The Indian Startup Ecosystem: A Global Perspective

Aproud moment for India was to have been ranked as the 5th most
startup-friendly economy in the world, in 2019. This was based on five
parameters: human capital investment, research and development,
entrepreneurial infrastructure, technical workforce and policy dynamics.
Despite losing the first four positions to the USA, UK, Canada and Israel,
India has come a long way due to various government schemes such as
Startup India, Make In India, Digital India, the setting up of the
Biotechnology Industry Research Assistance Council (BIRAC) and many
more which foster a culture of entrepreneurship and innovation in the
country. However, India has lagged behind other countries in two aspects
majorly; innovation and taxation. The persistent dearth of successful
innovation and the recent ‘Angel tax issue’ have discouraged investors
from providing funds to Indian entrepreneurs for the creation of their
own startups.

As per Global Innovation Index 2019, India stood at the 52nd position out
of a total of 129 countries for capacity and success in innovation. For a
country that is the fifth leading startup- friendly economy globally, to rank
so poorly in innovation is nothing short of a disgrace. This lack of
innovation is clearly depicted by India’s relatively low expenditure on
research and development. Although India stands at the 7th position
when it comes to absolute money spent on R&D (after adjusting PPP) with
a mammoth expenditure of $48.1 billion. However, this generally isn’t
enough, given the large geographical area and population.

The relative figures show a different reality altogether. India’s

expenditure on R&D continues to be as low as 0.8% of the GDP, much
lower than countries like South Korea at 4.3%, Israel at 4.2% and Japan at
3.4%. The lack of quality research is evidenced by the fact that many of
India’s startups are nothing but an emulation of successful global ideas
fine-tuned to serve local needs. Talk about the American Uber and Indians
have an Ola. Think about Spotify and we have the Indian version Gaana.
For Amazon, we have Indian competitors, Flipkart and Snapdeal. For
Airbnb, we have OYO Rooms. We have the Indian Zomato and Swiggy as
replacements of the middle-eastern Talabat. All these foreign startups
were established before we Indians copied their ideas and made it our
own. One cannot deny that India has become a startup hub with a total of
8625 startups in 2018 across various fields like edtech, traveltech, fintech,
logistics and healthtech, yet it is even harder to disagree with the reality
that the number of these startups formed out of original new ideas of
Indians is laughably low. This is perhaps due to loopholes in the Indian
education system that fails to provide the requisite infrastructure, skills
and highly-qualified, research-oriented teaching faculty in universities.
Next lies the issue of the ‘Angel tax’ which has been tormenting the Indian
startup ecosystem lately. Angel tax is an ‘income tax’ payable on capital
raised by ‘unlisted’ companies via issue of shares, where income refers to
the share price in excess of the fair market value of the shares sold. The
investors providing funds to these companies also have to pay a ‘gift tax’
on the excess amount. The Angel tax was introduced in India in 2012 with
the aim to curb money laundering by various small companies by
imposing a high tax rate of 30.9% on all unlisted companies in the country,
along with a tax on the investors. It all started when owners of small-scale
companies started laundering their tax-evaded income by selling their
shares to investors at a price above the fair market value. In reality, the
investors got the money to be invested in the companies from the owners
themselves and charged commission for helping the owners carry out the
money laundering process smoothly. The Angel tax successfully curbed
such malpractices.

However, this started creating problems for startups (which are often
unlisted companies), when honest angel investors who provided seed
funding to these startups had to start paying an exorbitant tax on the
excess amount, they began putting their money elsewhere. This gave
entrepreneurs a hard time in finding that first cheque to kick start their
business, thus, resulting in unnecessary road kills of many good ideas.
However, there was a sigh of relief when Indian Finance Minister Nirmala
Sitharaman announced in her 2019 Budget that startups and their
investors, who will provide the requisite declarations on their returns,
will not be subject to scrutiny under the Angel tax. The government also
eased the norms for companies to qualify as startups by increasing the
upper limit for the turnover of the tax exempt startups from ₹250 million
to ₹1 billion. Furthermore, an entity will now be considered a startup for
upto 10 years after its incorporation, as compared to 7 years earlier.

