STARTUPS: OPPORTUNITIES AND CHALLENGES

STARTUPS: OPPORTUNITIES AND CHALLENGES

This was my entry to the essay writing competition conducted by M. L. Dahanukar College, Vile Parle (E). I encourage people to comment on this to point out my mistakes and to have a healthy discussion.

Note: The ₹ is the Indian Rupee sign; in case you are unable to view it in your browser.

Since the last few years and particularly after the launch of the ‘Startup India’ campaign by our Hon’ble Prime Minister Mr. Narendra Modi, there has been a lot of buzz for this very word – ‘start-up’. Hence, before coming to the Startup India scheme, let us analyse the meaning of the word ‘start-up’.

Before the launch of the Startup India initiative, on 16th January 2016, the word ‘start-up’ or ‘startup’, had no legal definition in India. Hence, there was no law which could distinguish such newly established small scale companies proposing innovative solutions from the mainstream businesses. Now, the Department of Industry Policy and Promotion (DIPP) has defined a startup under a ‘Definition of startup’ notification gazette (citation: Click here) which defines the word as follows: –

“A startup means an entity, incorporated or registered in India,

  • Not prior than five years
  • With an annual turnover not exceeding 25 crores
  • Working towards innovation, deployment and commercialization of new products, processes or services driven by technology or intellectual property”

This does have additional conditions applicable; such as that the company must not be formed by splitting up or reconstruction of a business already in existence.

Now the very question that comes to our mind is that, were there no start-ups prior to 2016? The answer is obviously no, the only fact is that the government doesn’t recognise them as start-ups because only those companies registered after 1st of April, 2016 are eligible to call themselves ‘start-ups’ technically. This means that companies registered before the said date with an annual turnover of fewer than ₹25 crores could not avail the benefits of the scheme. Hence, companies such as Paytm, Flipkart, Ola cabs, though informally referred to as start-ups, do not fall under this definition.

The very purpose of starting such a scheme was to promote entrepreneurship development amongst young, brilliant minded Indians. India is showing an excellent growth rate; however, unemployment still exists and is a serious problem in various developed countries too! The government can, by no means, provide jobs for everyone. Hence, they decided to let individuals create jobs on their own. It’s often said that the back-benchers land up creating their own companies whereas the front-benchers pursue excellent qualifications, but just to work in such companies. That’s what precisely took place in the case of Bill Gates.

So, what are the benefits one can avail? The benefits include a faster application for patents, an investment of ₹10,000 crores through alternative investment funds, tax exemptions on income tax up to three years, tax exemptions on capital gains and investments and a faster winding up of the company under the Bankruptcy code of 2016, in case the company is unable to make profits in the long run.

So, is it right to say that startups have the right environment to flourish? The government has certainly done whatever it could do for their businesses to prosper. But are the consumers ready to accept products from an unknown, newly established company? It has been my observation that Indians are reluctant to immediately accept products from such companies, but over a period, they do. For understanding this, we may take an example of e-commerce giants – such as Amazon and Flipkart. This is evident from the statistics presented here – in the financial year 2013-14, the net revenue of Flipkart was ₹179 crores, higher than that of Amazon standing at ₹168.9 crores. However, the net loss of Flipkart was the highest, at ₹400 crores and that of Amazon was ₹321.3 crores. Now, in the next financial year 2014-15, Amazon’s net loss was ₹1724 crores, though their revenue increased six-fold to ₹1022 crores. MakeMyTrip – a travel agent company established in 2000, still reports a loss and had a net revenue of 81% of its total expenditure. Thus, it can be said that these online shopping firms won’t be able to recover from their losses soon; it’ll take time, perhaps a lot of time. The reason is because middle class Indians have not yet switched over to online shopping fully. This is mainly because of the hesitation of consumers to accept something new, trying to take over the conventional methods.

This is just one of the many challenges that new startups may face. As per the definition of a start-up, it should be meant for innovation. However, many emerging start-ups take this wrongly and try to be a competitor for someone who’s already innovating. As an example, we can name more than ten online fashion clothing shopping websites such as Myntra, Jabong, Yepme, NNNOW, etc.; but we must keep in mind that we can’t innovate the same beyond a certain extent. Hence, only those emerging companies that are proposing a fully innovative solution, or considerably improving an existing innovation, are considered to be a start-up under the Startup India initiative and hence, tax benefits would be granted only for such companies. Finally, the result is that the actual innovators get a lot of competition, and ultimately all these companies run into huge losses, just as the example presented above.

There could be challenges faced because of poor marketing strategies. The primary idea of marketing could be an utter failure. These companies today majorly focus on increasing their consumer base and not on their quality. This is the reason for them posting a full-page ad in the leading newspapers and offering a discount on various commodities. Thus, they end up paying money from their own pocket for increasing their customers. Today, as more and more companies are engaging into this out-dated marketing trick, customers are becoming more and more smarter and realising the selfish motive behind such discounts; as an example, sellers often upload their products for online retail with an inflated price and then show a hefty discount tag to bring back the price to its MRP. Until the recent past, no company had tried to adopt a new marketing strategy which could truly influence its customers. However, with the changing demands of customers and with more and more customers swinging to online shopping, well-established players such as Amazon are trying hard to maintain their existing consumer base. As an example, recently, Amazon refunded an amount of ₹7999 for a mobile phone ordered by a customer because it had been delivered to him at a different address than the specified one, along with the new phone. In the sense, the customer got the phone for free!

Another important problem for newly emerging start-ups is a lack of funding from investors. Venture capitalism was not considered as a safe form of investment in our country, until the recent past; however, the World Economic Forum in its report on ‘Alternative Investments 2020’ (Click here for the source) reported that China and India together receive more venture capital investment than Europe. However, as per the report, India accounted only for 5% of the investment in 2012-14, in contrast to 14% in China and 68% in the United States. Hence, there’s certainly a long way to go!

Innovation is inevitable; someone must innovate for the betterment of the future; without innovation, we wouldn’t have had computers, mobile phones, the internet, rapid transportation; our world would have been totally blank – we would still be living in the 18th century period! Hence, it’s essential for the government to encourage innovations through startups, the Startup India initiative is certainly welcoming; however, much more needs to be done to keep the startup growing, to bring them into a position to make profits. At this stage when our GDP is growing at more than 7% per annum, there is hardly any contribution from such companies; nevertheless, there would be a time when India would turn into a huge market for them. We need to focus more on improving our ease of doing business, where India stands 130th as per the Doing Business Report, 2017 (Reference: report) and I’m assured that the Central government and most of the state governments are working day and night to make that happen!