innovation, employment
generation, and wealth creation. An entity that meets the aforesaid criteria needs to apply
for recognition as such from the Department for Promotion of Industry and Internal Trade
(DPIIT).

2.2 Simplification and Handholding

One of the major challenges for startups has been legal compliance. Addressing this
issue, the government provided for the following points, emphasizing an “ecosystem
without the trappings of a system.”

2.2.1 Compliance Regime Based on Self-Certification

India has worked extensively on its EODB ranking, which is evident from the consistent
improvement in the latest rankings from 142nd in 2014 to 63rd in 2020. One of the
important parameters for the EODB ranking has been the “ease of starting a business,”
and for this parameter there has been an improvement from 158th in 2014 to 136th in
2020 (World Bank 2020). For startups, India has relaxed the compliance regime further,
especially in the two areas of compliance relating to labor laws and the environment. For
five applicable pieces of labor legislation, startups just have to provide self-certification
and there will be no inspection for 3 years, unless some complaint arises in this regard.
For environmental law compliance, startups are allowed to give “self-certification” in 36
categories of newly introduced “white category industries.” These categories are in
industrial sectors with a pollution index score of up to 20 and are practically non-polluting
(Korreck 2019). This self-certification mechanism offers great relief to startups.

2.2.2 Startup India Hub and Mobile App and the Startup India Portal
Finding a mentor and resolving teething troubles have been a considerable challenge for
startups. The SAP addressed this issue by creating the “Startup India” hub working on a
hub-and-spoke model and bringing different stakeholders of the startup ecosystem into
one platform. To this effect, the government created an online portal
(https://www.startupindia.gov.in) and a mobile app. These act as an official networking
portal connecting more 70,000 startups, 65 investors, 480 mentors, 95 accelerators, 470
incubators, and 38 government bodies (as of 25 December 2019). There are about 3.5
lakh users of this portal.

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2.2.3 Fast-Tracking Patent Examination at Lower Costs

and Legal Support
Startups operate on their innovation strength; hence, the protection of the idea/brand in
the form of a patent, trademark, or design is crucial. The recognition of these intellectual
property rights (IPRs) facilitates commercialization for startups and opens up funding
opportunities (Conti, Thursby, and Thursby 2013). In this regard, the SAP came up with
the scheme for Startup Intellectual Property Protection (SIPP) with the aim of facilitating
the filing of IPRs. The Controller General of Patents, Designs, and Trademarks
(CGPDTM) is the nodal agency to steer this policy. The CGPDTM has a panel of more
than 4,000 facilitators who help startups in obtaining IPRs at rebated rates. These
applications also receive fast tracking by virtue of coming from startups. The government
has extended the scheme, which initially operated for a year, to
3 years until March 2020.

2.2.4 Relaxed Norms of Public Procurement for Startups

A new startup cannot compete with established players, especially in cases of public
procurement, wherein two of the major qualification criteria are based on “prior
experience” and “prior turnover.” To promote startups in the manufacturing sector in
India, the government has relaxed the requirements of prior experience, prior turnover,
and earnest money deposit (EMD) in cases of startups without compromising on the
quality standards and technical parameters. The Government e Marketplace (GeM) also
facilitates startups, and Startup India is integrated with the Central Portal for Public
Procurement (CPPP).

2.2.5 Faster Exit for Startups

Fear of failure and associated problems with insolvency operate as a dampener for new-
age entrepreneurs. Among the major problems are the lock-in of capital, unusual delays
in resolution, and ultimate erosion of capital. To improve this situation, the new
insolvency law of India, namely the Insolvency and Bankruptcy Code 2016 (IBC),
provides a fast-track mechanism for insolvency resolution of startups, which takes
135 (90 + 45) days instead of 270 days in the normal channel for startups (other than a
startup organized as a partnership firm, as insolvency regulations applicable to
partnership firms are not included).

2.3 Funding Support and Incentives

Scalability is one of the major characteristics of the startup revolution. In Silicon Valley,
“think big” is the focus of innovation. Its conventional business model is all about scale,
reaching large markets, and the ambition to create a social impact (Ester 2017).
Scalability requires funding support; however, it is extremely difficult to convince
someone to invest in startups, which by nature are not impervious, and there is a
question of survival in most cases. The good news for India is that an expert committee
on venture capital (VC) opined that “India has the potential to build about 2,500 highly
scalable businesses in the next 10 years, and given the probability of entrepreneurial
success that means 10,000 Startups will need to be spawned to get 2,500 large scale
businesses” (Press Information Bureau (PIB) 2016). This necessitated the creation of a
special ecosystem for funding support and incentives for private investors (Shrivastava
and Garg 2017). The SAP addressed these concerns in the following ways.

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2.3.1 Providing Funding Support through a Fund of Funds

for Startups (FFS)
This is an initiative in which, with a corpus of INR 10,000 crores, the GOI has created
a Funds of Funds for Startups (FFS). The Small Industries Development Bank of
India (SIDBI) manages the fund, and it supports different alternative investment funds
(AIFs) registered with the Securities and Exchange Board of India (SEBI). AIFs extend
funding support to startups (twice the SIDBI’s contribution). The SIDBI identifies
experienced professionals (fund managers) in the venture funding ecosystem through
its Venture Capital Investment Committee. “SIDBI has committed Rs 3123.20 crore to
49 SEBI registered AIFs. These funds have raised a corpus fund of INR 27,478 crore.
INR 483.46 crore have been drawn from Fund of Funds for Startups. Further, the AIFs
have invested a total of Rs. 1,625.73 crore into 247 startups” (PIB 2019b).

