New Generation Start-ups in India What Lessons Can We Learn from the Past?

New Generation Start-ups in India What Lessons Can We Learn from the Past? M H Bala Subrahmanya An increasing number of new generation start-ups in the technology/knowledge-intensive industries have created something of an euphoria in major cities of India. This paper discusses the salient features of the start-up ecosystem that has emerged in our country, its adequacy for start-up promotion, and the measures needed to strengthen this. As a prelude, the paper traces the origin and phases of start-up growth in India, and its employment contribution, relative to the organised sector. The paper concludes with an emphasis on the need for a steady increase in new generation start-ups as a means of productive employment generation, economic transformation and growth. M H Bala Subrahmanya (bala@mgmt.iisc.ernet.in) is Chairman, Department of Management Studies, Indian Institute of Science Bangalore. 56 1 Introduction Of late, technology entrepreneurship leading to high growth technology start-ups is assuming increasing importance the world over as a key to economic development. This is primarily attributed to the recent development of start-up ecosystem flowering all over the world. Historically, high growth start-ups have emerged primarily from a couple of start-up ecosystems, particularly Silicon Valley and Boston in the United States (US), but this trend appears to have reached its end. Along with a global explosion of entrepreneurship, there has been an explosion of new start-up ecosystems around the world (Start-up Genome 2012). Start-ups, generated due to technology-based entrepreneurship and known as new technology ventures (NTV) can have significant positive effects on employment, and could rejuvenate industries with disruptive technologies (Song et al 2008). Start-ups can contribute to structural change by introducing new knowledge-intensive products and services (OECD 2013). Of late, India has been recognised, as one of the potential sources of hi-tech start-ups in the global economy (Gai and Joffe 2013). Within India, its Silicon Valley, Bengaluru is considered to have one of the best ecosystems for start-ups in the world (Start-up Genome 2012). It is also considered one of the nine International Start-up Hubs outside the US (Pullen 2013). About a decade back, India was considered one of the dynamic adopters of technologies and Bengaluru was considered one of the 46 Global Hubs of Technological Innovation in the world (UNDP 2001). Today, India in general, and Bengaluru in particular is characterised by the presence of a growing population of young technocrats who are the potential sources of start-ups through NTVs. The growing potential for start-ups should augur well for the Indian economy because new venture creation has been statistically linked to both job creation and regional development (Acs and Armington 2006). However it is important to understand its flip side as well. Start-ups have been observed to have a limited survival rate (Song et al 2008). Creating a start-up involves a considerable degree of uncertainty regarding its future. More often, start-ups are created on a small scale with limited resources. They often face large and experienced competitors, powerful suppliers, sceptical customers and scarce resources (Subrahmanya 2010). Therefore, their ability to withstand sustained losses is usually very limited, and as different researchers have observed, start-ups have a high failure rate relative to established firms (Hannan and Freeman 1984; march 21, 2015 vol l no 12 EPW Economic & Political Weekly

2 The What and Why of Start-ups A start-up is, in general, defined as a new venture which has no previous history of operations. Such new ventures suffer from the liability of newness derived from the fact that they (new ventures) are unfamiliar and without precedent (Stinchcombe 1965; Baum 1996; Certo 2003). In terms of age, they are age-zero firms or infants (less than one-year old) (Kane 2010). A start-up means creating a new business, which stands alone, and is not tied to other organisations, except in SPECIAL ARTICLE Hay et al 1993; Robinson 1998). According to Barringer, Jones and Neubaum (2005), of the estimated 7,00,000 new ventures started each year in the US, only 3.5% grow sufficiently to evolve into large firms. The most important predictors of start-up survival and growth identified include the entrepreneurial characteristics, resources, strategy, and organisational structure and systems (Gilbert, McDougall and Audretsch 2006). These are largely firm-level influencers. Another important but external influencer of start-up survival and growth is a start-up s geographical location (Folta, Cooper and Baik 2006). This is because start-ups are highly dependent on the local environment for resources needed