India has definitely come a long way, but still has a lot to learn from how
other countries have successfully implemented some out-of-the-box
policies to create a vibrant startup ecosystem. The global startup economy
has achieved great heights with a total economic value of nearly $3 trillion
in 2019, a 20% increase in worth from the prior two periods. This growth
is largely driven by high-tech startups in the fields of advanced
manufacturing and robotics, blockchain, agritech and new food, and
artificial intelligence. Meanwhile, sectors such as edtech, digital media,
gaming and adTech have seen falling levels of investment.

Some countries have outperformed others in terms of innovation, friendly

government policies and entrepreneurial mindset. Israel is one such
country which boasts of the highest venture capital investments as a
percentage of GDP. The influx of highly educated Jewish immigrants in the
1990’s and the training of people in sophisticated technology, due to
compulsory military service, has given a boost to technological research
in this small Middle-Eastern country.

The government has played an instrumental role in ensuring that this

abundant human capital does not go to waste by providing adequate
funding to convert their ideas into businesses. The Matching Grants
Programme is one such government initiative that was launched with the
aim to eliminate the financial risk associated with the ambiguity in the
outcome of a research. The firms simply have to submit their R&D
proposals to the chief scientist, and grants are awarded on a competitive
basis, with 66% to 90% of the research costs covered. These grants act as
high-risk loans, where successful projects repay the funding received via
a deduction of a small percentage of annual sales whereas the government
bears the costs of the unsuccessful projects. This policy played a major
role in boosting the high-tech industry of Israel and made it the ‘Startup
Nation’ that it is today. In India, the government does provide funds to
startups to carry on R&D, but it does not bear the risk of failure of startup.
With over 90% of Indian startups failing in the initial years due to lack of
original ideas and innovation, a government policy mirroring Israel’s will
inculcate a sense of confidence conducive to taking bolder risks by
entrepreneurs.

Canada is also known for its startup hubs like Montreal, Vancouver and
Toronto. Canada has successfully launched and implemented NextAI: the
first global programme to build Canada’s Artificial Intelligence ecosystem.
It not only provides funding to talented teams and individuals in AI
ranging from $50,000 to an additional $150,000 to the top performers, but
also provides them with education from AI experts, a network of like-
minded innovators and corporate mentors, office space in AI-focused
hubs, and easy access to visas to entrepreneurs from abroad. R&D on AI is
non-existent in India and initiatives like NextAI must be undertaken in
collaboration with educational institutions, the corporate sector and
international governments to provide Indian researchers the required
expertise and monetary support to kickstart such a programme.

In European countries, like the UK, private companies help individuals

and firms in the paperwork of proving and estimating the costs of R&D for
a meagre commission, a facility non-existent in India. This has great
prospects in India because this Asian country requires every fund-raising
request to go through 14 procedural stages against the global average of
4.3.

However, the single most important aspect which Indians lack is the
Israeli ‘chutzpah’, which literally translates to audacity and boldness.
Entrepreneurs in countries like USA, UK, Canada, Japan and Germany are
risk-takers who are not afraid to fail. Unlike India, where being practical
and financially secure is given far more significance than the ability to
dream big, failure is merely seen as a learning experience and a stepping
stone to success in these counties. The Indian startup economy has not yet
seen its full potential due to the timid and risk-averse nature of people,
which is reiterated time and again, thus, creating a mental barrier in
people. However, India is changing for the better, with a bold, young
generation ready to take the risks of having their own businesses. India is
treading the correct path. All it needs to do is learn from the best; whether
that is innovative governmental policies or Chutzpah, and finally,
implement it efficiently in their country.

7 sources of start-up financing:=

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Putting all your eggs in one basket is never a good business strategy. This is especially
true when it comes to financing your new business. Not only will diversifying your sources
of financing allow your start-up to better weather potential downturns, but it will also
improve your chances of getting the appropriate financing to meet your specific needs.
Keep in mind that bankers don't see themselves as your sole source of funds. And
showing that you've sought or used various financing alternatives demonstrates to
lenders that you're a proactive entrepreneur.

