The Startup Winter And Beyond

Fans of ‘Game of Thrones’ are well acquainted with the phrase ‘Winter is coming’ symbolising impending hardships. A similar chill is currently sweeping through the Indian startup sector. 

Reports of startup collapse, fundraising challenges, and underperforming venture capital (VC) funds are becoming commonplace. 

Yet, amid this gloom, there is a silver lining: the very discussion of a ‘startup winter’ indicates the maturity that our startup ecosystem has started to attain. 

From Nascent Beginnings To Seasonal Cycles

Unlike Silicon Valley, which is around 50 years old, India’s startup ecosystem is relatively young. While VC firms began establishing themselves in India in the mid-2000s, the real surge in startup culture has occurred only over the last decade or so. 

In this short span, the number of startups has skyrocketed, covering diverse sectors and with the evolution of a comprehensive financing food chain. The fact that we’re now discussing seasonal metaphors like Winter, Spring, or Summer reflects a level of maturity akin to developed financial markets. 

If our ecosystem were still in its infancy, we’d be talking about the end of startup culture, not its cyclical nature.

Today, over 117,254 DPIIT registered startups (as of December 2023) are pursuing innovative solutions in sectors such as ecommerce, fintech, SaaS, GenAI etc. 

A decade ago, the number of startups was less than 3,000! And more importantly, despite the overall funding slowdown, early stage startups continue to attract investor interest; driven by the evolution of the financing food chain.

Evolution Of The Financing Food Chain

A strong sign of the maturity of the Indian startup ecosystem is the evolution of the financing food chain. Today, a diverse set of investors backs startup ambitions:

1. Ultra-High Net Individuals (HNIs) and unicorn founders as Angels
2. Angel Networks syndicating financing among HNIs
3. VC Firms
4. Corporate Investors
5. Government Grants
6. Incubators and Accelerators

Government initiatives deserve the highest credit for rapidly strengthening the startup ecosystem. Programmes like the Startup India initiative, Seed Fund Scheme, and Atal Innovation Mission have institutionalised the startup culture through startup incubators and provided crucial financial support through grants. 

Through various schemes and initiatives, the government has enabled funding of INR 960 Cr to startups and sanctioned INR 828 Cr for infrastructure support. 

Additionally, the Credit Guarantee Scheme for Startups (CGSS) aims to provide collateral-free, fund, and non-fund-based credit support to startups, benefiting over 7,500 startups in three years. 

The success of these initiatives is evident in the cultural shift towards entrepreneurship. This transformation is epitomised by the popularity of shows like ‘Shark Tank’, which have sparked a wave of interest in startups.  

Path To The Best Startup Ecosystem

Despite the progress, challenges remain as the ecosystem continues to emerge. Here are some significant areas that require attention:

Role Of Startup Incubators And Accelerators

Currently, there are over 300 incubators of various types across the country. These institutions play a crucial role in supporting founders in their journey from zero to one. However, there’s a noticeable gap when it comes to fine-tuning product-market fit and scaling up. 

Unlike the abundance of startup accelerators like TechStars, Y Combinator, and Plug and Play in the US, we lack sufficient similar platforms here. What we need are more startup accelerators which adopt a verticalised approach to startup scaling. 

These domain-specific accelerators have the potential to bring together specialist mentors, corporate partners for market access, and investors focused on specific domains. This convergence of expertise and resources creates a flywheel effect, propelling startups from their initial stages to significant growth.

Mentors

Mentoring remains a nascent area within our startup ecosystem. While it’s encouraging to witness founders like Anupam Mittal and Aman Gupta providing advice to startups, the reality is that we face a severe shortage of mentors to meet the needs of the 110,000+ startups in India. 

This shortage stems from the fact that we haven’t produced enough successful startups to build a substantial mentoring pool. Consequently, many startups seek guidance from corporate executives within their industries. 

However, many of these executives lack the necessary experience with startups or the understanding of startup cycles to effectively guide founders. It is quite common to see startups give away advisory equity in exchange for limited value. Given that quality mentoring can be the determining factor for startup success, addressing this shortage is crucial for the growth of our ecosystem.

ESOP

At the heart of every startup lies a promise – a promise to revolutionise the world and offer substantial rewards to founders and key employees who embark on the challenging journey. ESOPs stand as the cornerstone of a startup’s ability to attract and retain top talent. 

However, the current tax laws present a significant hurdle for startup employees. In some form or shape, employees are required to pay perquisite tax upon exercising their ESOPs, regardless of whether the startup ultimately succeeds or fails. 

Why can’t we have a simple rule of tax obligation at the point of sale or transfer irrespective of ESOP duration? 

Consequently, despite the allure of potential rewards, many startup employees find themselves unable to rely on ESOPs for wealth creation, enduring the arduous journey with uncertain prospects.  

Looking Ahead: Navigating The Winter And Beyond

So, while the Indian startup ecosystem faces a challenging winter, this period also signifies a stage of maturity and resilience. The evolution from nascent beginnings to a dynamic, cyclical ecosystem showcases the remarkable progress made over the past decade. 

Despite the hurdles, such as the need for robust mentoring, improved startup accelerators, and more favourable ESOP tax laws, the future remains promising. 

Government initiatives, the growing interest from diverse investors, and the increasing aspirational value of entrepreneurship continue to drive the sector forward. By addressing these challenges head-on and leveraging the existing strengths, India’s startup ecosystem can emerge stronger, setting the stage for a vibrant summer of innovation and growth. 

As we navigate through this winter, the collective efforts of all stakeholders will be crucial in shaping a resilient and thriving startup landscape.