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Know our Mentors

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Changing dynamics in India’s startup eco-system

2014 was a defining year for the Indian startup ecosystem. Compared to the rest of the decade, a number of significant events and activities had changed the very nature of the startup world. Companies like FlipkartSnapdealPayTmZomato, etc had redefined‘scale’ and investors had started placing big bets on them. These companies darted ahead of the pack, to not just dominate their markets, but to grow it too. Of course, they were helped by a conducive environment – mobile phones, internet connectivity etc – but they also built infrastructure, people and processes that could handle a different order of scale than what they themselves could have imagined a few years ago. These startups demonstrated the potential and the competence to build world-scale companies and created new goalposts for entrepreneurs to aspire for.

As a result of e-commerce, a number of enabling technology and service companies started becoming more meaningful. Analytics, online engagement platforms, delivery companies etc found a much larger market to address their business case, and therefore their investment-worthiness became stronger. What remains to be seen is how effectively the e-commerce industry will retain customers once the discounting era is over and customers have to buy on the fundamental value proposition of e-commerce i.e. ease of access and choice. We may see some changed market dynamics at that stage, and the transition phase may throw up some new, unexpected leaders.

If you take the apparel and fashion sector, current leaders like Flipkart, Myntra, Jabong, etc appeal to the rational sense i.e. ‘this looks good, and is discounted, so buy.’ However, fashion is an emotional purchase category. Browsing and selecting garments, getting opinions from friends, etc. are aspects that make offline fashion-shopping pleasant. But in the online world, fashion sale is currently largely driven on the incentive of discounts. However, some emerging brands that are integrating and adopting social commerce, user experience (offline fashion events, private shows etc), and consumer understanding tools, technology-aided ‘product recommendation and discovery’ at the heart of their company strategy, may end up giving a tough fight to current leaders in the fashion segment as the discount era ends.

According to Ashish Jhalani, founder of eTailing India,

As much as 25 per cent of revenue for a leading eCommerce brand comes from Facebook. And it is growing. However, companies like Limeroad have based their entire business on social commerce, and they may become serious contenders in the market.

Anchal Jain, a global fashion industry veteran whose currently in-stealth-mode startup is launching a consumer preferences/understanding driven product recommendation tool for online fashion etailers, says:

Fashion marketing is a different science, and is layered with the art of presentation and easy discovery. Shopping becomes delightful when you let your senses do the product discovery.

Technology tools like the one Anchal is building will change the dynamics of the industry, and can again create a level playing field for existing e-commerce leaders, as well as new entrants to vie for dominance in the category.

Increased seriousness about India; among overseas investors:

The most important change for me was that overseas investors, who till recently were watching India as a possible market have now started having serious conversations in their board rooms about accelerating entry into India. Many of them are firming up plans for India, and have started serious efforts to explore their entry. Some of them have made significant announcements; and more will start investing or co-investing in the near future. My conversations with industry participants indicate that after the budget announcements, a number of investors will make their announcements for India.swup

However, institutional investors that are getting excited about what a handful of companies have been able to achieve are likely to expect a similar performance from the startups they shortlist for investment. And that might set the wrong expectations. If investors change their benchmarks on what kind of scale they would like to see in their investee companies, we may again get into a situation where loads of capital is committed to India, but eventually only very few deals get done because most startups do not have the revised scale of aspirations that investors now hope for.

Faster move to Series A funding (but only very few companies progressing to Series A)

Quite a few institutional investors are now open to making Series A investments slightly earlier than they are typically used to doing. They are now comfortable in making larger capital commitments even if the company has demonstrated the product-market fit, and has a reasonable level of team competence and commitment.

What that also means is that startups have to accelerate their progress to demonstrate that they have the foundation on which a scale business can be built. Investment Banker and Founder of Aurum Equity Partners LLP –  Sanjay Bansal  – adds,

It is imperative that startups think of exits. It is only when the exits happen and monies are made, that the enthusiasm to invest and build companies of scale multiplies.

However, the number of angel or seed funded companies progressing to Series A is still very low. Karthik Reddy, co-founder of Blume Ventures reinforces,

Series A is still the biggest choke-point in the country.

I therefore get very worried about media articles, which suggest that startups are likely to get more capital and higher valuations. I think what the country needs is a vibrant, economically sensible startup eco-system that is mutually beneficial for  all participants – entrepreneurs, investors, accelerators, etc. If we create the imaginary fantasy land of billion dollar valuations for all startups, the funding mechanisms will falter and we will create the wrong incentives for someone to become an entrepreneur.

