GS-3 : Government policies and interventions for development in various sectors, Indian Economy and issues relating to growth, development and employment.

Key phrases: Startups, Startup Ecosystem, Unicorns, Valuation, Startup India,Atal Innovation Mission

Why in News?

The PM has said Indians are not just dreaming of becoming job seekers, but also job creators and that this would strengthen India’s stature on the global stage, highlighting the startup-boom in the country.

Keypoints:

• India has more than 70 unicorns or startups that have crossed the valuation of more than one billion dollars.
• In a country with a large youth population, three aspects matter —ideas and innovation, the spirit of taking risks, and the ‘can do’ spirit.
  • When these three things combine, phenomenal results are produced and miracles happen.
• The PM also interacted with a college student named Mayur Patil, who through his start-up, was working on improving mileage of vehicles and reducing their carbon emissions.

Startup Boom in India:

• India is witnessing a golden chapter in the history of Indian entrepreneurship, with it being counted amongst the largest startup ecosystems in the world with over 41000+ recognised startups by DPIIT.

  

  • Indian startups have raised over $31.2 billion in 11 months of 2021 from investors, nearly three times 2020’s $11.2 billion, and more than double the previous record of $13.1 billion in 2019.
  • 2021 has seen 40 unicorns from India so far, compared to 26 unicorns in the entire decade prior.

Once named for their rarity, unicorns have become mainstream, with businesses from real estate to software to job portals attracting frenzied funding.

What are Startups?

As per DPIIT, an entity shall be considered as a Startup:

• Upto a period of ten years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
• Turnover of the entity for any of the financial years since incorporation/registration has not exceeded one hundred crore rupees.
• Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
  • Provided that such entity is not formed by splitting up, or reconstruction, of a business already in existence.
  • An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/registration or if its turnover for any previous year exceeds one hundred crore rupees.

However, this definition is limited only for purpose of Government Schemes

Reason for the growth:

• Enabling ecosystem under Start-up India Program, which includes:
  • Legal Support and fast-tracking patent examinations
  • Funding support through Fund of Funds ( Corpus of Rs. 10,000 Crore)
  • Relaxed norms for public procurement for startups.
  • Faster Exit of startups: notified as ‘Fast-track firms’.
  • Fast track firms can wind-up operations within a period of 90 days.
  • Credit guarantee fund or startups
  • Tax exemptions in form of capital gains, upto three years for profit, above fair investment value
• Further boosted by Atal Innovation Mission with SETU Program
• Digitisation and the rising online consumer base in India
• Availability of talented pool of skilled Human Resource.
• Investors too are doubling down seeing the prospect of unexpected returns and anticipate a technological revolution.

There has been an increased liquidity in the US market and reallocation of funds from China to the Indian startup ecosystem following the country’s crackdown on •tech companies.

Issues involved with such a rapid growth:

• Aggressive valuations for unproven business models and investors jostling to fund ideas they have not fully analysed has also created fears of a bubble, that some of these companies or valuations cannot sustain.
  • Fintech firm Paytm’s IPO - India’s biggest so far, saw a tepid response, and its shares fell over 40 percent in days.
• A lot of money is going to relatively fewer companies.
  • Fast-growing companies have raised large funding rounds at double and triple their previous valuations in a few months - Unacademy, OfBusiness, Infra.market and Meesho to name a few.
  • Data sourced from industry tracker Venture Intelligence showed that almost 50% of the $24.5 billion in total funds raised by Indian startups between January and September has been ploughed into 73 companies in follow-on rounds.
  • Investors are willing to pay a premium to companies with proven track records, rather than put their dry powder (investible capital) on ‘probable turnarounds’ or younger companies
• Risk investors are now keen to pump in more money into top players eyeing IPOs over the next two to three years, making exit garnering the profit. This will lead to drastic decrease in Company’s valuation.
• Burning Out Phenomenon : Many entrepreneurs are on the brink of burning out, spend days obsessing over their competition rather than chalking out their own plans.
• Rapid expansion drives undertaken by internet startups who work with a ‘growth at all costs’ mindset- encouraged by founders and investors, without giving due diligence for need, which later leads to massive job losses.
• Unhealthy Competition for funding: In multiple sectors, from commerce to fintech to software, companies are raising successive rounds at double and triple and triple their previous valuations only because a competitor did the same, and they don’t want to be seen as lagging.
• A talent crunch is becoming startups’ biggest cause for worry, giving 100-150% salary hikes and still unable to retain talent, unable to sustain their growth.
   

Conclusion:

• Last few years have been monumental in India’s entrepreneurship growth story. With unprecedented collaborations and collective efforts of ecosystem at large, the nation now is geared up for next set of growth under Aatma Nirbhar Bharat. The need is to diversify this growth along Sectors, innovations and geographies.

Mains:

Q. Critically examine the position of India as the global hub for Start-up Ecosystem.(150 words).