2.3.2 Credit Guarantee

The GOI formulated the Credit Guarantee Scheme for Startups (CGSS) with a corpus
contribution of INR 2,000 crores. This will enable startups to raise loans without any
collateral for their business purposes. A startup with DIPP recognition is eligible for a
credit guarantee up to INR 500 lakhs through member lending institutions (MLIs) per
case, inclusive of the term loan, working capital, or any other instrument (PIB 2017). The
National Credit Guarantee Trustee Company (NCGTC) has the trusteeship management
of this scheme.

2.3.3 Tax Exemptions

Tax incentives/exemptions are one of the major driving forces for startups. The SAP
envisaged the following main tax benefits:
a. Tax Exemption on Capital Gains: Under Section 54EE of the Income Tax (IT) Act,
startups are exempt from capital gains tax on capital invested through a fund that
the government has notified. The existing section 54GB of the IT Act is also
available to startups now; this provides exemption from tax on long-term capital
gains on the sale of a residential property to HUFs and individuals if they invest
such gains in startups for a period of 5 years.
b. Tax Exemption/Holiday for Startups for 3 Years: Startups incorporated after
1 April 2016 can avail themselves of a tax rebate of 100% on their profits for a
total period of 3 years within a block of 7 years (section 80 of the IT Act).
c. Tax Exemption on Investments above Fair Market Value (FMV): Investments not
registered as a venture capital fund (VCF) or incubators above the FMV are
exempt for eligible startups.
d. Angel Investors: A robust financial ecosystem to support startup initiatives is
crucial. The emergence of high net-worth individuals (HNIs) as angel investors
contributes substantially to this ecosystem. Tax exemptions for angel investors
provide significant encouragement.
2.4 Industry–Academia Partnerships and Incubation
“A pivotal component for growth of Startups is regular communication and collaboration
within the Startup community, both national as well as international. An effective Startup
ecosystem can’t be created by the Startups alone. It is dependent on active participation
of academia, investors, industry and other stakeholders” (Action Plan 2016). To this
effect, the SAP provides for the following eight action points:

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ADBI Working Paper 1146 V. K. Singh

Organizing Startup Fests for Showcasing Innovation and Providing a

Collaboration Platform
Launch of the Atal Innovation Mission (AIM) with the Self-Employment and Talent
Utilization (SETU) Program
Harnessing Private Sector Expertise for Incubator Setup
Building Innovation Centers at National Institutes
Setting up Research Parks
Promoting Startups in the Biotechnology Sector
Launching Innovation-Focused Programs for Students
Annual Incubator Grand Challenge
The objective of the aforesaid points is to create a culture of first-generation
entrepreneurship. Awareness and the availability of training programs and mentors,
competitions and roadshows, and incubation facilities play an important role in creating
a startup culture.

2.4.1 Building a Startup Infrastructure and Culture

The SAP envisages the organization of startup fests, both national and international, to
showcase innovation and provide collaboration platforms for new entrepreneurs.
Incubator grand challenges motivate new players to participate and test their ideas and
passion for innovation, leading to business ideas. These platforms also allow the
harnessing of private-sector expertise. The national institutes of learning, that is, the
National Institute of Technology (NIT), the Indian Institute of Management (IIM), and the
Indian Institute of Technology (IIT), have become involved by establishing centers of
innovation and entrepreneurships through government funding with an objective of
setting up and scaling up technology business incubators (TBIs) at these NITs/IITs/IIMs.
With an objective of promoting industry–academia collaboration through joint research
projects and consulting assignments, the SAP anticipated the setting up of seven new
research parks in the IIT.

2.4.2 Atal Innovation Mission (AIM)

The AIM is an initiative that promotes the establishment of Atal Incubation Centers (AICs)
for nurturing innovative startup businesses in their quest to become scalable and
sustainable entities in subject specific areas, such as manufacturing, energy, transport,
health, agriculture, education, water and sanitation, and so on. The AIM will provide a
grant-in-aid of up to INR 10 crore for a maximum period of 5 years to cover the capital
and operational expenditures involved in launching an AIC. Entities such as higher
education institutions, groups of individuals, individuals, R&D institutes, the corporate
sector, AIFs registered with the SEBI, and business accelerators are eligible to apply.
The objective of AICs is to “create world class incubation facilities across various parts
of India with suitable physical infrastructure in terms of capital equipment and operating
facilities, coupled with the availability of sectoral experts for mentoring the start-ups,
business planning support, access to seed capital, industry partners, trainings and other
relevant components required for encouraging innovative start-ups.” To create an
environment of scientific temperament, innovation, and creativity amongst Indian
students, the government has established Atal Tinkering Labs in schools. NITI Aayog,
the planning body of the GOI, oversees this initiative. There are also schemes like the

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National Initiative for Developing and Harnessing Innovations (NIDHI) and Million Minds
Augmenting National Aspiration and Knowledge (MANAK).
An analysis of the SAP shows a clear focus of the government on building a startup
culture in the country and facilitating the entrepreneurship revolution. This is a highly
necessary requirement for unemployed youths, who traditionally have looked toward the
job market, especially government jobs, to find useful/fruitful engagement. The success
of the SAP would be a significant cultural transition (Paltasingh 2012).