to sustain operations (Romanelli and Schoonhoven 2001). As there are inequalities in the availability of resources in different geographical locations, a start-up s geographic location has strong implications for its survival as well as growth (Glibert, McDougall and Audretsch 2006). Further, the regional perspective is particularly relevant in terms of policy, since measures that aim at stimulating new business formation are in most cases directed towards regions more than industries (Fritsch and Noseleit 2013). All these indicate that it is the strength of the regional ecosystem, which can nurture and promote start-ups, which would determine the rate of emergence as well as the rate of success of start-ups in different economies. Of late, start-ups have attracted the attention of Indian policymakers. The Inter-Ministerial Committee for Micro, Small and Medium Enterprises (MSME) has come out with a comprehensive list of recommendations for the promotion of start-ups in the Indian economy (Ministry of MSMEs 2013). In this the normal course of trading. It does not mean that the idea is necessarily new, it is only the vehicle which is set up to exploit it (Stokes 1995). They do not include existing enterprises which are acquired by new management or inherited by younger generations from the older ones, and they do not include spin-offs where a large firm has a control, directly or remotely. They do not include franchises of any form. The scope of a start-up can vary significantly in line with the objectives of the founder/s, linked to their willingness and ability to invest in the enterprise. The level of risk taken by the founder/s can range from virtually nothing to highly significant personal, financial and time investment. This investment can be made by an individual on their own, as the sole owner of the new venture, or it can be shared with others, who are either directly involved as equal partners, or less committed but still investing money, or time, in initiating the venture. Thus, a start-up may emerge as an individual proprietorship or partnership or as a private limited company or even as a cooperative enterprise (Stokes 1995). The word start-up may be new but start-ups are not new to the Indian economy, as much as to the global economy. Historically, start-ups have emerged for a variety of reasons/ objectives. Broadly, they can be classified under five heads: (i) as a means of livelihood, (ii) due to policy support/inducements, (iii) in response to the needs of large firms, (iv) understanding the wider market opportunities, and (v) due to innovative ideas based on knowledge acquired and experience gained, over a period of time. However, these objectives might overlap in most cases, and therefore, they cannot be treated as watertight compartments. context, it is important to understand the evolution of start-ups in the Indian economy, its different growth Figure 1: Possible Routes for Start-up Emergence in India Start-up Routes phases, and its current scenario. Further, it is appropriate to examine the necessity or adequacy of proposed 1 2 3 support system for the promotion of Traditional Industries and Technology/Knowledge-Intensive start-ups, to ensure that they will be Modern Industries and Services Services Industries and Services able to make a significant difference to job creation and economic growth. This paper makes an attempt towards that end. At the outset, it is important to understand what do we mean by Traditional Start-ups Startups Modern Start-ups Startups New GenerationStart-ups Startups start-ups? Why do they emerge? Cottage/Household / Unregistered Medium- Micro- Small-Scale Scale Individual Partnership Private And in what form, generally, can Industries or Workshops or Scale enterprises Handicraft Enterprises Enterprises Proprietorship Firms Limited Artisans Artisan Workshops Enterprises Firms Companies they emerge? Given the above, start-ups can emerge in both rural and urban areas, from time to time. They can spring up in (i) traditional manufacturing industries and services, (ii) modern manufacturing industries and services, or (iii) technology/ knowledge intensive industries and services. Thus, in an emerging economy like India, start-ups have three parallel tracks for emergence (Figure 1). In traditional manufacturing industries, they had emerged and continue to emerge as (i) cottage industries/household industries/handicraft artisans, which Economic & Political Weekly EPW march 21, 2015 vol l no 12 57

