Eight Indian start-ups attaining unicorn status, funding in excess of $10 billion after a lull in the preceding years, the acquisition of Flipkart by US-giant Walmart for a whopping $16 billion, the number of businesses operating in the start-up ecosystem breaching the 40,000 mark, and the conclusion of over 700 funding deals — these are some of the key developments that described the start-up journey in 2018. While all this paints the picture of a buoyant and thriving start-up ecosystem, a closer inspection will reveal that all is not hunky-dory and future growth will be governed by the ability of Indian entrepreneurs to accurately gauge the challenges that lie ahead and devise out-of-the-box solutions.
Modern-day customers are knowledgeable, demanding and spoilt for choice, which leaves no room for error. Meeting their distinctive expectations is no small feat; it has been the Waterloo of many Indian start-up entrepreneurs. A pertinent example is that of the food tech start-ups, which have been luring consumers with cashback offers and discounts, which is in itself an expensive affair. However, successful consumer acquisition has not necessarily translated into retention, unless you are able to provide continuous benefit which exceeds expectations. The fundamental factor that will determine the success of the start-up ecosystem in India is the ability of the entrepreneurs and businesses to retain consumer loyalty in a profitable way. The only plausible way to do so is to meet the evolving expectations of consumers and keep appealing to their senses. Also, while online platforms offer ease of buying, these cannot ever replicate the wholesome experience of visiting a brick-and-mortar store with family. Five million consumers were added to the tech ecosystem last year, but an equal number exited the online space during the same period.
What investors want
The average age of a tech entrepreneur entering the home-grown start-up world is around 29 years. They are young, often learning the nuances of growing a business, but are strongly driven by a passion to succeed. Thus, it is natural for them to call on their investors for guidance. However, despite their best interests at heart, the key performance indicators and business metrics that investors want founders to focus on have changed continuously from engagement metrics to growth to revenue to profitability. This leads to disorientation of start-up founders, who find it hard to grasp as to what truly is a successful and definite business model.
There have been instances when the diktat from the investor has been to drive growth and acquire a customer and all of a sudden the founders have been asked to undertake a tectonic shift in the strategy to focus on cost-saving, creating confusion for the management. Founders need to have a strong conviction of what business they are building and the path towards long-term goals rather than just getting influenced.
It is imperative that the government appreciates the requirement of creating an environment where businesses do what they do best — “Solving a customer problem/need in an innovative manner.” The government can do this by linking the compliance to the realisation of certain conditions, which could be a minimum number of employees, turnover or tenure of business operations etc. The new-age start-ups and entrepreneurs are keen to fulfil the regulatory obligations and run a transparent shop. The reality is that new businesses may have the intent, but they do not necessarily have the resources that can be deployed to manage non-revenue-generating complexities. The issue can be addressed holistically only when the dispensation of the day undergoes perception metamorphosis towards the start-ups and their exclusive requirements.
The measure, if adopted, will act as a catalyst for the start-up environment because it will accord much-needed protection to businesses and also go a long way in making ‘minimum government, maximum governance’ a reality.
The elephant in the room
Anyone familiar with the angel tax issue will vouch for the negative repercussions it can have on the development of a robust Indian ecosystem in the long run. Even though we have heard voices which seem to understand the issue at hand, the actual implementation continues to act as an impediment to growth and overall stability of start-ups, which collectively employ over 5 lakh people directly or indirectly. There can be arguments on both sides, but the need is to create a supportive environment where investors see private funding as another class of investment. This will help companies get local financial support instead of always looking at the established foreign investors.
The taxman is not out to harass you. He is merely doing his duty. A permanent solution lies in passing a law, which views start-ups from a different prism and gives them time to lay a solid foundation. As an interim measure, the government should explore the possibility of instituting a committee of stakeholders to examine possible solutions.
All businesses that are part of the Indian start-up story can also consider the possibility of coming together to form an association on the lines of FICCI (Federation of Indian Chambers of Commerce and Industry) or CII (Confederation of Indian Industry), whose sole purpose should be to educate the decision-makers of the challenges faced in day-to-day operations.
Defining a start-up*
- A start-up is an entity, incorporated or registered in India not prior to five years, with an annual turnover not exceeding Rs 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
- Such an entity should not be formed by splitting up, or reconstruction, of a business already in existence. An entity shall cease to be a startup if its turnover for the previous financial years has exceeded Rs 25 crore or it has completed five years from the date of incorporation/registration.
- A start-up shall be eligible for tax benefits only after it has obtained certification from Inter-Ministerial Board set up for the purpose.
- To boost the development of start-ups, the government has exempted profits of startup initiatives from income tax for three years. The exemption shall be available subject to non-distribution of dividend by the start-up.
Co-Founder and CFO, Policybazaar.com
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