What we can all learn from India’s huge startup growth story

As emerging economies around the world stumble along, one exception stands out — India, where growth is set to overtake China soon. Now a new report ranks Asia’s third largest economy as the fourth largest startup ecosystem in the world.

The report, released last month by India’s IT association Nasscom, places the country behind only the US, the UK and Israel and notes that should the current trend continues, India could rank second by 2017.

Nasscom says India currently has 3 100 technology startups (which it describes as tech firms that have started since 2010), employing 65 000 people. This is against 41 500 such firms in the US, 3 500 in the UK and 3 300 in Israel.

About 800 tech firms started up in 2014 alone. This could grow to 11 500 by 2020, with firms employing 250 000 people, the report said.

The report attributes the growth in startups in India to a booming domestic market of internet users (over 250 million are now online there), an increase in mergers and acquisition and better access to mentors and capital.

In all 70 venture capital funds were active last year. Together with angel investors they have ploughed about $3 billion into startups between 2010 and last year.

Read more: India is home to 3rd-biggest startup ecosystem in the world, says report

Those like Gaurav Kushwaha (previously he started a film news site subsequently acquired by Flipkart), who runs online  jewellery retail store Bluestone.com and Rahul Yadav’s Housing.com (pictured below with co-founder Advitiya Sharma), which helps users search for homes have enjoyed multiple rounds of funding from venture capital funds and angel funds.

Young men

Most of the founders of India’s tech startups are fairly young (three quarters are under 36) and almost half have experience working in a multinational firm. A third are engineers. Only 6% of founders are women.

About half of India’s tech startups are concentrated in Delhi and Bengaluru. While Mumbai is also coming on.

Many focus on cloud-based services, distance learning apps, big data solutions, advertising platforms, gaming platforms and payment solutions. In all 43% focus on global customers.

Growth prospects are good. India’s annual economic survey (The Economic Survey 2014-15) notes that sales for software products and services will grow at over 12% in 2015. Make in India — a state initiative which aims to revive Indian manufacturing – backs the sector among its 25 focus sectors.

Long way to go

Despite all the optimism, India’s startups are still faced with serious challenges, mainly because of the difficulty of doing business in India, says the Business Standard. The newspaper says by several estimates, over 70% of Indian startups are forced to register abroad to avoid complex regulations in the country.

In addition India ranks lower than all BRICS nations bar Russia on the World Economic Forum’s Global Competitiveness Report 2014-15 for research and development (R&D). In particular India scores poorly on patents granted and on university-industry collaboration on R&D. This, despite double digit growth in the last few years in R&D.

On top of this India’s venture capital deal size remain small. Indian IT think-thank iSpirt told the Business Standard that India has still some way to go before it can compete with Israel and India in startups.

Read more: 20 startup accelerators in India we should all know about

It says India saw 467 venture capital investments up till the middle of 2014, against 9 070 in the US and 381 in Israel. The average merger and acquisition deal size in India was US$11-million, far behind Israel’s US$100-million and the US’s US$147-million.

Budget letdown

The state needs to help more by removing several tax challenges. Though the Finance minister Arun Jaitley (pictured left) announced a cut in income tax on royalty fees and fees for technical services, and the lowering of the corporate tax rate from 30% to 25% during his budget speech, there was no respite on angel investments.

Startups will still have to pay tax on investments they receive from angels, currently levied at 33% tax, if the shares issued in lieu to investors are above book value.

Despite this Jaitley removed a hurdle that taxes venture capital investors twice over. A new bankruptcy code tailored for small businesses is also on its way.

The budget also changes rules to allow foreign investors to directly invest in funds registered with the Securities and Exchange Board of India, thus expanding the pool of money available for Indian startups.

Yet strangely Jaitley didn’t explain when the 100-billion rupee venture capital fund that he announced in the last budget would be launched (and mentioned in this earlier post). This was a serious flaw. Many were betting on the fund to be in the form of a fund-of-funds. Perhaps more details need to be ironed out. The wheels of bureaucracy still spin too slowly.

Entrepreneurship flourishes in India, but too often cumbersome rules and graft prove a headache to many business owners. The government should do more to lower the number of rules these firms face. Doing so will help ensure India’s startups can continue their upward trend without hitting turbulent skies.

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This article originally appeared on Small Business Insight, a Burn Media publishing partner. Stephen Timm writes on small business and is presently in Cape Town, South Africa. Click here to sign up to his monthly newsletter. Follow him on Twitter at @Smallbinsight and on Facebook.