are run exclusively based on household labour and thus employed no hired labour, and (ii) unregistered workshops or artisan workshops, which hired labour. The latter is an extension of the former and is likely to involve a larger scale of production relative to the former. In pre-independent India, at the beginning of the 19th century, even urban industry was mainly in the nature of handicrafts, the chief industry being textile handicrafts (Gadgil 1972). In modern manufacturing industries and services, promoted since independence, start-ups can emerge as microenterprises or small-scale enterprises or medium-scale enterprises (together known as the MSME sector), which are determined based on the scale of investment. In technology/knowledge intensive industries and services, start-ups are generally coming up as proprietorship or partnership firms or as private limited companies, based on the nature of ownership. [It is important to note that an enterprise in the MSME sector is also classified in terms of nature of ownership, and similarly an enterprise in the technology/knowledge-intensive sector can be classified as a micro/small/medium enterprise based on its scale of investment.] With this backdrop, it is appropriate to examine the different phases in the evolution of start-ups in India. 3 Start-ups in India: Origin and Phases To understand the current status of start-ups in India, it is necessary to ascertain its origin in terms of its earliest form and its economic contribution in terms of employment, the different phases of its evolution, and the factors which facilitated them. Broadly, the evolution and growth of start-ups and their contribution to the Indian economy can be identified under three phases, over a period of time. 3.1 Household Industries/Own-Account Enterprises Historically speaking, it was the cottage industries, which were start-ups in their earliest form, which led to the diversification of traditional economies from agriculture to industry and services. It comprised village industries such as smiths, shoemakers, garment-makers, handicrafts, masons, carpenters, builders, various crop processing activities and so on, and the subsistence-level off-farm activities of peasant households. Their primary function was to provide rudimentary inputs and processing services to agriculture and to cater to the non-food needs of the rural population (Anderson 1982). This was the first phase of industrialisation, known as proto-industrialisation, which was supported by a putting-out system, among others, in which cottage industries comprising rural handicrafts and artisans thrived (Mendels 1972). These cottage industries sprang up in India as well as elsewhere spontaneously and largely in response to market conditions and population growth. Only some crude forms of rural moneylenders [or urban merchant entrepreneurs, as in the case of Europe (Mendels 1972)] would have played a positive role in facilitating its emergence. Cottage industries played a decisive role in rural economic diversification by generating much needed non-farm employment. However, industrial revolution gave a death blow to these cottage industries 58 through the demise of putting-out system and factory industrialisation began. This held good for advanced countries like the United Kingdom (UK), and other parts of Europe. Even for developing countries, it was observed that with economic growth, rise in income levels and expansion of rural markets, household industries tend to decline, unregistered workshops tend to grow, eventually leading to factory sector growth (Anderson 1982). In India, this kind of transformation was observed implicitly in the context of Karnataka in the 1980s (Subrahmanya 1993). But, at the same time, cottage/household industries continued to play an important role, particularly in rural India as many of them have become ancestral professions over a period of time. Further, putting-out systems, which facilitated the continuation of household industries, thrived in India in some regions even in the 1980s (Subrahmanya 1993). With the introduction of the Economic Census in 1977, household industries have been identified as Own account enterprises (OAEs) (CSO 2001). There is no formal registration for OAEs and they can emerge conveniently in any household across the country. The only source of ascertaining the magnitude of OAEs and their employment contribution today is the Economic Census, which is conducted periodically. What is significant to note is that OAEs keep emerging in the Indian economy even now. The growth of nonagricultural OAEs, in terms of number of enterprises and employment between 1998 and 2005, is presented in Table 1. The number of nonagricultural OAEs has gone Table 1: Non-Agricultural Own Account Enterprises, 1998 99 to 2005 06 Year Number Total of OAEs Employment 1998 1,82,72,847 2,68,86,121 2005 2,18,07,829 2,78,93,191 (2.56) (0.53) Figures in bracket given the percentages. Figures in parentheses are CAGR over the previous period. Source: Central Statistics Office (2001, 2008). up from more than 182 lakh in 1998 to more than 218 lakh in 2005 (a compound average growth rate (CAGR) of 2.56%). The total employment generated by the non-agricultural