This article has been written by Nived S Kumar.

From a fancy word that is difficult to spell and pronounce, entrepreneurship has entered the ordinary Indian’s vocabulary since the last six-years. The start-up ecosystem in India has developed remarkably since 2013, thanks to the digital revolution and the rise in consumerism propelled by an increase in the middle class. From 2014 to 2018, the total number of internet users in India went from 239 m to 560 m, with the number of smartphones per 100 people increasing from 5.4 to 26.2¹. By 2025, the digital revolution could radically transform the Indian economy, increasing the opportunities manifold in different sectors.

While things look promising on the surface, there are a set of challenges that impede the growth of the start-up ecosystem, some of them unique to our country. A study by IBM Institute for Business Value found that the mortality rate of start-ups in India is much higher compared to other countries.² Lack of innovation was attributed as the main reason for this, along with the absence of a strong business model. In this article, we will touch upon some of these obstacles and find out what different stakeholders can do to foster innovation-centric start-ups.

Join the bandwagon – Let’s start a venture!

Predominantly, Indian start-up owners start their venture soon after college, without having any real experience with the business world. While this might have worked for Mark Zuckerberg, Steve Jobs, and even our own Ritesh Agarwal (OYO Founder), it might not work for all. Starting and running a venture without having real work experience can often produce inefficient leaders. In fact, 50% of Venture Capitalists in India are not interested in investing in a start-up that does not have an experienced leadership.²

Lack of a competent workforce is also a major concern shared by start-up owners and investors alike. Indian universities churn out a massive number of graduates every year, but most of them lack the necessary skills that equip them for new-age jobs. An employability report by Aspiring minds stated that only 3.84 per cent of graduates in India have the technical, analytical, and communication skills required for start-up jobs.³ The report also says that less than 3% of the engineers in India are equipped to take up leadership roles in futuristic areas like Blockchain, Artificial Intelligence, machine learning, and big data. This would be a massive hindrance to the growth of innovation-based start-ups, and this brings us to the major issue we are discussing in this article.

Innovation scarcity and Weak Business models

Innovation involves generating or adopting new business ideas, technologies, products, and processes, and applying them to solve practical problems. While India is the 3^rd largest start-up hub in the world after the USA and China, India lags behind in terms of innovation-based start-ups and in linking innovation to markets.

According to a survey conducted by IBM Entrepreneurial India among Indian investors to find out what they perceived as the most prominent reason for start-up premature deaths in India, 77% of investors attributed ‘undifferentiated business models and a lack of pioneering innovation based on new technologies’ as the biggest reason for start-up failures.²

Most of the Indian start-ups don’t focus on innovative ideas. This is evident from the fact in 2016-17, a time when the start-up growth in India was at its peak, the total number of patents filed in India were only 1423, compared to a whopping 44235 count in Japan, 23846 in China and 14626 in Japan.⁴ And out of these filed patents, only 7% came from the start-up space. The rank of India in the Global Innovation Index is also weak (52/128).

Most Indian start-ups operate on a weak business model. The idea is to increase the valuation, sell the business, and make some quick bucks. Focusing too much on customer acquisition and forgetting to build a self-sustaining revenue model often ends up burning the funds raised by the investors, without generating any income.

Barriers to innovation

Mainly, there are four barriers to innovation-based entrepreneurship in India: Educational, Cultural, Economic, and Regulatory.

1. Education: The Indian education system is obsessed with exams. In most of the undergraduate and even post-graduate institutions, bookish knowledge is given more importance than practical know-how. Since childhood, students are conditioned to mug up lessons, crack entrance exams, bag a good-paying job, and settle. The success of universities is measured by the placement packages with little importance to start-ups built or journals published. Overall, the Indian education system fails to inculcate out-of-the-box thinking in the students.
2. Low tolerance to failure: Generally, we Indians are risk-averse. Daring innovative ventures are frowned upon by parents and teachers alike. Failure is considered shameful, and creative students who wish to tread through an unbeaten path are often discouraged because it is ‘too risky.’
3. Funding issues: While the overall funding increased for start-ups increased in India in the last few years, seed funding has declined considerably. In 2018, 4.3 billion dollars was the total funding received by start-ups in India. This is a 100% increase when compared to the previous year. Even when VCs blame lack of innovation as the main reason for start-up failures, when it comes to investing, they are risk-averse. Rather than supporting true innovations, most of the funding goes to tried and tested ideas. The funding for start-ups at the seed stage has declined from $191 m in 2017 to $151 m in 2018.⁵
4. Regulatory issues: The Indian Government has brought some remarkable initiatives to foster start-up growth in India. Good initiatives include start-up India initiative, Fund of Funds for start-ups through SIDBI, Atal innovation scheme, National Initiative for Development and Harnessing Innovations (NIDHI) etc. But even with these ambitious initiatives, there are some basic issues that are left unattended.

