Demand-led Innovation: The way ahead for startups

Outlining an approach to address the demand-supply conundrum

Introduction

On its way towards becoming a US$3 trillion economy, India has established itself as a vibrant market across several industries. Its economic power, population growth, technological advancements, environmental pressures and changing customer expectations are demanding innovative approaches and innovations for continued growth toward US$5 trillion mark. The timing couldn’t be better for the startup ecosystem.

The growth of the startup ecosystem in India, so far, broadly falls into three phases. In Phase 1 (2006–11), we saw entrepreneurs “cutting and pasting” business models that had worked in other countries. Most of these startups failed, with a few exceptions in B2C markets. In Phase 2 (2012- 2015), we saw B2C startups focused on building business models for India, and a few gained traction and scale. In Phase 3 (2016–19), the focus was on scaling B2C models and emergence of B2B models building tech solutions for industrial enterprises (corporations) and government departments, together defined as corporates, which were actively looking for solutions. The next phase of growth of the startup ecosystem will be based on demand coming from corporates, making the growth not only rapid, but also sustained.

A demand-supply conundrum

The Government of India, through initiatives such as Startup India, Standup India of DPIIT and MeitY Startup Hub, has helped creating the third largest startup ecosystem in the world. Based on the results from the last five years, stronger initiatives are being discussed that will send a bold, strong signal to the Indian startup ecosystem. Major initiatives under consideration are in the areas of developing innovation infrastructure (incubators and accelerators), enabling ease of doing business, introducing a tax rebate on long-term capital gains for investors, addressing venture debt and the expeditious release of Fund of funds (FFS).

However, most initiatives have focused on the “supply side” and ignored the “demand side”. To scale-up and grow, startups would require consistent demand for product and services from the corporates.

Generating demand for innovation

Most industry players have a good understanding of customer needs and markets within their sectors. Innovators who are external to the organisations, such as startups, have a deep understanding of technologies and the possibilities that the technologies can unlock. Hence collaboration between the two on an open innovation platform brings the best of both worlds — latest technology solutions from startups and curated problem statements from industry. It is such active collaboration between corporates and startups to facilitate innovation that is known as Corporate Innovation.

Multinational corporations (such as United Technologies and Facebook), Indian corporates (such as Reliance Jio, and HDFC Bank) and Systems integrators (such as TCS, Wipro and Accenture) have instituted corporate innovation programs to engage with startups. Today, the greatest demand for products and services from startups is generated by Multinational corporations (MNCs), followed closely by Systems integrators (SIs). It is a clear indication that most demand for innovation is generated from outside India, as both MNCs and SIs cater largely to markets outside India. Why is the demand for innovation so weak in India?

To understand the dynamics of Indian corporates, we studied the top 486 Indian corporations on their engagement with startups. Our study revealed that nearly 42 percent of Indian corporations with a revenue of over 10,000 crores engaged with startups. On the other hand, only 8 percent of corporations with a revenue of less than 5000 crores annually engaged with startups. Overall, only about 20 percent of these 486 corporations overall engaged with startups. For the total number of corporations in India, this percentage would be much lower.

The maturity stages for Corporate Innovation

Corporations mature in their engagement with startups gradually through the following stages of Corporate Innovation:

Emerging: Corporates that are beginning to consider corporate innovation models fall into the “emerging” category. These organisations attend events related to startups and study startup reports to take an initial step into the world of open innovation. Nurturing an innovation culture and open innovation mindset in their organization is the primary motivation for such organisations.

Coordinated: Corporates that have multiple teams engaged in open innovation models fall into the “coordinated” category. Such organisations engage startups in deeper ways such as accelerator programs, building proof of concept (PoC) prototypes, building intrapreneurial teams and designate a central innovation team to coordinate efforts across the innovation teams.

Transformative: Corporates that have institutionalised an open innovation model fall into the “transformative” category as they actively seek inputs, insights and external collaboration to develop their next generation of products and services. Such organisations engage multiple startups across the organisation, and also have active investments, and merger and acquisitions (M&A) teams.

Disruptive: Corporates that are putting together new business models to transform their growth trajectories fall into the “disruptive” category. Such organisations actively develop and execute their innovation plans through diligent engagement with startups, investments, and mergers and acquisition (M&A) programs.

It is estimate that 93 percent of Indian corporations are in the “emerging” category. Only 6 percent are in the “co-ordinated” category and less than 1 percent are in the “transformative” category. There are no corporations in the “disruptive” category.

Governance that accelerates innovation

Policies and initiatives

As discussed earlier current policies focus almost completely on the “supply side. Clearly, there must be policies to develop a strong “demand side” as well.

Some suggestions for government initiatives to enhance the “demand” through corporate innovations include:

• Introducing tax incentives for products developed using products/services from startups and revenue from startup engagement.
• Ensuring a favourable tax rate for expenses incurred for corporate teams working with startups.
• Allocating a portion of profits to fund startups. Several PSUs in the oil and gas sector are already doing this.
• Allowing CSR funds to be used to finance corporate innovation programs.

Government as a customer

The government can also lead the way for corporates by becoming major procurer of startup products, especially in the agriculture, defence and social sectors. In fact, the government has already enabled startups to participate in public tenders to ensure they have access to large demand. Further, a National Public Procurement Portal, the Government e-Marketplace (GeM) has been launched to simplify public procurement. However, the pace of procurement is slow and adoption has to quicken.

Conclusion

‘Supply always comes on the heels of demand’, said Robert Collier. His thought-provoking statement is apt for the current outlook for the Indian startup ecosystem. Corporations’ concerted efforts to build an “open innovation” approach will enhance competitiveness and accelerate growth for startups. The government can also create a fillip in the growth of startups by actively procuring products and services from such organisations. Equally importantly, the government can cultivate an environment conducive for the growth of startups.

The growth of the startup ecosystem in the last 14 years have been a testament to the ingenuity of Indian entrepreneurs. Bringing corporations and the government to actively procure from startups will herald a new wave of unprecedented growth for the Indian startup ecosystem. Together, this will build tomorrow’s innovation ecosystem that ushers in an era of transformative and disruptive corporate innovation.

-Ravi Narayan, CEO T-Hub

NOTE: This article was originally published in Economic Times on December 24, 2019 with the title ‘Enabling startups through demand-led innovation’ .