OAEs increased marginally from about 268.8 lakh in 1998 to about 278.9 lakh in 2005 (a CAGR of 0.53%). Thus, along with India s economic growth, non-agricultural OAEs, which represent traditional industries and services, have also grown from strength to strength. If the number of non-agricultural OAEs and employment are increasing over time, this is due to two factors: (i) Continuity of ancestral professions by families, in the absence of more lucrative alternative employment opportunities, and (ii) emergence of new OAEs (in the form of start-ups) as a means of employment generation. This could be attributed to (i) a lack of inclusive economic growth, and (ii) unabated population growth over time, particularly lower-income household populations characterised by low levels of education. Thus the major source of entrepreneurship for OAEs is poor-income, less-educated households across the country. Therefore, OAEs primarily represent livelihood based entrepreneurship. Today they have become such a formidable economic force that its employment of 278.9 lakh (in 2005) has exceeded the total organised sector employment of 269.9 lakh (in 2005) (Ministry of Finance 2013). march 21, 2015 vol l no 12 EPW Economic & Political Weekly

How to transform the OAEs into the organised sector has remained a major challenge to our policymakers. 3.2 Modern Small-scale Industries The second phase of start-up growth began with India s independence, more precisely in the late 1950s and after. The Government of India formed an exclusive Small Scale Industries Board (SSIB) to promote modern small-scale industries (SSI) in the country, along with five other boards to promote traditional industries such as handlooms, handicrafts, coir, sericulture, and khadi and village industries, from the 1950s onwards (Planning Commission 1985). Exclusive institutional infrastructure and policies have been formulated over the period to protect and promote SSIs (Subrahmanya 1998). Thus policy interventions at the national, regional and local levels have been conspicuous by their presence to promote this sector (DCSSI 2002). The growth of SSI due to the regular emergence of start-ups has been a significant feature Table 2: SSI Growth and Start-up of India s small-scale industrialisation. As a result, they Emergence in India, 1990 91 to 2005 06 Year Number Number of Start-ups of SSI are able to contribute increasingly in terms of employment, 1990 91 67.9 (in Lakh) (in Lakh) production and exports. It is 1991 92 2.7 70.6 estimated that in terms of 1992 93 2.9 73.5 value, the sector contributes 1993 94 3.0 76.5 about 45% of the manufacturing output and 40% of 1994 95 3.1 79.6 1995 96 3.2 82.8 1996 97 3.4 86.2 total exports of the country 1997 98 3.5 89.7 (Ministry of MSMEs 2012). The 1998 99 3.6 93.4 annual start-up emergence 1999 2000 3.8 97.2 and the cumulative number of 2000 01 3.9 101.1 SSI enterprises from 1990 91 2001 02 4.1 105.2 to 2005 06 are presented in 2002 03 4.3 109.5 Table 2. The rate of emergence of start-ups has steadily 2004 05 4.6 118.6 2003 04 4.5 114.0 increased in the era of globalisation since 1990 91. 2005 06 4.8 123.4 Source: Kasturi and Bala Subrahmanya (2014). The entrepreneurship for SSIs emerged from different social categories (Ministry of MSMEs 2013). In terms of the educational background of entrepreneurs, there is evidence to show that it ranges from minimum school education on the one hand, to PhDs in engineering/management, on the other, comprising Class 10 pass-outs, college dropouts, diploma holders, technical and non-technical graduates and postgraduates (Subrahmanya et al 2001). Given the vast institutional network for the promotion of SSIs across the country, from national to regional and subregional levels, some of these start-ups might owe their origin to this exclusive support system created over a period of time. Further, most of these enterprises would have benefited from one policy promoted institution or the other, by availing support varying from mere information, to institutional finance, subsidy, government procurement, technology, price preference, subcontracting assistance, raw material imports, procurement of machinery on lease, subsidised infrastructural inputs, industrial sheds, technology upgrades, or even manufacturing of SPECIAL ARTICLE products reserved exclusively for SSI manufacturing. Therefore, this may be broadly called policy induced/sponsored entrepreneurship. The modern SSI sector employed 295 lakh persons in 2005 06, which was much more than the total organised sector employment (269.9 lakh in 2005 06). However, what is more worrisome is that our modern SSI sector never remained modern. Technological obsolescence and sickness became two of the key challenges faced by this sector (Chakrabarty 2012; Ministry of MSMEs 2012). Empirical studies have also brought out that there was hardly