Of late the rate of unemployment has come up as a significant issue in the public sphere. Though it has always been significant, thanks to debates that regularly precede every election, the issue has now caught the public eye. Questions are also raised if the Startup India movement has lived up to its hype and how much help it can offer when the specter of unemployment looms large on the horizon.
Let us take a step back and first understand the meaning of the word startup. The following story is well documented in various articles, books and documentary movies. It starts in the late 1950s when few silicon chip makers housed themselves in and around southern San Francisco Bay Area. The area was mostly known then for agriculture and ranching and offered a lower cost of living. Between 1956–58 after three tech IPOs (including Hewlett-Packard) from the region, the ‘traitorous eight’ employees left Shockley Semiconductor Laboratory to form Fairchild which later spawned Intel and numerous other companies. Entrepreneurs consciously developed the work hard, play hard culture and produced the first Integrated Circuit (ICs) and microprocessors. Gordon Moore, co-founder Intel, observed that the number of transistors per square inch of an integrated circuit chip doubles about every two years while the costs are halved (Moore’s law).
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These companies solicited investments from private individuals who had day jobs at various financial institutions. Wishing to cash in on this semiconductor revolution, successful entrepreneurs invested in fledgling ‘startups’. The region, now called Silicon Valley, formed a symbiotic relationship between opportunists and risk takers, between inventors and angel investors and the tech expertise of Stanford University. Institutional investors woke up to these market shifts and started capitalizing in fast-growing early-stage companies which carried more risk than they were habituated to and eventually formed venture capital firms (VCs) for such specific asset class which often needed more intuition than traditional risk assessment for investing.
In the context of India, the Government, to offer a mainstream playground has defined the meaning of the word Startups in terms of annual turnover (INR 100cr or less), age (up to 10 years) and companies which have an element of innovation. This third bullet point on innovation remains vague and therein lies the ambiguity and the deviation from the traditional meaning of the word startup. The Department of Science and Technology (DST of the Ministry of Science & Technology) enabled the first few startup Incubators almost three decades back in India. The whole ‘startup ecosystem’, the VCs, angels and startups independently evolved imbibing the ethos of the Silicon Valley meaning of startups. Naturally after the Government’s recent intervention through Niti Aayog, while the ambit of companies who can now be called startups has increased, the startup ecosystem remains rooted to the traditional meaning, and thereby sources of alternative investments (VCs and angels) have by and large remained the same. The Government in its right intention seeks to drive skill building and job creation. Startups and VCs come from the point of view that inefficiency is the biggest employer and seek to innovate, i.e. augment returns from optimal resources or maximize benefits from minimal resources (read Moore’s Law). It is important to note that not every startup is a Flipkart or an Ola which created massive direct and indirect jobs. For example, when Whatsapp got acquired by Facebook for $19b, the company comprised of 32 engineers and 450 million monthly active users, i.e. 1 engineer for every 14 million users. Therein lies the dichotomy. In the context of this article let us distinguish VC investible startups by ‘Startup1’ and Govt definition of startups by ‘Startup2’ wherein Startup1 is a subset of Startup2.
The impact is such that a lot of startups who have the DIPP startup recognition certificate are not considered investible by VCs. This fallout could be due to various reasons; however, the chief reason being simply the lack of innovation. Every VC is seeking to invest in either an investment/product segment category creator or a category leader. For most industry sectors, the 5th company doing the same thing may be a company too many for the VC. So a vast majority of Startup1 are left without capital. In turn, a majority of Startup2 who have reasonable funding have not bothered to apply for the DIPP certificate. The Mudra scheme for non-collateral loans catered to a tiny few. Given the glamour attached to startup funding and a general lack of sources for working capital, a lot of companies with homogeneous products working in perfect competition with innumerable companies are trying to rebrand themselves as startups. These companies ultimately end up being in the Startup2 basket — for example, new restaurants or cafes.
To be fair to the Government, there are numerous studies which show a positive influence of startups to the economy.
The Kauffman Foundation published a study back in 2010 which positively affirmed that net job growth occurs in the US economy only through startup firms. https://www.kauffman.org/-/media/kauffman_org/research-reports-and-covers/2010/07/firm_formation_importance_of_startups.pdf. The study encompassed startup firms younger than 1-year-old from 1977–2005.