Whether you opt for a bank loan, an angel investor, a government grant or a business
incubator, each of these sources of financing has specific advantages and
disadvantages as well as criteria they will use to evaluate your business.
Here's an overview of seven typical sources of financing for start-ups:

1. Personal investment
When starting a business, your first investor should be yourself—either with your own
cash or with collateral on your assets. This proves to investors and bankers that you have
a long-term commitment to your project and that you are ready to take risks.
 2. Love money
This is money loaned by a spouse, parents, family or friends. Investors and bankers
considers this as "patient capital", which is money that will be repaid later as your
business profits increase.
When borrowing love money, you should be aware that:

 Family and friends rarely have much capital

 They may want to have equity in your business
 A business relationship with family or friends should never be taken lightly
3. Venture capital
The first thing to keep in mind is that venture capital is not necessarily for all
entrepreneurs. Right from the start, you should be aware that venture capitalists are
looking for technology-driven businesses and companies with high-growth potential in
sectors such as information technology, communications and biotechnology.
Venture capitalists take an equity position in the company to help it carry out a promising
but higher risk project. This involves giving up some ownership or equity in your business
to an external party. Venture capitalists also expect a healthy return on their investment,
often generated when the business starts selling shares to the public. Be sure to look for
investors who bring relevant experience and knowledge to your business.

BDC has a venture capital team that supports leading-edge companies strategically
positioned in a promising market. Like most other venture capital companies, it gets
involved in start-ups with high-growth potential, preferring to focus on major interventions
when a company needs a large amount of financing to get established in its market.
4. Angels
Angels are generally wealthy individuals or retired company executives who invest
directly in small firms owned by others. They are often leaders in their own field who not
only contribute their experience and network of contacts but also their technical and/or
management knowledge. Angels tend to finance the early stages of the business with
investments in the order of $25,000 to $100,000. Institutional venture capitalists prefer
larger investments, in the order of $1,000,000.
In exchange for risking their money, they reserve the right to supervise the company's
management practices. In concrete terms, this often involves a seat on the board of
directors and an assurance of transparency.

Angels tend to keep a low profile. To meet them, you have to contact specialized
associations or search websites on angels. The National Angel Capital
Organization (NACO) is an umbrella organization that helps build capacity for Canadian
angel investors. You can check out their member’s directory for ideas about who to
contact in your region.
5. Business incubators
 Business incubators (or "accelerators") generally focus on the high-tech sector by
providing support for new businesses in various stages of development. However, there
are also local economic development incubators, which are focused on areas such as job
creation, revitalization and hosting and sharing services.

Commonly, incubators will invite future businesses and other fledgling companies to
share their premises, as well as their administrative, logistical and technical resources.
For example, an incubator might share the use of its laboratories so that a new business
can develop and test its products more cheaply before beginning production.

Generally, the incubation phase can last up to two years. Once the product is ready, the
business usually leaves the incubator's premises to enter its industrial production phase
and is on its own.

Businesses that receive this kind of support often operate within state-of-the-art sectors
such as biotechnology, information technology, multimedia, or industrial technology.

MaRS – an innovation hub in Toronto – has a selective list of business incubators in

Canada, plus links to other resources on its website.
6. Government grants and subsidies
Government agencies provide financing such as grants and subsidies that may be
available to your business.
Criteria
Getting grants can be tough. There may be strong competition and the criteria for awards
are often stringent. Generally, most grants require you to match the funds you are being
given and this amount varies greatly, depending on the granter. For example, a research
grant may require you to find only 40% of the total cost.

Generally, you will need to provide:

 A detailed project description

 An explanation of the benefits of your project
 A detailed work plan with full costs
 Details of relevant experience and background on key managers
 Completed application forms when appropriate
Most reviewers will assess your proposal based on the following criteria:

 Significance
 Approach
 Innovation
 Assessment of expertise
 Need for the grant
Some of the problem areas where candidates fail to get grants include:

 The research/work is not relevant

 Ineligible geographic location
 Applicants fail to communicate the relevance of their ideas
 The proposal does not provide a strong rationale
 The research plan is unfocused
 There is an unrealistic amount of work
 Funds are not matched
7. Bank loans
Bank loans are the most commonly used source of funding for small and medium-
sized businesses. Consider the fact that all banks offer different advantages, whether it's
personalized service or customized repayment. It's a good idea to shop around and find
the bank that meets your specific needs.