3. REGULATORY ECOSYSTEM
The Department for Promotion of Industry and Internal Trade (DPIIT), previously known
as the Department of Industrial Policy and Promotion (DIPP), is the nodal agency for
dealing with matters related to startups in India (https://dipp.gov.in). The DPIIT comes
under the Ministry of Commerce and Industry, the Government of India, which also deals
with issues relating to industrial policies and foreign direct investment (FDI). To obtain
the benefits of “startups” under the Startup India initiative, as outlined above, recognition
from DPIIT is necessary. Startups meeting the definition criteria of startups may apply
for recognition in the prescribed format. The government charges no fees for this
recognition.

3.1 Inter-Ministerial Board of Certification (the Board)

The Board undertakes the validation of startups for granting tax-related benefits. The
Board comprises the following three members (initially there were eight members):
Joint Secretary, DPIIT, Convenor
Member Representative, Department of Biotechnology
Member Representative, Department of Science and Technology

3.2 Monitoring Mechanism

To review the progress of the Startup India program on a regular basis, the government
put in place the Monitoring Committee, comprising high officials from different concerned
ministries, to review continuously the progress and implementation of various measures
for the growth of the startup ecosystem (PIB 2019c). The Government of India has further
established the structure of the National Startup Advisory Council (NSAC) to help create
an environment of absorption of innovation in industry and taken measures to foster a
culture of entrepreneurship. The Minister of Commerce and Industry will chair the NSAC
(PIB 2020).

3.3 NITI Aayog

The National Institution for Transforming India (NITI) is the new avatar of the erstwhile
Planning Commission (Yojana Aayog), which came into existence on 1 January 2015 as
the government’s premier think tank. Reflecting the changed dynamics of the new India,
NITI aims to “foster cooperative federalism through structured support initiatives and
mechanisms with the States on a continuous basis, recognizing that strong States make
a strong nation” (PIB 2015). NITI Aayog drives the Atal Innovation Mission
and indirectly supports the SAP through its initiatives; for example, NITI Aayog launched
“Pitch to MOVE—a mobility pitch competition that aims to provide budding entrepreneurs

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ADBI Working Paper 1146 V. K. Singh

of India a unique opportunity to pitch their business ideas to a distinguished jury” (PIB
2018).

4. COMPLEMENTARY FRAMEWORK AND SCHEMES

Startups begin with a small venture, scaling up to a bigger enterprise in due course. As
a legacy of Gandhian philosophy and the focus on the socialistic pattern of
administration, the small-scale sector has been an important agenda item for all political
parties, policy makers, and intelligentsia since independence in India. The special push
for this sector has had the multiple objectives of regional dispersal of industries,
employment generation, and providing a “seedbed for Entrepreneurship” (Uddin 1989;
Singh 2010). There are several complementary frameworks that accelerates the startup
revolution.

4.1 Micro, Small, and Medium Enterprises (MSMEs)

Due to their nature of permeability into local areas, providing large employment
opportunities at a low capital cost, small-scale industries (SSIs) play a crucial role in
economic development. They also help in reducing regional imbalances by creating
opportunities for industrialization of rural and backward areas, assuring more equitable
distribution of the national income and wealth. Due to their focus on socio-economic
development, SSIs have featured consistently in the industrial policies of India (Reddy
2008). Subsequent to an amendment of the GOI (Allocation of Business) Rules 1961,
two ministries, specifically the Ministry of Small Scale Industries and the Ministry of Agro
and Rural Industries, merged to create the Ministry of Micro, Small and Medium
Enterprises (M/o MSMEs) in May 2007. The M/o MSMEs now creates an ecosystem
through policies, projects, programs, and schemes to assist MSMEs in scaling up with
the support of state governments, which have the primary responsibility for MSMEs.
The definition of MSMEs concerns their investment threshold (there is now a proposition
to change this to define them solely on a turnover basis):

Table 2: Classification of MSMEs

Manufacturing Sector
on the basis of Service Sector New Classification Criteria
investment in plant and on the basis of proposed on the basis of
Enterprise machinery investment in equipment annual turnover only*
Not more than INR 25 lakh Not more than INR 10 Not more than INR 5 crore
Micro
lakh
Small INR 25 lakh to INR 5 crore INR 10 lakh to INR 2 crore INR 5 to INR 75 crore
INR 5 crore to INR 10 crore INR 2 crore to INR 5 crore INR 75 crore to INR 250
Medium
crore
Source: DCMSME (2018).

The National Small Industries Corporation Limited (NSIC), working under the Ministry of
MSMEs, has set up six livelihood business incubators under the “Scheme for Promotion
of Innovation, Entrepreneurship & Agro Industry” (ASPIRE). These rapid incubation
centers provide facilities for hands-on training and education on working projects and
offer support to prospective entrepreneurs and start-up companies to start product
manufacturing.

