Is Y Combinator Causing Long-Term Damage To India’s Tech Economy?

Is Y Combinator Causing Long-Term Damage To India’s Tech Economy?

SUMMARY

US-based accelerator Y Combinator has been shifting the headquarters of its India portfolio companies to the US

While the HQ flipping is done to cut down the time spent in paperwork and regulatory procedures, Indian investors are crying foul over this practice

Early-stage investors already present on the cap table of YC-selected startups face extra administrative and legal burden due to HQ shifting 

US-based startup accelerator Y Combinator’s (YC) decision to ‘flip’ Indian startups into American entities for the purpose of funding is facing backlash from early-stage investors and founders alike. Startups set up in India but selected for Y Combinator’s 2019 and 2020 batches are mandated to shift their headquarters to the US, which essentially ‘flips’ their India-registered entity into a wholly-owned subsidiary of a new US parent, Inc42 has learnt from founders and early-stage investors who have invested in YC-selected startups.“So you have a bunch of foreign investors who tell our best young startups that they will invest in their companies provided they shift their company domicile overseas. The reason being that they do not want to be subject to Indian laws, taxes and government rules except to the minimum extent required (because) they say they do not trust the Indian government and the legal system. So the ownership of the startup, the intellectual property (IP) and data all shift overseas. However, other operations continue as before; they build their products in India as before using Indian manpower; they sell to customers in India as before,” Bikhchandani told Inc42 in an emailed response.“After creating the US company, the founders and current investors (who have put their money into the Indian entity) would have to be ‘gifted’ some shares of this new U.S. entity for a nominal amount. Next, the US entity (of the startup) will have to open an Indian subsidiary that will carry out all essential operations like hiring employees or building products. Interestingly, the U.S. company will own the IP (intellectual property) and the brand, and will have a service agreement with the Indian subsidiary through which it will pay for the cost of operations with the money raised outside India,” explained Bhagia.“All India-registered alternative investment funds (AIFs), which have invested in that startup, will have to apply to the Securities and Exchange Board of India (SEBI) for approval before they can invest even a token amount in the US company. And the whole thing will take months,” he added.“If 500 of our best startups have shifted overseas and 2% of those become as successful as Naukri and half of that (2%) become as successful as Infosys, we are talking about a future loss of more than INR 17 Lakh Cr in market cap at current prices. These companies will operate in India and access the market. However, they will not be Indian companies. A domicile shift and transfer of IP and data to an overseas company is a permanent loss. As a company grows, so does this loss. Remember that HCL and Infosys were startups in the early ’80s. Imagine what would have happened if they had flipped overseas when they were young. This is a matter of strategic significance for India,” says Bikhchandani.

Several early-stage investors with whom Inc42 had spoken, raised concerns over the shifting of startup headquarters from India to the US, which would increase administrative and legal costs. This could have been avoided had Y Combinator directly invested in the Indian entities.

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