In general, you should know bankers are looking for companies with a sound track record
and that have excellent credit. A good idea is not enough; it has to be backed up with a
solid business plan. Start-up loans will also typically require a personal guarantee from
the entrepreneurs.

Small Business Administration (SBA)

What Is the Small Business Administration?
The Small Business Administration (SBA) is an autonomous U.S. government
agency established in 1953 to bolster and promote the economy in general by
providing assistance to small businesses. One of the largest functions of the SBA
is the provision of counseling to aid individuals trying to start and grow
businesses.

On the agency’s website, there is a wealth of tools to assist small businesses

including a small business planner and additional training programs. Localized
SBA offices throughout the United States and associated territories offer in-
person, one-on-one counseling services that include business plan writing
instruction, and assistance with small business loans.

The SBA is headed by the administrator and deputy administrator, and also has
a chief counsel for advocacy and inspector general—all of which are confirmed
by the Senate.

The Small Business Administration has at least one office in every state.
Understanding the Small Business Administration
The Small Business Administration offers substantial educational information with
a specific focus on assisting small business startup and growth. In addition to
educational events offered on the SBA’s website, local offices also provide more
personalized special events for small business owners.

According to its website, the SBA provides the following services to small
businesses:

 Access to capital: The agency offers a variety of financial resources for

small businesses including microlending, or small loans that are issued to
those who wouldn't otherwise qualify for financing.
 Entrepreneurial development: This is driven by counseling services and
low-cost training provided by the SBA. This is available to both new and
existing business owners.
 Contracting: The SBA reserves 23% in government contracting dollars for
small businesses with the help of other federal departments and agencies.
 Advocacy: The agency acts as an advocate by reviewing legislation and
protecting the interests of small business owners across the country.

The agency has helped small businesses across the country get access to loans,
loan guarantees, contracts, and other services.

The History of the SBA

The SBA was established by President Eisenhower when he signed the Small
Business Act in the summer of 1953. In its more than six decades of existence,
the SBA has been threatened on numerous occasions. The House of
Representatives, controlled by the Republicans in 1996, had the SBA slated to
be eliminated. However, the agency survived this threat and went on to receive a
record budget in 2000.

The SBA faced another threat from President Bush and his administration.
Though attempts to cut the agency’s loan program saw significant resistance in
Congress, the SBA’s budget was cut repeatedly every year between 2001 to
2004, when certain SBA expenditures were frozen altogether.

KEY TAKEAWAYS

 The Small Business Administration is a government agency established in

1953 to bolster and promote the economy by providing assistance to small
businesses.
 The SBA is headed by the administrator and deputy administrator who are
confirmed by the Senate.
 The agency offers a variety of resources to small businesses including
access to capital, entrepreneurial development, government contracting,
and advocacy services.
 The SBA's loan guarantee program is among its most visible elements.
The SBA Loan Program
The loan programs offered by the SBA are among the most visible elements the
agency provides. The organization does not offer grants or direct loans, with the
exception of disaster relief loans, but instead, guarantees against default pieces
of business loans extended by banks and other official lenders that meet the
agency’s guidelines. The number one function of these loan programs is to make
loans with longer repayment periods available to small businesses.

Loans backed by the SBA include 504 Loan—also called a grow loan— which
provides small businesses with financing to buy some of the fixed assets they
need to run their operations including real estate. The 7(a) loan, on the other
hand is the agency's primary loan program. The maximum loan amount
guaranteed under this program is $5 million.

Other SBA-guaranteed loan programs include

 Express loan
 CAPLines loan
 Disaster loan
 Export loan
  Microloan

These loans are generally provided by financial institutions, with the SBA acting
as a guarantor. Small businesses qualify for loans more easily when they are
guaranteed by the Small Business Administration. The agency also allows
entrepreneurs to make lower payments for a longer period of time.

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