Startups should be left to start up on their own
Rarely are such ventures really innovative. Most of them are set up to chase valuation and then hope to sell out. That’s one reason — not the only one — for the high failure rate for startups. But the question is: Should the government get its hands messy by getting into all of this?columns Updated: Jan 25, 2016 02:09 IST
It was the early 2000s. India’s information technology (IT) industry had touched what can be called its inflexion point — the turning point after which it would grow dramatically. It was around then that I had asked the personable CEO of an Indian company that would soon become an iconic symbol of the IT industry what he thought was the single-most important reason for India’s IT boom. India’s IT companies, as we all know, benefited hugely from many things. An especially important one was the timing. The US economy was in recession then and many American companies, especially those in banking and financial services, were under massive pressure to cut their costs and outsource several functions, including their IT needs; and Indian IT companies were an attractive cost-effective option for them. Yet, surprisingly the CEO’s reply didn’t mention any of that. He said the most important reason for his industry’s growth was the fact that the government had left it alone and not tried to meddle in it.
I was reminded of that conversation nearly 15 years later last week when Prime Minister Narendra Modi launched the action plan for Startup India at a well-attended and equally well-hyped event in Delhi. The government’s policy for startups — no doubt well-intentioned — include public funding of venture capital firms; tax incentives; incubation; easier exits and so on. But they come with worrisome things — such as more red tape. For instance, in order to qualify for the various government schemes startups will have to meet a 125-word definition, which, among other things, requires certification from an inter-ministerial board. What is more, a corollary to the wordy definition is a wordier explanation of the terms that are used in the definition. To be eligible for the government’s schemes meant for startups they would need recommendations, own patents and get other approvals in what appears to mimic a return to bureaucratic procedures that various governments have since 1991 been at pains to dismantle.
More worrisome is the proposal by the government to invest Rs 10,000-crore worth of public money in venture capital funds that are registered with India’s stock market watchdog, SEBI. Venture capital funds operate with risky business models — the startups they invest in have high failure rates and it is not uncommon for nine out of 10 of them coming a cropper. Should the government invest public funds, which is just another description of money that is contributed as taxes paid by people like you and me, in such risky ventures? Besides, many of the proactive venture funds that have invested in India’s startups aren’t even registered with SEBI. Actually, they don’t need to. And, the startup culture is doing pretty well even without a ‘helping hand’ from the government. India is believed to have the highest number of startups (4,200-4,400) in the world after the US and the UK; every day three or four are born; and, in 2015 alone, they received an estimated $5 billion of funding.
Yes, the startup culture has also meant the emergence of an inexplicable herd phenomenon where entrepreneurs clone other entrepreneurs by the dozen (just take a look at how many similar online retail companies there are; or e-grocers; or food delivery companies; or e-taxi services). Rarely are such ventures really innovative. Most of them are set up to chase valuation and then hope to sell out. That’s one reason — not the only one — for the high failure rate for startups. It’s also an issue that the market forces will eventually sort out. But the question is: Should the government get its hands messy by getting into all of this? Maybe not.
But there are things the government can get into. Every month a million young Indians join the workforce; but only a tenth of them manage to land jobs. Moreover, half of that million have to eke out a living from over-burdened farms. Instead of funding patented ideas and heavily cloned startups, the government could shift its focus elsewhere such as the social sector. It could encourage startups in high-deficit areas such as rural health and diagnostic services; marketing and e-payment services for farmers; or village transportation. Such ventures can certainly benefit those who need those services but they can also generate jobs for India’s growing numbers of youth. That’s what the government should start up.
The author is the editor-in-chief of Hindustan Times, and tweets as @sanjoynarayan
Views expressed are personal.