The Indian startup story began over a decade and half back with the likes of Naukri.com. MakeMytrip, Shaadi, Baazee being “backed” by venture capital (VC), a new type of financing product. VC did not take collateral like debt financing did, instead it bought equity in very young but highly promising companies, with the expectation that these companies would use this money to grow, and after 7 to 10 years of rapid growth would become profitable and list on the stock exchange or be acquired by other larger companies.
Grow very rapidly they did, because unlike debt, which they could not access, as they did not have profits to pay interest, this VC money was available and came from people who would also bring smart advice on how to achieve swift growth. It was a heavenly match and from then till now when an entrepreneur receives VC money he/she thinks of themselves as among the luckiest people alive! Of course back then if you decided to quit your nice corporate job and start one of these companies you were considered quite an odd one, since it was seen as a risky path and one did not know where it would lead.
As time went on the number of VCs kept on increasing and the number of startups kept rising too. More and more money kept on coming in from foreign investors who proclaimed India one of the world’s “hottest” Startup destinations along with the US and China. More and more people quit high paying jobs in famous companies and became “founders” (a Startup term for entrepreneurs). It became such a Tsunami of capital in 2015 that the financial newspapers and business TV channels looked like they were covering nothing else.
That year I counted around a dozen companies, less than 10 years old, which became “Unicorns” (a startup industry term for companies worth a Billion Dollars or more). These Unicorns, in their rise, were employing directly and indirectly 100s of 1000s of people, from office staff to computer programmers, delivery boys & girls, warehouse handlers et al. India had never seen such growth.
All this caught the eye of Amitabh Kant, a dynamic IAS officer who at the time was heading DIPP (the till then the less known Department of Industrial Policy & Promotion) and had been responsible for path breaking business policy thrusts like Incredible India and Make in India. He quickly put together #StartupIndia (yes they wrote it Startup style with a hash tag!) and got the Prime Minster on stage with Softbank’s Masayoshi Son, a big investor in Indian startups, and “hot” founders like Bhavish of Ola, Travis of Uber, Ritesh of Oyo and others. The PM made several announcements around how to #UnObstacle and #Fund startups along with a plethora of “incentives”, like tax breaks, labour law relief, incubators etc.
Among these was an announcement that Rs 10,000 crore, around $1.6 billion, would be given to startups. Most people, including myself, did not pay much attention to this, because in the previous year’s Central Government budget Rs. 2000cr had been announced and no one heard more about that.
All this euphoria suddenly changed the social status of Startup founders. When till a few years back you were a fool to have quit your cushy career and become a founder, now you were cool. You were profiled in the media, put on stage at startup events, proudly introduced at family gatherings by your parents; and if in addition you had raised VC funding, you were like Sachin, a god.
It was unprecedented in the history of our nation.
Then suddenly, without a warning in early 2016, the funding dried up. Two major Venture Capital investors in India, Tiger Global and Softbank pulled back and stopped making investments in new companies. These two had previously led the charge and were responsible for creating most of the dozen Unicorns. Coffee shop conversations which were all about growth became all about survival. Media headlines turned from boom to doom. The overall sentiment turned to gloomy and throughout 2016 the Indian Startup ecosystem went through a period of soul searching.
This receding of capital had left India exposed, it showed that the Indian startup story was built on just about 10 to 15 funds and from those, the bulk of the funding had come from two funds, the ones who had pulled back; and that many of the major funds were made up off foreign capital and this capital could be fickle as it could be allocated to India or other countries. India did not have major domestic funds and significant Indian investors who invested in these funds. The Indian Startup story had been built on a shaky foundation.
It was against this cheerless backdrop in September 2016 that I got a sudden email asking me come to Delhi to give suggestions on the “disbursal” of the Rs10,000 crore Startup Fund. Amitbah Kant had moved from DIPP to Niti Aayog and #StartupIndia had faded from memory, but his successor Ramesh Abhishek together with his team had quietly and steadily been working to bring the fund into the hands of Startups “quickly” (as he told us when we met him).
I got together with our President of India Venture Capital Association (IVCA) and went to Delhi. There we learnt that Rs 10,000 crore was to be invested via Venture Capital funds that were registered in India and SIDBI (Small Industries Development Bank of India) was in charge of disbursement. The money would be used to “anchor” these domestic VC funds making up 10% to 15% of each fund and thus creating a up to Rs 100,000 crore ($15 billion) Indian domiciled Venture Capital Industry, which was more that double all the venture capital that had been brought to India till date.
It was a masterstroke, India which had so far been subjected to the seasonality of international capital could soon have a robust domestic VC industry and the gloomy scenario of 2016 could be mitigated to a substantial extent.
There were two challenges with the above plan A. The first was that though DIPP wanted to put in 10% to 15% in each fund, they wanted the entire venture capital fund to go into startups, which had been defined as companies with maximum Rs 25 crore annual turnover. Now imagine Rs100,000 crore going into such young companies and no money available for when they become larger. The second issue was that it would be very difficult, almost impossible for the domestic VC industry to raise Rs 90,000 crore against the Rs 10,000 crore Startup fund they would receive. This was because the domestic Venture Capital investor market was very young and as the return cycle was not yet complete large amounts were challenging to raise.
To overcome these challenges, IVCA together with SIDBI’s inputs (who are also IVCA members) recommended that 2x of the Startup Fund’s money in venture capital funds should go to companies below Rs 25 crore in turnover and they should be free to put the rest of their money into older companies. And that instead of investing 10% to 15% per fund they consider investing 15% to 35% which would then make it a more realistic Rs 20,000 crore ($3 billion) to Rs 50,000 crore ($7.5 billion) that would have to be raised by domestic VCs. Yet a tremendous size of venture capital industry in the making.
After a series of consultations from September 2016 till February 2017, across multiple stakeholders, with Ramesh Abhishek and his team flying around to several cities, DIPP adopted the above recommendations and announced them yesterday 23rd March 2017.
This Rs 10,000 crore Startup fund now directly goes onto creating a domestic venture capital pool that will be Rs 30,000 crore to Rs 60,000 crore in size; and lays the long term foundation of a broad based Indian venture capital industry. This not only makes significantly more capital available to startups, but also mitigates against sudden retreats by international investors by reducing them to close to 50% of the venture capital available in India.
Thus 23rd March 2017 is a momentous day for India as it is in a way the birth of the domestic venture capital Industry.
Source: Times of India.
