Note: In researching this post, I contacted multiple founders and investors from India and the US to get their take on whether recent developments will create a startup environment where friendly regs and access to capital can balance the need to bootstrap and network.)
Lifehacking is a core aspect of Indian culture.
Nearly every citizen employs Jugaad: necessity-driven problem solving that uses whatever tools are at hand to get things done, whether it’s constructing a water pump, mailing a parcel or building a new house.
India’s entrepreneurs in every sector rely on Jugaad to cut through red tape, reduce R&D costs and resolve other inefficiencies.
Also known as frugal engineering, the ethos is associated with breakout successes like Grey Orange Robotics, which has succeeded in an environment lacking significant infrastructure for hardware companies, or founders like Vishal Mehta of Infibeam, who sold his home and several long-term investments to self-fund one of the nation’s largest e-commerce startups.
If recent proposals pan out, India’s startup ecosystem is poised to become a more sustainable environment for founders and investors; PM Narendra Modi’s Startup India initiative includes a $1.5 billion fund and 3 years of exemptions from income tax, labor inspections and capital gains for startups. The proposal also includes free legal support, faster and 80% cheaper patent applications, and an app that enables same-day business setup.
Startup India includes funding for a nationwide network of incubators, research parks, and university research centers, even 3D printers for engineering labs. To foster a startup mindset and build social ties between IT students, more than 500,000 schools will offer innovation education programs that integrate with ongoing startup fests and pre-incubation training.
The entrepreneurs and VCs I talked to to generally agreed that bootstrapping will always be essential for Indian startups, but also acknowledged that a cultural shift is underway.
Whether or not the new economic, educational and regulatory moves proposed in Startup India comes to fruition, bankers and investors (domestic and international) are stepping in where angels once literally feared to tread. According to VCCEdge, Indian private equity investments exceeded $21 billion last year, a 67% increase over 2014.
Since PM Modi’s proposals were unveiled, private lenders have made moves to support the startup community; RBI Bank’s India Startup Club offers founders end-to-end banking services, as well as administrative services like HR, office space and CRM. Last month, the State Bank of India opened InCube, a Bangalore branch which will also assist with financial services and mentorship.
Notably, neither RBI or SBI plan to invest in the startups they’ll advise.
Even with last year’s increase in private equity investment, several international investors I spoke to said India still lacks a critical mass of local funding and expertise, which makes sense, since the nation’s startup environment is only 7 to 10 years old, depending on who you speak to. Local investors are pragmatic due to “historical necessity,” one VC told me; entrepreneurs who’ve established themselves selling durable goods are largely unmoved by “change the world” founder pitches, it seems.
Market watchers hope RBI’s recently announced plans to allow foreign investors to transfer shares in Indian companies to local firms will attract more international money to fill this gap, even as many overseas funds have dialed back their involvement in the last two years.
In the coming months, one barometer of success for India’s startup ecosystem will be the number of new companies that are based inside the country. Due to capital gains and historically onerous regulations, standouts like Flipkart and Ola are Singapore-based, a model many other founders have emulated as they work toward an IPO. Last September, Infibeam became the first India-based online retailer to prepare an offering for the National Stock Exchange.
In an informal poll of the people I spoke to, fintech, education and e-commerce were all attractive sectors, with two respondents noting that B2B and SaaS in particular, is very appealing. Less so: food delivery, social networking and user-generated content.
Although media coverage of India’s startup scene largely focuses on big wins and belly flops, the consensus we gathered is that a slowdown in new investments is the result of a correction, not skittishness.
Last month, Grofers, a hyperlocal grocery delivery startup, shuttered operations in 9 cities, even though it recently closed a funding round of $120 million. Contractions like these can be taken as a sign of hard times, or, as one investor explained, they can also indicate that a company’s unit economics are too low to scale the business.
“Things are more realistic,” a founder explained.
With a population of 1.2 billion and an IT education system that produces approximately 1 million new engineers each year, “opportunity” may be too small a word to describe India’s startup potential.
As government and industry streamline regs and direct more capital to the IT sector, international investors would be well served to use Jugaad to seek out sustainable local partnerships and get in the game.