any gradual growth from micro to small, small to medium, and medium to large enterprises in Indian industry due to policy bias against gradual growth (Little, Majumdar and Page 1987; Kashyap 1988). There is a need to nurture and strengthen the sector in such a way that today s small firms will converge into large firms tomorrow or even into multinational corporations (MNCs) (Chakrabarty 2012). This brings out that, how to promote the competitiveness of modern small-scale sector remains an issue of concern to policymakers even today (Ministry of MSMEs 2012). Figure 2: Employment Contributions of OAEs, SSIs, and Organised Sector, 1990 91 to 2005 06 300 Overall, the first two phases of start-ups have played a crucial role in employment generation in the Indian economy. Though both SSI and OAEs generated employment much less than that of the total organised sector in 1990 91 and 1998 99, respectively, by 2005 both of these sectors individually employed more of the workforce than the entire organised sector (Figure 2). Economic & Political Weekly EPW march 21, 2015 vol l no 12 59 Employment (in Lakh) 250 200 150 100 50 1990 91 2005 06 1998 99 0 OAEs SSI Organised Sector Employment generated by OAEs, SSI and organised sector Sources: (1) Central Statistics Office; (2) Ministry of MSMEs; (3) Ministry of Finance. Figure 3: Employment Growth Rates of OAEs, SSIs, and Organised Sector 5 Growth Rates of Employment (%) 4 3 2 1 0-1 1990 91 to 2005 06 1998 99 to 2005 06 OAEs SSI Organised Sector Employment growth of OAEs, SSI and organised sector.

Obviously, employment generated by OAEs and SSIs grew whereas organised sector employment appeared to be virtually stagnant between 1990 91 and 2005 06, but in fact it actually declined in absolute terms by 2005 06 compared to 1998 99 (Figure 3, p 59). However, the roles of both OAEs and SSI are supposed to be largely transitional in the process of industrialisation and economic development (Anderson 1982). But we have not succeeded in dealing with their transformation (with OAEs in the first phase) and in their gradual growth by steadily building up their competitiveness over the period (with SSI in the second phase), and thereby we have failed to integrate them successfully into the overall industrial economy of India. The increased employment contributions of both OAEs and SSI, and the competitiveness-related challenges of SSIs are a reflection of the failure of policies more than anything else. The emergence and growth of new generation start-ups has to be examined in this backdrop. 3.3 New Generation Start-ups The third wave of start-ups or new ventures began rather spontaneously since the onset of economic liberalisation in the early 1990s. This is in response to (i) the informattion and communication technology (ICT) r evolution, and (ii) globalisation characterised by the freer movement of labour and capital between countries, which transformed the organisation of production throughout the world, where firms increasingly work in networks (OECD 2013). Thus, like the original wave of cottage industries, new generation start-ups are emerging more due to market forces more than anything else. However, unlike the earlier waves, these start-ups have multiple sources of entrepreneurship such as ICT industries, higher education institutions (HEIs), public sector units (PSUs), research and development laboratories, technology business incubators (TBIs) and accelerators, return migration of highly qualified and resourceful Indians (entrepreneurs as well as former employees of MNCs) in the form of reverse brain drain, etc. Generally, the entrepreneurs of new generation start-ups are either technical graduates/ postgraduates or technical graduates with postgraduate management qualifications, or doctorates with previous work experience or previous start-up experience. Non-graduates are non-existent and non-technical graduates are exceptions (Krishna and Subrahmanya 2014; ispirt 2014). Therefore, this is largely technology/knowledge-based entrepreneurship, and it is duly supported by new forms of financing such as venture capital funds (VCF; both domestic and foreign), angel investors, and private equities. Further, an ecosystem has gradually emerged to support new generation start-ups in different cities, like Bengaluru (Figure 4). The ecosystem has a strong base of diversified sources of entrepreneurship on the one hand, and three important sources of funding, on the other. In addition, the enactment of Limited Liability Partnership (LLP) Act, 2008 and the recently established SME Exchange platforms on the Bombay Stock 60 Exchange (BSE) and National Stock Exchange (NSE) (though introduced for the MSME sector and not exclusively for new generation start-ups), enables early corporatisation and further fund raising, on the lines of start-ups in the US. Added to these are the