What’s in the definition?
Can the definition of the word “Innovation” stop your company from being recognized as a startup?
(Based on Research (CCS Project) by Mr. Piyush Dhore & Mr. Dharmesh Kariya)
Entrepreneurship is a major buzzword these days. Over the last two decades, we have seen a number of startups coming up in India. The number of entrepreneurship enthusiasts has also been growing steadily and it has become common to hear people describing entrepreneurship as their career goal. Startups are a major contributor to the economy today and provide a wide range of products and services. The Government of India, recognising the importance of startups, has taken a number of measures to make it easier for startups to function. But, have these measures really made life easier for startups? Let us take a look.
What has the government done?
The government, through the Startup India Initiative launched in 2016 hopes to boost the start-up ecosystem and accelerate the growth of start-ups in India. Under this scheme, startups were given various incentives. These included a tax exemption for three years and some exemptions from the Income Tax Act 1962 section 56(2). Further, the government created a policy framework for setting up of incubators as public private partnerships. 35 new incubators were created in existing institutions with funding sup-port from central Government, state government and private sector. The “Startup India Hub”, a network of foreign VCs, angel networks, banks, incubators, legal partners, consultants, universities, and R&D institutions was also created to assist start-ups in various stages of their lifecycle. Lasty, the government set aside a fund called the Fund of Funds with a total corpus of INR 10,000 crore.
So where is the problem?
So far, so good. The policies of the government seem to be well thought out and do seem to be beneficial for startups. However, for a company to qualify for these benefits, it first needs to be recognised as a startup. And here lies one of the most glaring flaws in the system; getting recognised as a startup is not as easy as it sounds.
The Indian Government defines a startup as “an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding INR 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.”
This doesn’t sound so bad right? It seems to pretty much fit the description of what we would call a startup, along with some financial constraints. However, the catch lies in the word “innovation”.
There is no fundamental set of rules that has been given which can help someone understand whether a service provided by a company is innovative or not. Hence, the scope of the word “innovation” can be made as wide or as narrow as possible depending on the interpretation of the person responsible for applying it. In India, the entity responsible for defining innovation is an inter-ministerial panel which generally means that the decisions are taken by a government bureaucrat.
Startups in India operate across a wide range of sectors and technologies. It is highly unlikely that a government bureaucrat will have comprehensive knowledge about how innovation is defined in all these sectors. This is particularly a big problem for organizations which are operating in traditional sectors. In these fields, it is often the case that a new business model retains all the set of activities that were earlier prevalent in the sector and still comes up with a model where the activities are done by different actors and in different ways. Such a startup may not qualify as innovative. Consequently, a lot of companies with innovative products or processes fail to be recognized as start-ups. In fact, there has even been an instance where a company, which has won awards for its innovative products, failed to be recognized as a startup by the government. What is worse is that there is no appeal process. So, once the decision has been made, there is no way for the startup to justify its innovativeness.
It is not that bureaucrats don’t want to qualify startups as innovative. However, for a bureaucrat, the implications in case of a wrong decision can be pretty severe and can even lead to an administrative inquiry or a judicial inquiry. If a startup ends up swindling money or does not provide a safe product there would be fingers raised directly on the bureaucrat who approved that startup. Hence, when there is any ambiguity in the process, most bureaucrats tend to err on the side of caution and don’t qualify the startup as innovative.
There is a way to bypass this process. This can be done by getting the start-up recognized as innovative by one of the incubators or venture capital funds recognized by the Government of India. However, this is easier said than done. This concentration of power has resulted in a new set of middlemen in the system that start-ups have to go through just to get recognised. These middlemen take cuts for their services resulting in heavy expenses for these early stage startups.
Across the world, different countries have taken different stances on how to define startups. In the US and UK, there is no separate financial requirement for a company to be recognized as a start-up; there are just some general guidelines. Whether a startup is innovative or not is decided entirely by the market. On the other hand, Italy has a very defined set of criteria (like percentage of R&D funding, number of researchers etc.) which are used to decide whether a startup is innovative or not.
India is caught somewhere in the middle and needs to come up with a clear definition of innovativeness so that the process of recognition of startups becomes easier. Alternatively, this decision can be left entirely to market forces. Going for either of these options will reduce the involvement of bureaucracy and middlemen in the system and streamline the process of startup recognition.
Complete report: https://drive.google.com/file/d/14wvSi-fzD9VvPIx6qWthuDXv4Ig0w00c/view?usp=sharing
(Summarized by Mr. Anuraag Jonnalagadda & Mr. Gaurav Singhal)