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4.2 Make in India Program

In September 2014, the GOI launched the “Make in India” program with the
objectives to
inspire confidence in India’s capabilities amongst potential partners abroad, the
Indian business community and citizens at large;
provide a framework for a vast amount of technical information on 25 industry
sectors; and
reach out to a vast local and global audience via social media and constantly
keep them updated about opportunities, reforms, etc.
The DPIIT is also the nodal point to run this program; however, a dedicated investor
facilitation cell (IFC) assists investors in seeking regulatory approval and provides hand-
holding services through the pre-investment phase, execution, and after-care support.
While there may be criticism of the success of this program (Green 2014), it
is undeniable that the EODB rankings have significantly improved for India, reflecting the
positive perception of foreign investors in Indian markets. Standup India and then Startup
India followed the Make in India initiative. The government launched the Standup India
scheme with the objective of supporting disadvantaged groups, in particular the
scheduled castes/tribes (SC/ST) and/or female entrepreneurs with bank loans from INR
1 Lakh to INR 1 crore for setting up a greenfield enterprise (a startup).

4.3 Digital India Program

This is an umbrella program, which the GOI launched in 2015, involving multiple
government ministries and departments. The objective of this program is to realize
the full potential of digitization in all walks of life. The Department (now Ministry)
of Electronics and Information Technology (D/MeitY) coordinates this program. There
are nine growth areas in this program, namely the Universal Access to Mobile
Connectivity, Broadband Highways, Public Internet Access Program, Reforming
Government through Technology, e-Governance: e-Kranti—Electronic Delivery of
Services, Electronics Manufacturing, Information for All, IT for Jobs, and Early Harvest
Programs. Startups have a natural home in the digital sector, and this initiative
complements the startup revolution well.

4.4 Skill India Program

While the demographic dividend is a plus factor for any country, it takes no time to
turn negative if youths are not skillful enough for employment. With the objective of
enhancing youth employability through skill development, the government formed a
dedicated Ministry for Skill Development and Entrepreneurship (MSDE) in July 2015.
The National Skill Development Corporation (NSDC) under the guidance of the MSDE
has introduced an initiative that allows aspirant candidates to register for skill
training/learning and employment opportunities through the online portal. The Skill India
Mission under the National Policy on Skill Development and Entrepreneurship 2015
created sector skill councils (SSCs), which the NSDC monitors. It has identified forty
priority sectors based on a skill gap analysis, for example the food industry, healthcare,
telecoms, banking and finance, and so on. It runs National Skill Qualification Framework
recognized courses that meet the requirements and standards of the industry in these
sectors. These courses focus on the practical delivery of work and thus startups can
obtained skilled resources that they may employ in different sectors (MSDE 2009).

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4.5 National Schemes

Inspired by the initiatives and push from the Prime Minister himself, various ministries
and departments of the GOI are complementing the startup revolution by way of more
than a hundred schemes. These schemes may encourage entrepreneurs to test a startup
idea for scalability. Some example of these schemes are:
The Ministry of Electronics and Information Technology—Support for
International Patent Protection in Electronics and Information Technology
(SIP-EIT)
The Khadi and Village Industries Commission under the Ministry of MSME—
Scheme of Funds for Regeneration of Traditional Industries (SFURTI)
The National Minorities Development and Finance Corporation (NMDFC)—
Virasat—A Credit Scheme for Craftpersons
A review of the aforesaid initiatives from the GOI shows how the central government
is geared up the overall machinery to make Startup India successful. For example,
the Startup Yatra (journey) initiative involves a mobile van traveling throughout the state
recording ideas from budding entrepreneurs and offering them the chance of incubation.
However, the success of the GOI schemes like “Startup India” lies in its adaptability and
in the enthusiasm of the state governments.

4.6 MUDRA Loans

To provide business finance for micro-business units, including startups, the GOI has
established the Micro-Units Development and Refinance Agency (MUDRA). Micro
or small businesses operating in the manufacturing, trading, and services sectors
(including startups) are eligible for loans in the following three categories:
Sishu (infant): loans up to INR 50,000
Kishor (adolescent): loans up to INR 5 lakhs
Tarun (young): loans up to INR 10 lakhs

4.7 International Linkages

India has also entered into global partnerships to make the startup ecosystems of India
and its partners closer and to facilitate joint innovation, which it refers to as “international
bridges.” It has entered into such global partnerships with Finland, the Netherlands, the
United Kingdom, the Russian Federation, the United States, Portugal, Japan, Sweden,
Israel, Singapore, and the Republic of Korea. For example, it conceptualized the India–
Korea Startup Hub as part of a joint statement signed between the Korea Trade-
Investment Promotion Agency (KOTRA) and Invest India
on 9 July 2018. The hub’s objective was “to enable collaborations between startups,
investors, incubators, & aspiring entrepreneurs of both countries and provide them
requisite resources for market entry & global expansion.” The State Bank of India and
Mahindra are mentoring the startup grand challenge “to channelize the entrepreneurial
capacity between Indian and Korean Startups to work together and build solutions for
the challenges facing the world for example Credit Rating, Predictive Analytics, Fraud
Detection, Cyber Security, Primary/Secondary/Tertiary Healthcare.”

