The promises and pitfalls of the startup boom in India

In his last Mann ki baat Airing on Sunday, Prime Minister Narendra Modi called public attention to the startup boom in India and the post-covid expansion of our unicorn club. Modi noted that India now has up to 70 unicorns, defined as startups valued at $ 1 billion or more, and praised the dynamism of a space that frequently resets its own investment records. “It’s true that this is the era of startups,” he said, “and it’s also true that in the startup world, India sort of leads the way today.” This is indeed a positive sign for our economy. A look at VCCircle’s latest roundup of weekly startup activity shows robust inflows. In the last seven-day period under his review, the total value of private equity and venture capital deals involving new businesses has tripled, with three new unicorns added to our tally. It’s a scorching pace. According to VCCircle’s tally, nearly $ 1.7 billion has been raised, with as many as 42 deals closed, five more than the week before. Separately, Slice made the news this weekend as our 41st unicorn born this year and the 11th fintech company to achieve this valuable status, after raising $ 220 million from investors. It was not long after online broker Upstox was celebrated as India’s 40th. Losing account has never been easier.

The buzz surrounding Indian startups has raised valid hopes for a revival of our economy. But it will take some time, and until then we must not let rhetoric take precedence over reality. Remember, it’s relatively easy to collect money from the global liquidity glut that central banks have released to protect us from the covid crisis. Additionally, our online addressable market is now so large that scaling almost any ambitious business model requires a sum that can turn a garage business into a unicorn if a slice is sold for the same price. Importantly, the billions of dollars invested in startups represent big bets on distant outcomes, not on generating value through income. Neither can we assume a high rate of business survival, as ensured by profits. This is because, given the way venture capital works, large investors would get their paychecks even if only a small portion of their portfolio ended up being successful. We cannot expect an entire herd of unicorns to gallop to glory. Critics also point out the paucity of concepts unique enough for global scalability, although this is irrelevant if national success is sufficient, as is usually the case. These quibbles should not, however, slow down risk-taking. Whether investor bets work or not, we need all this money and more to incubate value generators that could help reprogram our economy for faster expansion over the decades to come.

Arguably our startup space reflects some sort of Schumpeterian change, an embrace of “creative destruction” as a vital sign of progress, old ideas giving way to new ones, and innovation at the helm of capital. It helps that the wave of today sees share ownership becoming more and more widely shared. The favor of politics helped. Start-up income, for example, is exempt from tax for a few years. But the taxation of stock options issued to workers is a bit too complex. The levies on investments and capital gains realized by start-up investors could also be clarified. Overlapping accountability in a maze of tax rules allows for interpretations that allow officials to abuse their discretion. This is a waste of investors whose scope must be reduced. To end the ambiguity, we need tax reforms. High level intervention would be helpful.

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