In yet another study in 2015, the Kauffman Foundation states that irrespective of the size of the firm, startups under 5 years old account for nearly all net new job creation since the recession of 2008/09. https://www.kauffman.org/-/media/kauffman_org/resources/2014/entrepreneurship-policy-digest/september-2014/entrepreneurship_policy_digest_september2014.pdf
In spite of all the policy issues, we live in exciting times. The startup ecosystem broadly consists of not just investors and startups, but along with them, customers, users, the parents and family of these entrepreneurs all of whom together contribute to nurturing the enabling environment. It is much easier to go to a potential customer and co-ideate an upcoming product. I have had the opportunity to hustle my way through and spend productive time with Fortune 500 CEOs to frontline workers at agri-produce markets. It may perhaps be easier for a startup individual to meet Mr. Narayana Murthy at a startup conference than an average Infosys employee. Parents have become more supportive and allow kids to explore alternate careers. Gone are the times when parents aspired for their kids for a sarkari naukri (public sector jobs) or jobs at software services firms like Infosys or TCS. The ecosystem listens to budding individuals, and that is a substantial positive dividend from the Startup India movement. The demographic dividend we keep harping about is not just defined by the age of our population but also by the bulging population of these ‘young’ entrepreneurs who tried a startup or worked at one and experienced the entrepreneurial way of doing things than at a corporate — more responsibility, more initiative, creative thinking, nimbleness, growth mindset, the 360 degrees experience, all augur well for the long term. The decision makers of tomorrow are sensitised towards a form of agility which is otherwise not observed at a corporate.
Perhaps it is time we give a more considerable impetus to entrepreneurship as a whole and not just startups. SMBs employ the largest workforce after agriculture in India, and there is always room for them to grow. For the startups who succeed they will eventually either be acquired or graduate to being an SMB or perhaps turn into a large corporate. It is crucial to solving the working capital crisis once for all and champion SMBs as much as we have championed startups. Nationalized banks were created for the sole reason of catering to smaller organizations; however, these small organizations grapple with the same age-old issues while banks build NPAs out of larger organizations. This brings me to my last point.
Let’s reimagine entrepreneurs in 3 buckets — scalable, reliable and lifestyle. Each course of entrepreneurship is optimized for either one of these three motivations.
(1) Scalable businesses are the ones trying to achieve maximum impact within a short period, chasing the hockey stick growth and the grow fast — fail fast theory. These businesses generally have a gestation period and need external risk capital to create market leadership. VCs lean towards backing this category and prefer to label them as startups. At a certain point in its journey, the company may lose its nimbleness and agility owing to the size of the organization and that is when it ceases to be a startup and becomes a corporate.
(2) Reliable businesses, on the other hand, are optimized for sustenance. The intention may be to take care of immediate family needs and build a business of assured income over the long term. They may carry occasional risks depending upon entrepreneur appetite. These can also be called spreadsheet startups. A bank or private equity firm may provide capital to this category primarily basis the company’s performance on a spreadsheet. In the previous category, the market opportunities of disruption play a more significant factor than the company’s performance on a spreadsheet. Generally, businesses in manufacturing, distribution, trading, export-import, F&B and services fall into this category and tend to be labeled as SMBs, MSMEs or SMEs. Unless this category reaches an IPO, they seldom get talked about in the media.
(3) Lifestyle businesses are optimized for freedom. The freedom to pursue a passion regardless of financial returns. By no means am I suggesting that these cannot become big profitable companies; however big profits is not the central driver. It can be a vocation which the entrepreneur hasn’t had a chance to explore before or can be younger folks exploring art or even a restaurant as a passion project.
The ‘Startup India’ campaign encourages practically everyone to startup. To enable the momentum further, the Government promises money and mentorship. Given the lack of a proper yardstick to distinguish a good mentor from a bad, this organized effort to connect entrepreneurs to a cottage industry of self-proclaimed mentors and advisors hasn’t helped much. The money in the form fund-of-funds has taken the VC route where the beneficiaries are again the small subset of scalable startups. For the rest of the categories of businesses, early-stage capital is non-existent as banks and PEs would need to look at cash flow spreadsheets to invest. Moreover, the VCs do not accept this rest of them as startups. This dichotomy defeats the whole purpose of job creation because as reports show, the contribution to net job creation is maximum for enterprises less than 5 years old. By extension, we can conclude that banks and PEs contribute little to job creation.
The campaign is unclear in its intent to back any specific category of these businesses. The resultant has created massive confusion where entrepreneurs, are hopping across concrete playgrounds meant for these categories, in pursuit of capital or recognition. You would most often find f&b companies, services or altruistic companies at startup events and sometimes they are even handed over some awards. The ancillary industry of incubators, accelerators, the media and association bodies doling out awards are complicit in aiding to the confusion by their silence on the matter or inability to provide any clarity.
Nevertheless, the economy cannot depend upon just VC backed startups and the other categories need more sources of capital. For the ones who care of neither, and care about organic growth or who may be sufficiently content with employing a small workforce and creating self-employment for sustenance, can we celebrate them equally? Can we share ideas with our favorite restaurateur or the neighborhood handicraft seller how to augment her or his business? Can we celebrate the entrepreneurs who contribute as much to society than looking at job creation from the sole point of view of wealth creation — say as in the arts, caregiving or self-discovery?