Editor’s Note:

This following is the second of a 3-part research series from Walter Thompson, 500 Startups Journalist-in-Residence. (See Part 1 here: India’s Startup Ecosystem: Sure Bet or Impending Bust?)

Walter will be covering key topics on international and emerging ecosystems, and mid- to late-stage startup growth.

In our ever- (and rapidly) expanding world of VC content, there are a lot voices chiming on from Silicon Valley, from Silicon Valley.  

We brought Walter on board because we believe — and are seeing evidence of — “Silicon Valleys” springing up in new places around the globe.

Each has their own important story to tell, with actionable takeaways for all those who are listening closely, investors and founders alike.

Please share your thoughts on this series with us in the comments below, or email me directly at susan at 500startups.com.

–Susan Su, Partner / Content Chief at 500

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Most successful startups like Flipkart and InMobi are Singapore-based, thanks to lower taxes and a more business-friendly climate, but Indian Prime Minister Narendra Modi aims to cultivate homegrown talent by cutting red tape, creating a direct pipeline between STEM education and industry and giving founders/investors new tax breaks and regulatory incentives.

Last month, Modi announced Startup India, a series of proposals intended to make it easier to launch, fund and sell new technology firms. The initiative was crafted with input from entrepreneurs, economists, and industry groups like NASSCOM, which represents India’s IT sector, and FICCI, the Federation of Indian Chambers of Commerce and Industry.

Capital gains, income tax and labor inspections? Waived for three years. Patent registration fees? 80% off. How about a government app that facilitates same-day business setup? Coming soon.

To gather a diverse set of opinions about Startup India, I reached out to natives and people of Indian origin who’ve worked in-country with the following caveat:

To promote a frank discussion that will be posted on 500 Startups’ blog, we’ll anonymize quotes and will identify participants only by their job title or industry, as opposed to using names. We’re interested in a broad range of opinions, so supporters, detractors, and skeptics are encouraged to weigh in.

We heard back from several founders and investors who wanted to weigh in; their comments appear below. Enough respondents asked to speak on the record that we’ve included their names and faces. Thanks very much to everyone who participated.

Pankaj Jain (Partner, 500 Startups)
Pankaj Jain, Partner 500 Startups

“There weren’t a whole lot of things in the policy announcement that were clear, but many things were left very vague. There were some things that sounded like they will be better and will have some impact on local angel investors, like some part of their earnings when they exit would be tax-free. The classification of what a startup is is still very gray. Since founders will have to get a government body involved to say, ‘yes, you are a startup’, it could create a weird situation.

On the foreign investor side, there was nothing that I saw that is going to attract foreign investors. They did some things to try to improve the number of local angel investors, perhaps there’ll be some local funds getting created, but they didn’t really do anything to attract foreign capital, which I think is a mistake. They should have been a little more aggressive on the tax side and provided a whole lot of tax incentives to go out and create businesses and get investors in, both domestic and international.

I think the best option here is for the government to get out of the way, and that’s exactly what they’re not doing because of historical regulatory, cultural and political baggage. They should just set up a general framework of how startups are going to be treated from a tax perspective, from a legal perspective, from a foreign capital perspective, and then, say ‘we are going to get out of the way and let startups and SEBI registered foreign and domestic funds to what they are best suited to do, innovate.’

Overall, I’m happy to see that the government is acknowledging this idea called a ‘startup.’ They are taking the first steps in a very complex regulatory and tax environment to let entrepreneurs innovate and build great businesses, while, trying to put a proper regulatory framework in place to limit the uneducated and the scammers from taking advantage of tax policies, available capital, etc.”

Head of a large Indian tech multinational, very active angel investor

“I am a big fan. Good set of first moves. Several funds have got capital from Fund of Funds and [this] general attitude to startups is what we need. Policies like tax breaks will get better..3 years of zero tax does not make sense since first 3 years is losses anyway.”

Investor, Top-tier India Fund:

“Overall, we are huge fans of what the government is doing. The main highlight is that it is positive that startups are getting recognised as a sector and will be encouraged. The recent changes proposed by the RBI [Reserve Bank of India] will ease doing business for all building, investing and exiting startups are a great first step forward.

As with all announcements in India though, the value of this will be in the execution and in this case defining and certifying what a “startup” is – where there is still uncertainty. The intention of the RBI and the central government seems sincere, and if implemented well could really help grow this important source of FDI [foreign direct investment] and employment.”

Tarun Davda (Managing Director, Matrix Partners India)

Tarun Davda

“Net is that the intent is right; for the first time entrepreneurship and startups are an item on the national agenda which is fantastic. Action needs to of course follow, and we’re hopeful it will in due course.

Soaib Grewal (India Investment Advisor, 500 Startups)

Soaib Grewal

“I think the first few steps they’ve taken are a good start.

While the government has announced a few programs to boost local venture capital, it doesn’t incentivize global funds from participating in India as much as it could. Local VCs too are heavily reliant on foreign LPs. A robust tech ecosystem will require global capital both direct and indirect.”

Principal, Top-tier US-based VC firm:

“The Startup India initiative by PM Modi provides a much needed boost to the startup world as it addresses some core issues relating to setup, taxation and liquidation. By easing the barriers to setting up a company, it will give a big impetus to entrepreneurs and we will witness a lot more action on the ground. Companies that register in Singapore and Delaware should now look at Bangalore and Delhi as preferred alternatives.

While these initiatives are great starting points, they must be backed by startup-friendly policies in key sectors like Ecommerce/Retail, Transportation, Financial Services, etc.  for a conducive business environment.”

Shubhankar Bhattacharya (Venture Partner, Kae Capital)

Shubhankar Bhattacharya

“The Good:

  1. The extensive media coverage given to start-ups and technology innovations as a result of Startup India bode well to encourage the emergence of a new generation of entrepreneurs, motivate high-quality talent to consider joining early-stage companies, and create a social system that is more conducive and accepting of start-ups.
  2. The Prime Minister’s announcements of a Credit Guarantee fund, exemptions from capital gains tax, and tax exemptions on investments above fair market value are all well-timed initiatives needed to support financing of early-stage companies and show that the government is paying heed to what the startup ecosystem is asking for.
  3. The launch of the Atal Innovation Mission, sector-specific incubators, as well as entrepreneurship programs for students also made my wishlist to the PM and I expect them to be vital to support entrepreneurship in the core sectors, thereby creating more India-focused solutions and innovations.
  4. Lastly, the PM’s emphasis on patent applications is a welcome change in thought process, where we see Indians as innovators & technologists, rather than mere copycats of business models that have worked elsewhere in the world.

The Question Marks:

  1. We have heard of the Rs. 10,000 Crore fund for startups earlier and therefore execution is critical to make sure the fund is deployed in a transparent and effective manner to deserving startups.
  2. It is debatable how many ‘startups’ would truly benefit from being exempted for income-tax levied on profit gains for the first three years.”

The people I spoke to generally expressed guarded optimism, as well as respect and appreciation for Modi’s overtures, but on and off the record, everyone’s taking a wait-and-see attitude. Considering the massive potential of India’s startups, even modest reductions in red tape and regulation could plump up the number of companies launched this year.

In the months ahead, I’ll touch base with some of the founders in 500 Startups’ India Fund to see if the government’s plans are meeting expectations.

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