initiatives of National Association of Software and Services Companies (NASSCOM), Tata and some of the MNCs, such as Microsoft and Cisco, promote start-ups. Finally, it also includes numerous private websites (such as india.startuplogic.com; desistartups.in and StartupNews.in) which facilitate the diffusion of much needed preliminary information, and programmes (such as Start-up Garage) which enable prospective entrepreneurs to understand the prerequisites of entrepreneurship. Figure 4: Ecosystem for New Generation Start-ups in India Source of enterpreneurship Technology/knowledgeintensive large firms (MNCs or domestic) Higher education institutions R&D organisations Public sector undertakings Technology business incubators (TBI) & accelerators Reverse brain drain NASSCOM Start-up websites Informal start-up clubs + programmes Start-up initiatives by technology/knowledge intensive companies Private Support System New generation start-ups Public Support System Limited Liability Partnership Act 2008 SME Exchange Sources of funding Angel investors Private equities Venture capital funds The recent initiatives of NASSCOM are of particular significance and deserve an elaboration. The NASSCOM has taken several initiatives focusing on different cities, towards the development of an ecosystem for encouraging start-ups in the country. Of them, the most notable one is the Great Indian Start-up Carnival, as part of which NASSCOM initiated 10,000 Start-ups Programme with the support of Google, Microsoft, Kotak, Intel and Verisign (NASSCOM 2014). According to Rajat Tandon, Senior Director, NASSCOM, The 10,000 Start-ups program was envisioned to bridge the gap in terms of the support available to early stage companies especially when they are trying to go from a technological prototype to building a profitable and sustainable business venture. As an ecosystem we need to make the cost of failure small and we don t just need more enterprising founders but also investors who are willing to take risks and also willing to handhold these ventures in this critical stage of their evolution Recently, NASSCOM has launched a NASSCOM Technology Start-up Registry and introduced start-up skills initiative (NASSCOM 2014). Perhaps the first-ever initiative taken by policymakers was the launch of Technopreneur Promotion Programme (TePP) by the Ministry of Science and Technology, Government of India in 1998 99. TePP is a mechanism to promote individual march 21, 2015 vol l no 12 EPW Economic & Political Weekly

innovators to become technology-based entrepreneurs (Technopreneurs). Currently, TePP has 34 outreach centres across the country to promote individual innovators (DSIR 2014a). Of late, the promotion of start-ups has attracted more attention from policymakers. Among the recent initiatives taken by government agencies, the formation of TBIs by the National I nstitute of Science and Technology Entrepreneurship Development Board (NSTEDB), Department of Science and Technology (DST), and the Council for Scientific and Industrial Research (CSIR), through National Chemical Laboratory (NCL), Pune, are worth mentioning. The introduction of PRISM (Promoting Innovations in Individuals, Start-ups and MSMEs) scheme in the Twelfth Five Year Plan is another important development. PRISM is open to any Indian citizen with an innovative idea and the wish to translate their idea into working prototypes/ models/processes; or public-funded institutions or organisations engaged in the promotion of innovation (DSIR 2014b). A more significant development relating to start-ups are the recommendations of the Inter-Ministerial Committee for Accelerating Manufacturing in the MSME Sector (Ministry of MSMEs 2013). The committee recognised the role that start-ups can play in accelerating the growth of manufacturing output as well as catalysing a shift towards better technologies and productivity (p 24) and the role of the government in creating a conducive environment for start-ups in the form of favourable legal and regulatory framework, infrastructure, mentoring and guidance, and finance (Ministry of MSMEs 2013). Stable, simple and conducive regulatory environments are often the first and exclusive focus of those who try to accelerate the growth of start-up ecosystems. Therefore, the committee has made recommendations focusing on the need to have simplified rules and regulations, easy availability of infrastructure including land and building, role of district industries centres as facilitating institutions, and strengthening the ecosystem, particularly through angel investors, early stage venture capital funds, India Inclusive Innovation Fund, and promotion of open hub systems and TBIs (Ministry of MSMEs 2013). A recent noteworthy development is the proposal made in the Union Budget (2014 15) to establish a Fund of Funds with a corpus of Rs 100 billion for