The bureaucratic institutions in India often work like pregnant elephants. Laborious and ineffective, the complex framework often acts as a deterrent to innovation-based entrepreneurship. On average, small businesses in India need to deal with 60,000 possible compliances and at least 3000 filings annually! ⁶

In addition to this, the weak intellectual property regime and the long-wait to process a patent application discourages researchers from patenting their innovation, building a business based on it. While it takes two years to process a patent application in the USA, it takes seven years or more for the same process in India.⁷

With their limited resources and legal knowledge, start-up leaders often find it difficult to carry these out efficiently. Entrepreneurs also require institutional assistance to meet several business requirements like obtaining numerous registrations, certifications, institutional finance, labour law compliance, and tax compliance. This is what Startup India promised to offer, but failed to deliver.⁸

As start-ups focus on futuristic technologies, sometimes the governmental policies fail to catch up with them. The ad-hocism stance in policymaking doesn’t help either.

What can different stakeholders do to foster innovation?

Aspiring entrepreneurs should start a business only with a clear strategy and revenue model in mind. Just a problem-solving mentality would not keep the business afloat. Even when ideas play a huge role in a start-up’s success, the saleability and scalability of the business model propel it forward. While replicating Western business models and tweaking them for Indian markets is not a bad idea, it may not always work out.

The start-ups should also have strong leadership. The founding team must pool their strengths and complement each other by compensating their weaknesses. If gaps are found, consultants should be hired in order to bridge them.

There is no denying that the Government is bringing new policies to help Indian entrepreneurs. While the policies look good on paper, the bureaucratic snags associated with them pave the way to ineffective implementation. 

In addition to providing the required assistance to novice entrepreneurs for different compliances and registrations, the institution should increase the awareness of the policies and reforms that entrepreneurs can make use of. Wouldn’t it be helpful if an open, comprehensive course on all the policies that would help them build their business could be provided to the entrepreneurs?

While implementing new policies, a future-oriented decision making should be done – rather than taking an ad-hoc approach to policymaking, the Government should go by a predictive approach, figure out what could possibly go wrong, and make provisions to address them. All of these activities can reduce the “institutional voids” ⁹, i.e., the poor technological infrastructure and unpredictable markets that hinder the growth of start-ups.

Conclusion

In developing countries like India, start-ups based on innovations have a competitive advantage and high growth prospects. A strong entrepreneurial base not only improves the dynamism of the Indian economy but also provides a path to a robust economic transformation. We are indeed in the right direction. If every stakeholder involved support for the smooth functioning of innovation-based start-ups, the benefit would be manifold ranging from lower unemployment, a higher standard of living to a high growing national economy.

References

1. Digital India – Technology to transform a connected nation (McKinsey Global Institute March 2019)
2. Entrepreneurial India – Report by IBM Institute for Business Value
3. National Employability Report Engineers, 2019 – Aspiring Minds
4. Global Innovation Index 2019 (GII) – Cornell University, INSEAD, and the World Intellectual Property Organization
5. Indian tech start-up ecosystem approaching escape velocity – NASSCOM report 2018
6. https://www.moneycontrol.com/news/business/budget-2019-five-things-the-government-can-do-to-boost-jobs-4122451.html
7. NITI Ayog Report 2015
8. https://www.indiatoday.in/education-today/featurephilia/story/startup-india-problems-1021659-2017-06-30
9. https://www.smu.edu.sg/perspectives/2013/02/27/institutional-voids-black-hole-or-opportunities
10. Enhancing S&T based entrepreneurship : Role of Incubators and Public Policy– DST Centre For Policy Research IIT Delhi

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