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5. ROLE OF STATE GOVERNMENTS

India works on the principle of cooperative federalism, which envisages that “national
and state agencies undertake government functions jointly rather than exclusively. The
nation and states would share power, without power being concentrated at any
government level or in any agency” (Srikrishna 2015). India is a large, heterogeneous,
and complex nation, with multiple languages, religions, and ethnicities and over 1.30
billion people (Singh 2007). The country has now evolved from a few political parties
to 1,841 registered political parties (with 7 national, 49 state, and 1,785 unrecognized
parties). In the initial years of independence, the relationship between the center and the
states was stable due to a single party being in power both at the center and in the states.
Over a period, the role of regional parties in sub-national politics in several states
increased, and they had a hold on the coalitions at the central level. The fiscal federalism
in the country was not untouched by these developments and accordingly the fiscal
relationship between the center and the states evolved by way of devising mechanisms
and concessions to retain control (CUTS 2011). The Constitution of India has an inbuilt
mechanism to keep the economic unity of the country through provisions under Part XIII
(Atiabari 1961).
The Seventh Schedule of the Constitution of India provides three lists, specifically the
Union List, State List, and Concurrent List, which people also refer to as List I, List II, and
List III. While the Parliament of India has some supremacy in terms of having precedence
in legislating laws in the concurrent list, it generally would not encroach on the items that
the State List includes. Industries are normally under the purview of the state
governments (Entry 24 of List II) subject to the industries that the Central Law declares
to be expedient in the public interest, including the industries for the purposes of defense
or for the prosecution of war (entries 7 and 52 of List I of the Seventh Schedule of the
Constitution of India). Startups are not a particularly new idea for state governments, as
the states of Andhra Pradesh, Kerela, Rajasthan, and Goa already had a startup policy
before the GOI implemented the SAP in 2016. However, after the SAP, state
governments started a huge push on startup initiatives, which is evident from the fact
that 11 states adopted the policy in 2016 itself, four more did so in 2017, and three
followed in 2018. Now, except the few union territories and northeastern states, all the
states (25 in total) have their own policy to promote startups. However, in terms of the
opening up of startups and the coverage of geographical areas, the following statistics
are quite encouraging:

Table 3: Startup India Recognition Heat Map

484 Districts out of about 732 Districts 29 States (All) 7 Union Territories out of 9
55% in Tier 1 27% in Tier 2 18% in Tier 3
Source: States Startup Ranking Report of 2018.

5.1 Startup Policy of State Governments

An analysis of the startup policies of the 25 state governments shows that they have
developed their startup policies along the broad lines of the SAP; however, the incentives
that they provide to the startup ecosystem vary. A comparison of the nodal agencies of
these state governments indicates that the agencies for implementing the startup policy
are in the hands of:
Department of Industries—8

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Department of MSMEs—4
Department of Information Technology (IT)—9
Special purpose vehicles, like the Entrepreneurship Development and Innovation
Institute in Tamil Nadu—4
While, as natural devolution, the states’ MSME Department could have been the natural
choice for a nodal agency, due to the perception that startups have more to do with
information technology, in the majority of cases, the Department of Information
Technology is the nodal agency. In many of the cases, the startup policy is part of the
broader IT and e-commerce policy.
The startup policies of the states provide startups with a host of fiscal and non-fiscal
benefits. Some of the major ones are the following:
Self-certification in the case of some forms of statutory compliance and single-
window clearance
Interest subsidies on loans
Tax holidays in terms of tax reimbursements
Mentoring assistance
Product development and marketing/commercialization assistance
Availability of land at concession rates
Subsidies on utilities like power
Broadband and internet connection subsidies
Seed funding and scaling-up funding
Infrastructure availability, like co-working space
Reimbursement of IPR (patent and trademark) application charges
Encouragement for startup competitions
Preference/promotion of startups in government procurement

5.2 States’ Startup Ranking

In 2018, the DIPP conducted the first ever States’ Startup Ranking Exercise, with the key
objective “to encourage States and Union Territories to take proactive steps towards
strengthening the Startup Ecosystems within their jurisdictions.” The aim of this ranking
was just like the World Bank’s Ease of Doing Business Rankings, that is, “creating a
healthy competition among states to further learn, share and adopt good practices.” The
government has also announced the Framework for Startup Ranking 2019 to evaluate
progress made from 1 May 2018 to 30 June 2019. One of the major components of this
evaluation framework is the ease of financing startups. With
an objective of infusing competitiveness (competitive federalism) among the state
governments, the GOI launched a ranking framework in 2018 to determine the
robustness of the startup ecosystem in the seven framework pillars and 38 action points,
which are actually the reform areas in focus for promoting a conducive startup ecosystem
(DIPP 2018).

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Table 4: Startup Ranking Framework

Ranking
Framework Number of
Overview Pillar# Framework Pillar Action Points Score
1 Startup policy and implementation 13 7
2 Incubation support 3 20
3 Seed funding support 2 15
4 Funding support—angel and venture 3 10
5 Simplified regulations 4 13
6 Easing public procurement 5 14
7 Awareness and outreach 8 11
Total 38 100
Source: States Startup Ranking Report of 2018.