providing equity through venture capital funds, quasi equity, soft loans and other risk capital specially to encourage new start-ups by youth (Ministry of Finance 2014). But the success of such a fund will largely depend on its implementation. There will be a need to get competent people to identify the right kind of investment opportunities, set targets for deployment of fund in a timebound manner, etc (Business Today 2014). Overall, the above discussion brings out that, unlike in the earlier two phases of start-ups, both public and private initiatives for the promotion of start-ups have been emerging, though independently, in major cities across the country. However, the efforts will bear more fruit if public-private joint initiatives are encouraged in this regard. The recent proposal made by the NASSCOM to the Government of India acquires significance in this context. With an assumption that about 50,000 technology start-ups can generate about 3 million SPECIAL ARTICLE additional employment and contribute 2% of the GDP by 2020, the NASSCOM has recommended the launch of Rs 5,000 million India Technology Entrepreneurship Mission (ITEM) to further foster the ecosystem to accelerate the growth of start-ups (NASSCOM 2014). While the ecosystem for start-ups is getting stronger day by day, there is no clarity about the employment contribution of new generation start-ups yet. This is because, unlike the initial two phases of start-ups, no official attempt to gather data on the number of new generation start-ups and their employment contribution has been made so far. However, there are indications that technology/knowledge intensive industry start-ups are emerging in all the major cities of India, with Bengaluru accounting for the bulk of start-ups as well as closures. The database of Microsoft Accelerator could trace nearly 4,000 startups across the country (Microsoft Accelerator Research 2012). How far this figure is closer to reality, may be a debatable issue. 4 Evaluation and Conclusions India has a unique historical experience of dealing with startups. While the earliest form of start-ups, OAEs, almost vanished in industrialised and newly industrialised countries, they are going strong in Indian economy, in terms of supporting subsistence livelihood to poor income-less educated households. With India s independence, when policymakers laid stress on promoting modern industrialisation, SSI assumed promotional significance, soon complemented by a host of protective measures. The promotion of SSI in a protected environment did more harm than good resulting in technological obsolescence and sickness. However, overall, similar to OAEs, SSI has grown in size and employment. Thus, the first two versions of start-ups have thrived side by side in Indian economy, in the midst of constraints and shortcomings within. The new generation start-ups represent the third phase/wave/ dimension of start-ups. They are largely the product of the ICT revolution and globalisation. The ecosystem that has emerged in major cities of the country is distinct and unique in terms of sources of entrepreneurship and finance. An appropriate support system has emerged due to market forces, supplemented by some policy initiatives. However, India s policy for new generation start-ups is in its infancy, as it primarily focuses on the generation phase of start-ups and not on the subsequent stages to deal with either success and growth or failure and closure. What causes concern at this stage is that the proposed policy support by the Inter-Ministerial Committee (Ministry of MSMEs 2013) gives an impression that the government is going to view the promotion of start-ups through the same lens through which it viewed the promotion of MSMEs. There is a need to view the new generation start-ups in a distinct framework, based on the lessons learnt from the past. This is due to the following reasons: (i) The entrepreneurial background of new generation startups is entirely different from that of the MSME sector of the second phase. These start-ups are emerging neither as a means of livelihood nor in response to policy inducements. Rather, they are coming up largely with the knowledge base and Economic & Political Weekly EPW march 21, 2015 vol l no 12 61