Accelerators, incubators and angel networks will therefore, also have to think of reconfiguring their programs to get companies better prepared for Series A. According to angel investor Vikram Upadhyaya and founder of GHV Accelerator,

Unless we are able to provide assurance of Series A capital to startups, the entire acceleration program and angel funding is a futile exercise. There is sufficient interest and capital available in the market today, and a reasonable number of high-potential startups, ready for angel and Series A investments, are likely to double from last year. But for that to happen, the enablers – accelerators and incubators – will have to reconfigure their models.

A number of senior professionals and modestly successful entrepreneurs are considering becoming angel investors. In my view, what the country needs are thousands of angel investors so that thousands of startups can get angel and seed capital for their concepts. Individual angel investors coming on to online platforms will also make it possible for startups who have smaller capital requirements – say betweenRs 25 lakhs to Rs 50 lakhs – to raise capital as angel groups, whose members typically do not want to write smaller cheques, and are usually unable to support ventures unless their capital requirements are in the Rs 2 cr – Rs 5 cr range.

So for me, it is encouraging to see the increased interest from senior professionals and modestly successful entrepreneurs to also become angel investors. Media exposure of startup successes, and overall positive news about the entrepreneurship space highlighted by media, has increased awareness of startups as an investment class. Also, as the cost of doing business has reduced significantly, it allows many companies to start up with limited capital which angel investors can provide to companies that they discover and evaluate via online platforms.

To conclude, I think all this is good news for the startup ecosystem in India. From just under 300+ investment deals last year, I hope that we are able to go beyond 500 transactions this year, and as the angel investor base and enabling environment strengthens, I hope at least 2000 high-potential and competent teams are able to raise capital for their ventures. And yes, I hope that more startups are able to get ready for Series A. The industry recognizes that as a choke point. It is time now, to put efforts in place to unblock that choke point.

 








Startup Wonderland: Singapore

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Less than 6,000 km away from India, there is the small island country of Singapore with a population less than Bangalore but a startup ecosystem that has been rated as the best in Asia and seventh in the world. So what makes this country, which is around 700 sq km, so special and why are numerous companies from India and around the world looking to register or move operations to Singapore?

The obvious reasons that come to mind are the ease of doing business, transparency, lack of bureaucracy and one of the friendliest tax regimes in the world. Various Indian startups have relocated or now co-locate to Singapore due to these reasons. Here are some examples:

  • Milaap: A social crowd funding and micro finance startup based out of Singapore with an office in Bangalore.  Founders were able to get SGD 10,000 grant from the National University of Singapore and were able to set up their company within 24 hours in Singapore.
  • AdNear: This location intelligence platform for advertisers started out in Bangalore but is now headquartered in Singapore. Backed by Sequoia, it has raised more than $25 million in the last two years. The key reason for the shift in base seems to be the strategic location for the South East Asian market and high smartphone penetration.
  • Mobikon: A cloud-based customer engagement platform for the hospitality and retail sector seems to have shifted base to Singapore after a $2.5 million round by Singapore-based Jungle Ventures and Spring Seeds Singapore.

These startups have benefitted tremendously from the shift, so here are the most important points for anyone looking to shift their headquarters

  1. Incorporation

Incorporation in Singapore takes less than 24 hours and can be done online or with the help of corporate services firms. Singapore does not have any minimum capital requirement if one of the directors is a local. If the company does not have a local director, there are services to help you fulfill this requirement; this service is called Nominee Director. GuideMeSingapore and FutureBooks are two such firms that provide useful guidance when it comes to setting up a company as a foreigner.

2.  Taxation and Immigration

Singapore has one of the friendliest tax regimes in the world.  It has a tax rate of only 8.5 per cent on corporate profits up to SGD 300,000 (approximately INR 1.5 crores). Not only this, there is absolutely no tax when it comes to capital gains. In terms of work permits and immigration, Singapore has been startup friendly when it announced the launch of the Entrepreneur or EntrePass to help entrepreneurs migrate easily to commence work. 

3. Singapore Ecosystem

Last year, The Economist covered the startup scene in Singapore and this is what it had to say about Block 71 which houses close to 150 startups.

“It is the world’s most tightly packed entrepreneurial ecosystem, and a perfect place to study the lengths to which a government can go to support startup colonies.”

There are numerous incubation and funding schemes that the government runs and promotes. Early stage startups having local ownership can secure more than $100,000 in funding from schemes administered by SPRINGACE, IDM. In addition to this there are terrific accelerator programs like JFDI, co-working spaces like PlugIn@Blk71 and venture funds like Golden Gate Ventures.

Last year July, I helped BizEquity, a US startup expand into Asia- the registration process was smooth and was able to obtain incubation at Block 71. Not only this, it is an extremely tight knit community and within weeks I was able to connect with key stakeholders for the business. Having experienced it first hand, I can definitely confirm Singapore is a heaven for anyone setting up a new business.

Source: Your Story