With an objective of promoting cross-learning and providing impetus for beginners, the
government performed pairing for mentoring. A total of 30 states and UTs participated in
this exercise. In line with their percentile-based grading, the government categorized
states into the following six categories:
Best Performer: 100th percentile (Gujarat)
Top Performers: higher than the 85th and lower than the 100th percentile
(Karnataka, Kerela, Odisha,1 and Rajasthan)
Leaders: higher than or equal to the 70th percentile and lower than or equal
to the 85th percentile (Andhra Pradesh, Bihar, Chhattisgarh, Madhya Pradesh,
and Telangana)
Aspiring Leaders: higher than the 50th percentile and lower than the 70th
percentile
Emerging States: Higher than the 25th percentile and lower than or equal to the
50th percentile
Beginners: Lower than or equal to the 25th percentile
The ranking framework helped the states to take action and work on the key reform areas
necessary for a facilitative startup ecosystem. There are several best practices of the
states along the seven interventions that the ranking framework lists (StartupIndia 2019).
The government has already announced the 2019 ranking framework and
the process is underway for data collection at the startup portal. It has also announced
the National Startup Awards 2020 for startups and ecosystem enablers (incubators
and accelerators).

1 In 2011, the Government of India approved the name change of the State of Orissa to Odisha. This
document reflects this change. However, when reference is made to policies that predate the name
change, the formal name Orissa is retained.

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6. STARTUPS’ PERSPECTIVE ON SMALL

BUSINESS FINANCING
For the success of any new business, access to external finance and the ability to
undertake profitable investment opportunities are especially important (Levine 2005).
Financing for small businesses, including startups, has been their Achilles’ heel. Most of
these startups rely initially on informal channels of funding, like family, friends,
moneylenders, and self-funding. The formal channels of banks are not available to these
new startups due to the requirements of a credit history/rating, the risk and viability of the
business, and so on (Chavis, Klapper, and Love 2011).
Soon after independence, the GOI provided mechanisms to support small-scale
industries through initial funding and national schemes. At the level of state government,
state financial corporations (SFCs) provided the small-scale sector with financial support.
However, one of the greatest challenges in such financing was the “poor lending
decision,” creating “non-performing assets” (NPAs). Under the Startup India scheme, the
GOI created the Fund of Funds under the SIDBI.

Table 5: Number of Startups Provided with Financial Assistance

under the Fund of Funds
(Year-Wise as on 13 June 2019*)
Financial Year 2016–17 2017–18 2018–19 2019–20*
No. of startups given financial assistance 62 58 98 31
under the FFS
Source: PIB (2019a).

6.1 Private Funding

Robust private funding ecosystem is a sine qua non for a successful startup revolution.
Startups in India, both tech and non-tech, face a dearth of funding beyond the Series B
stage. The RBI, in its report, suggested, “A board that allows equities exchange of these
SMEs can effectively help address this problem. It will also give the wider public to
participate in the dynamic Indian startup ecosystem. The Innovators Growth Platform
(IGP) proposed by SEBI is a welcome development. Some modifications are required
for the success of IGP. SEBI must relax the norms defining the Accredited Investors (AIs)
who could participate. To create enough liquidity, participation of HNIs, Mutual Funds,
FIIs, etc. must be encouraged. Most technology startups or high-growth startups are
often loss making hence there should be no profitability requirement to list. SEBI should
facilitate dual class share structure which is very popular with tech startups across the
world. Further, standards for internal governance of MSMEs may be developed that can
help MSMEs identify current gaps and areas of improvement” (RBI 2019).

6.2 CSR Funding for Incubators

The Companies Act 2013 (CA) requires companies beyond a threshold to spend at least
2% of their average net profits made during the three immediately preceding financial
years in one or more of the areas specified in the Seventh Schedule of the Act (section
135 of the CA). One of the areas in which such investment is possible is the contribution
that specified institutes engaged in promoting scientific research make
to incubators.

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ADBI Working Paper 1146 V. K. Singh

Table 6: CSR Spending in the Area of Technology Incubators

FY 2014–15 FY 2015–16 FY 2016–17 FY 2017–18
Year (INR Cr.) (INR Cr.) (INR Cr.) (INR Cr.)
Spending in technology incubators 4.74 26.34 23.09 15.55
Overall CSR spending 10,065.93 14,517.37 14,329.78 13,623.62
Source: https://www.csr.gov.in/developmentlist.php.

7. STARTUP ECOSYSTEM UNTIL 2019

The Startup Action Plan of the GOI has no doubt provided much-needed support
and encouragement for entrepreneurship in India. The post-SAP data on startups
with DPIIT recognition are very encouraging, making India the third-largest startup
ecosystem in the world with close to 25,000 startups.