technology/innovations achieved by the entrepreneurs in response to perceived market opportunities. (ii) The growing population of TBIs and accelerators is presenting an altogether new environment for new generation startups. They are meant for promoting/accelerating the commercialisation of most potential innovative ideas/products. Therefore, start-ups emerging from them are likely to have a higher probability of success than failure. (iii) There is no guaranteed or subsidised finance for any new idea from any financial institution. Angel investors/venture capitalists/private equity funds will intensively screen and assess the potential of an innovative idea/product, and based on satisfactory evaluation only will such ideas/products be commercialised. (iv) The market support system for start-ups, which are emerging will enable the prospective entrepreneurs to acquire the required preliminary information from websites, start-up clubs, seminars and conferences, apart from NASSCOM. Further, those startups which succeed can go public by making use of SME platforms and thus raise more resources for their scale expansion. (v) In most cases, the entrepreneurs themselves would have made plans to withstand any kind of eventuality, including start-up failure. In fact, the start-ups should be viewed to form the base of a pyramid where successfully grown medium firms and large firms should form the intermediate layers whereas the most successful ones would grow to become MNCs, which would constitute the top of the pyramid (Figure 5). In such a pyramidal structure, there should not be any scalar bias and the evolution of large sized firms and MNCs should happen spontaneously and continuously. This will coincide with the closure of unsuccessful ones and survival and modest growth of moderate achievers. Figure 5: A Hypothetical Pyramidal Structure of Technology/Knowledge Intensive Industries and Services MNCs Large firms Medium-sized firms would always like to grow, to facilitate such a growth, late stage venture capital must be strengthened as much as early stage venture capital. (iii) It is essential to recognise the imminent failure of weak start-ups. Appropriate mechanisms must be developed to deal with start-up failures by allowing their closures, irrespective of their age and size, and redeployment of such invested funds, as far as possible. There should be no attempts made to artificially make the firms alive, by declaring them sick and deal with their sickness. Some of the failed entrepreneurs might try to restart a new venture, with their learning and experience from the past mistakes, whereas some others might join large firms as employees. There is already evidence to show that about 61% of first time failed entrepreneurs got back to work at large companies in India (Microsoft Accelerator Research 2012). Repeated experiments and attempts by entrepreneurs would contribute to the evolution of a better ecosystem for start-ups in the course of time and therefore it deserves to be encouraged. Allow them to swim and/or sink as they deserve. (iv) Acquisitions, mergers, and/or takeovers of start-ups by other firms, MNCs, or domestic large firms should form part of the ecosystem. In many cases, talented entrepreneurs might initiate start-ups time and again, to make profits by enticing large firms to acquire them. This might encourage other prospective entrepreneurs to learn and follow suit. A suitably developed start-up ecosystem can lead to a steady increase in the generation of start-ups and growth of the successful ones, and thereby promote a vibrant technology/knowledge-intensive industry in the country. This should eventually result in employment generated by newgeneration start-ups led technology/knowledge-intensive e nterprises to outpace SSIs [or micro, small and medium enterprises (MSMEs)] as well as OAEs in the coming decades. An approximate description of this anticipated scenario is presented in Figure 6. Figure 6: Relative Significance of Three Generations of Start-ups for Employment over Time Employment * Livelihood-based entrepreneurship + Policy-induced entrepreneurship $ Technology/knowledge-based entrepreneurship Start-ups Given the above, the policy for the promotion of start-ups must focus on the following core issues: (i) Incentives for start-ups, if at all, must be time-bound and not perennial. This will dissuade the less successful startups to remain infants enjoying the concessions and benefits. Rather, efforts should be focused on what LeBlanc (2012) calls, development of Mass Incubators, drawing on the tenets of Y Combinator and 500 start-ups in the US. These efforts should not be confined to Tier I cities alone but should cover Tier II and Tier III cities as well. (ii) It is imperative to facilitate the scalability of start-ups that survived and stabilised successfully. While the successful ones 62 OAE Employment* SSI/MSME Employment + Technology/Knowledge- Intensive Industry Employment $ Time To conclude, we have not dealt successfully with the earlier two phases/waves of start-ups, and we cannot afford to falter again while dealing with the third wave of start-ups. How do we deal with new generation start-ups will have a long lasting impact on future productive employment generation, economic transformation and growth, and possibly, external economic performance of India. march 21, 2015 vol l no 12 EPW Economic & Political Weekly

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