Table 7: State-Wise Number of Startups that the DPIIT Has Recognized

(as of 5 November 2019*)
States with a Startup Policy 2016 2017 2018 2019* Total
1 Andaman and Nicobar 0 1 2 5 8
2 Andhra Pradesh 4 103 162 140 409
3 Assam 10 35 68 57 170
4 Bihar 1 48 149 15 213
5 Chhattisgarh 11 57 121 143 332
6 Goa 2 20 44 32 98
7 Gujarat 29 298 452 514 1,293
8 Haryana 28 271 487 591 1,377
9 Himachal Pradesh 0 9 17 25 51
10 Jharkhand 2 35 88 80 205
11 Karnataka 67 886 1,213 1,374 3,540
12 Kerala 24 172 332 563 1091
13 Madhya Pradesh 7 107 297 272 683
14 Maharashtra 93 1,104 1,661 1,778 4,636
15 Manipur 0 4 7 4 15
16 Nagaland 1 4 2 2 9
17 Odishaa 4 115 168 142 429
18 Punjab 7 31 70 81 189
19 Rajasthan 14 140 246 300 700
20 Tamil Nadu 54 271 459 489 1,273
21 Telangana 20 328 511 492 1,351
22 Uttar Pradesh 29 413 791 709 1,942
23 Uttarakhand 4 45 69 84 202
24 West Bengal 8 181 275 255 719
439 4,681 7,691 8,147 20,935
a
In 2011, the Government of India approved the name change of the State of Orissa to Odisha. This document reflects
this change. However, when reference is made to policies that predate the name change, the formal name Orissa
is retained.
Source: PIB (2019d).

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ADBI Working Paper 1146 V. K. Singh

Table 8: State-Wise Number of Startups that the DPIIT Has Recognized

(as of 5 November 2019*)
States/Union Territories without a Startup Policy 2016 2017 2018 2019* Total
1 Chandigarh 9 22 27 32 90
2 Dadra and Nagar Haveli 0 3 0 2 5
3 Daman and Diu 0 1 0 1 2
4 Delhi 75 743 1,187 1,152 3,157
5 Meghalaya 0 0 2 6 8
6 Mizoram 0 0 2 1 3
7 Pondicherry 0 3 16 6 25
8 Sikkim 0 1 0 2 3
9 Tripura 0 0 4 5 9
84 773 1,238 1,207 3,302
Source: PIB (2019d).

7.1 Major Sectors for Startups

The traditional perception is that startups operate in the area of information technology
(primarily software development). However, the latest sector-wise data on startups show
that they operate in more than 45 different sectors. The top 15 sectors in which startups
operate in India are the following:

Table 9: Major Sectors for Startups

Sl. No. Sector 2016 2017 2018 2019* Total
1 IT Services 0 610 1,417 1,351 3,378
2 Healthcare and Life Sciences 0 424 768 808 2,000
3 Education 0 313 767 658 1,738
4 Food and Beverages 0 179 365 450 994
5 Professional and Commercial Services 0 190 388 400 978
6 Agriculture 0 174 319 427 920
7 Finance Technology (FinTech) 0 160 237 362 759
8 Green Technology 0 128 274 310 712
9 Technology Hardware 0 152 260 286 698
10 Renewable Energy 0 142 292 262 696
11 Enterprise Software 0 148 249 263 660
12 Internet of Things (IOT) 0 143 265 246 654
13 Retail 0 116 241 224 581
14 Artificial Intelligence (AI) 0 73 218 288 579
15 Construction 0 83 212 282 577
17,519
Source: PIB (2019d). * As of 5 November 2019.

While IT services still lead, newer focus areas, like FinTech, the IOT, AI, aggrotech, and
renewable energy, are encouraging. Realizing the potential of new areas like FinTech
(technological solutions for providing financial services), one of the states in India
(Maharashtra) has come up with a dedicated FinTech policy for startups with a vision of
becoming a “global FinTech hub.” Another example is the regulatory sandbox regulations

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that the Insurance Regulator in India implemented to facilitate FinTech innovations in the
insurance sector.

7.2 Startup Culture

One of the major challenges for the government lies in creating a culture of
entrepreneurship and developing confidence in the minds of the younger generation
(Pereira 2007). Looking at the numbers of new startups and initiatives at the level of
schools and universities, the future in India looks positive; however, it will take more time
to see the results of these initiatives. The Global Entrepreneurship Monitor (GEM) Report
for India on entrepreneurial framework conditions ranks it higher on almost
all its parameters, which include government support, internal market dynamics, and
infrastructure. However, entrepreneurial and behavioral attitudes, like the motivational
index, established business ownership rate, and so on, still require improvement (GEM
2019). It is necessary to nurture the risk-taking appetite among youths so that they can
venture into entrepreneurship, which has generally been associated with families with a
business background.

7.3 Female Startup Founders

The phenomenon of female entrepreneurship is becoming increasingly global (Estrin and
Mickiewicz 2011). In India, women occupy about 30% of corporate senior management
positions, which is notably higher than the global average (24%); however, women
constitute only 13.76% of the total entrepreneurs, and the figure is even lower in the case
of startups, about 10% (Colaco and Hans 2018). Different state governments have
devised incentives specifically to promote female entrepreneurship; for example, under
MSMEs, Trade Related Entrepreneurship Assistance and Development
(TREAD) provides women “with trade related training, information and counselling &
grant of up to 30% of the total project cost.” A dedicated online portal called udyam sakhi
(entrepreneur friend) helps to provide women with information on entrepreneurship.

7.4 Bureaucratic Hassle

Irrespective of several measures to eliminate the bureaucratic hassle for the startup
ecosystem, in a general review of writings/reviews on this subject, the perception of the
ineffectiveness of bureaucracy has emerged as one of the prominent factors. While the
situation has changed at the central level to a greater extent (StartupIndia 2020), reforms
in the complete hierarchy are still desirable. This is further complicated when different
sets of governments at the state level become involved. Digitization and states’ ranking
framework have helped to bring some standardization; however, it is still a work in
progress.

7.5 Funding Blues

Beating the “valley of death” has been a pertinent issue that startups have faced. The
GOI has undertaken several initiatives in this regard by providing support through initial
seed funding, incubation support, and various subsidies; however, this support has not
been sufficient to bail out the startups. There is a need for startups to secure funding
from private players (VCFs) and maybe even from the public at large (IPOs).
On the other side of the coin, some authors have criticized the paternalistic and
bureaucratic approach of the government in promoting small-scale industries, which

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ADBI Working Paper 1146 V. K. Singh

leads to dependency. They have suggested that, when developing a self-reliant modern
small-scale industry, it is important to make it free. How long can the protection last
(Tendulkar and Bhavani 1997)? Taking this argument forward, overreliance on
and expectation of government support are not a good idea. The ecosystem has to
generate the required trust from private investors, as private equity (PE) funding
has proved to be a more stable source of equity funding (Pandit, Tamhane, and
Kapur 2015).

7.6 Startup Failures

Studies have shown that 90% of startups fail within 3–5 years of commencing operation
(Failory 2020). However, during this research, it became apparent that there is a
conspicuous absence of an official figure of closed startups and an analysis and lessons
learnt on the Startup India portal. This may be because the SAP is just 4 years old and
it is too early to judge the success/failure on the number of startups closed.
The “Stayzilla” Case—The founder of this travel startup in India entered into a wrangle
with one of its creditors, which led to cases of fraud and so on. The issue became murkier
to the extent that the robustness of the startup ecosystem came into question. Presently,
the matter is still under liquidation proceedings. In such cases, preparing an exit strategy
from the beginning, including pre-packaged insolvency, M&A, IPO, and so on, would be
greatly useful (Chambers 2019).

8. CONCLUSION AND SUGGESTIONS

A review of the Startup Action Plan of the GOI shows a positive impact on the number of
startups, and it seems that the startup ecosystem has reached the early traction stage.
One of the major requirements for this initiative to sustain momentum is the availability
of funds so that the SAP is able to emerge from the “valley of death,” a crucial period
that requires acceleration and consistent efforts. There is a point at which one can state,
“What entrepreneurs need, far more than the fine words or advice of politicians or
academics, is the support, solace, and help of other entrepreneurs” (Broughton 2012).
There is a greater need for established businesses to handhold the startups and
encourage them through mentorship, incubation, and financial support, crafting their role
in the existing ecosystem of business. People should not perceive the startup revolution
as a fad.
While the SAP does not have any fixed tenure as such, its performance in producing the
desired results of creating an ecosystem of entrepreneurship that would drive
“sustainable economic growth and generate large scale employment opportunities” is
subject to scrutiny from the Parliament through the elected representatives.
The RBI Committee on MSMEs deliberated on all the aspects relating to startups in India
and found that “the major reason for migration of startups to other countries is because
of better enabling environment such as tax concessions, well developed infrastructure,
ease of doing business, exit policy, etc. Hence, the Committee was of the view that
financial incentives and excellent infrastructure facilities must be deployed to retain
successful Indian startups and to lure the best talent from across the world to start
businesses in India” (RBI 2019).

There is a need to focus on developing a culture of entrepreneurship. The mindset of

youths is still toward fixed-tenure employment rather than venturing out in startups. For

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ADBI Working Paper 1146 V. K. Singh

a successful startup revolution, this attitude needs to change. Business failures should
act as lessons for new entrepreneurs, and thus it is important to bring forward failure
case studies of startups as a reference point to avoid known potholes.
The skewness of funding support toward IT- and software-focused startups requires
diversion. There is a need to invite innovation in the areas of renewable energy,
aggrotech, smart cities, health, water, and plastic waste management (Dhindaw and
Kumar 2019). The startup ecosystem also requires integration into the overall economic
development perspective of the country (Jain 2011). It cannot be a standalone policy.
Whenever we discuss startups, we discuss them from the angle of startups themselves,
but an analysis from the sectoral side concerning how small innovations can help a
particular sector is necessary. One such analysis on how startups can ameliorate the
conditions of Indian farmers has shown the way for other sectors (Anand and Raj 2019).
It is good news that the startup ecosystem so far has performed well in accordance with
the SAP. Rising numbers of soonicorns (startups that have the potential to become
unicorns soon) and unicorns (startups with a value over a billion US dollars) in India are
witnesses. A robust startup ecosystem will not only boost the economy but also
contribute to the sustainable development goals (SDGs), specifically SDG 8 on decent
work and economic growth. The recent announcement of the Government
of India about the creation of the National Infrastructure Pipeline (NIP) to achieve
the GDP of $5 trillion by 2024–25 raises further hope for the startup revolution. The
hallmark of India’s efforts in creating a startup ecosystem is the GOI’s regular active
interventions with the required policy and regulatory changes.

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