Editor’s Note: Here’s a story from our archives we feel is relevant even today and deserves your attention
Alibaba might be keen to invest more in India and work with Indian technology entrepreneurs and SoftBank might be planning to invest US$10 billion in the country, but the bitter reality is that an increasing number of tech companies are shifting overseas for a better regulatory environment and easy access to capital.
In 2015, almost 65 per cent of the technology startups that plan to raise Series A are expected to be re-domiciled outside India. Nine of the top 30 B2B software product companies have relocated to the US, Singapore and the UK, according to data released by the industry think tank, iSPIRT (Indian Software Product Industry Roundtable).
“It is projected that three of four new technology startups that focus on the global market and plan to raise seed or venture capital will be domiciled outside India. Almost 54 per cent of tech companies that raised Series A in 2014 have already re-domiciled outside India,” explains Sharad Sharma, Co-founder of iSPIRT.
India is a good place to hire talent and is reasonably inexpensive to set up early on and hire the core teams. However, widespread corruption (including in the private sector) and poor policing have led to investors treating Indian entrepreneurs with far greater caution, and also to an unequal playing field where the rules of the game are tilted in favour of a few powerful people.
Indian eco-system is unhelpful for startups
Startups have shifted base from India due to lack of infrastructure, support from banks, corruption and red-tapism. Niranjan Rao, Founder of 6degrees (a self-updating phonebook app), based out of India and Singapore, feels that innovation-focussed, technology-creating startups find India’s ecosystem unhelpful, especially for fund-raising and strategy. “India’s tech ecosystem is still geared towards the relatively low-risk, transactional, revenue-focussed e-commerce businesses. High-quality startups in even slightly different/ riskier businesses find better reception abroad, especially in the US, since the skill-sets required for evaluating or understanding those businesses are missing among investors within India,” he says.
Some investors feel that it is challenging to do an IPO in India as the current listing mechanisms are not suited for tech companies. Sharma says, “A lot of money for the stock market comes through the participatory notes which don’t involve any capital gains tax. However, there is capital gains tax for sticky investments, which is a completely bizarre policy. The government should look at revising these policies to prevent this exodus.”
Raj Sheth, Founder and CEO, Recruiterbox, based out of US and India, faced several issues in India related to taxation and billing the customers internationally. “Recurring billing by Indian gateway and Indian banks is not possible. US payment gateways have automatic recurring billing to charge the customer every month and all of our online software businesses work through monthly recurring payments by charging the customer’s cards,” he says.
Getting foreign currency into India leads to RBI (Reserve Bank of India) filings, which are structured in a way to torture the working human. This was his biggest problem. “Even when we had a US company send funds to our Indian company, there is an annual filing to be done which has to be done through one’s bank. Every single bank and the RBI operates in a manner where filings and requests for more information go on for months through written notices. For a small startup with no admin staff, this can be a very bitter experience,” he says.
He also highlighted that on the cost side (not revenue), every single international expense from India – for the servers, marketing, software services calls for a 20 per cent International TDS. “So I have to pay tax on my expense. This is an India-only problem and unheard of, in other countries,” he says.
Why is US and Singapore a hot-favourite?
Many tech startups are registered or headquartered in the US because they have genuine global business interests and aspirations. Most of them have their high-paying customers available in the Western markets. US is a preferred growth market due to ease of access to foreign capital and better legal structures. There is not enough funding for young technology firms in India, while US has many funds focussed on this sector.
Pankaj Jain, Venture Partner at 500 Startups, feels that the US is a primary market for a lot of B2C and even B2B companies because the legal framework around startups has been well defined for a very long time, which creates a huge difference. He believes that raising money from the US is much easier from a structural perspective. However, some of the companies face challenges if they are not physically located in New York or the Bay area.
Most of the startups trying to make an impact in APAC or Latin American markets move to the tech hub of Singapore. Cloud telephony services provider Knowlarity shifted base to Singapore because of the tax rebates and easy access to capital to a company based out of Singapore.
“The regulations are startup friendly and the Government in Singapore is also pro-startup and startups enjoy tax rebates. Hence, access to large international market and easy access to capital are the two main reasons why maturing Indian startups target Singapore,” says Ambarish Gupta Founder and CEO at Knowlarity.
Singapore’s big strength (apart from rule of law and ease of setting up) is the fact that many different regional markets are accessible from the country, and many big companies’ regional corporate headquarters are in Singapore, despite the markets being in other places. “For startups, access to enterprises, partners or customers is important, and Singapore manages to provide those, despite being a small market by itself. However, Singapore is extremely expensive, and Indian startups should think twice before moving to Singapore without early funding,” explains Rao.
Will better policies reverse the exodus?
The ecosystem in India will be a lot more favourable for startups if the government can roll-out tax incentives and rebates for startups and investors. It should create opportunities to attract foreign entrepreneurs to India and help build intellectual property (IP). The government should look at simplifying the procedure of shutting down of companies and writing off the investment in case of a company failure.
Jain suggests that Delhi should be made the Indian equivalent of a Delaware C corporation in the US. The city can have a standard legal structure, processes, taxation and shutdown requirements and other states will eventually follow the model, according to him.
According to Rajesh Sawhney, Founder of GSF Accelerator, startups with India as their prime market should be incorporated in India. “The Indian government should make it easy for startups to incorporate, build operations and raise capital in India. It is equally important for the government to formulate better policies for tech IPOs in India,” he says. In a recent move, the Securities and Exchange Board of India (SEBI) is planning to prepare new guidelines for startup IPOs in three-four months and investors and startups are bullish on this move by the regulator.
Gupta states that the government can focus on things that they could influence and change, such as infrastructure, reliability of regulation, not changing regulation retroactively and being a little more conscious of how these polices would affect early-stage companies. “It would be great if our policy makers would not try to run startups or try and get into venture capital business, as we saw in the latest budget. Let the private market do what they do best,” he says.
He also feels that banks in India are currently incapable of providing capital to companies or startups because they need some hard assets to bank their debt on, and most startups wouldn’t have any asset per se. “The government should take steps to change this in favour of startups,” he says.
Govt-funded campuses must be judged by tangible entrepreneurial results
India’s leading educational institutes, especially the IITs and the IIMs, have contributed very little towards entrepreneurship during the startup boom in the last five years. While a couple of campuses have taken feeble, halting steps towards it, most of the institutes have preferred to limit themselves to lip service and eloquent convocation speeches. “India’s government-funded campuses must be judged by the tangible entrepreneurial results (jobs created, etc.) produced by their students in the three-four years immediately after graduation, and these should be made a part of the KPIs (key performance indicator) of the institute’s top managements — most of whom have a long enough stint to implement medium-term policies,” Rao advises.
“Students who drop out of placements should be provided some assistance in starting up, and some protection in case they fail. Also, at least two per cent of every batch of our MBA campuses should consist of ex-entrepreneurs,” he adds.
According to Rao, technologies developed on campus should be given commercialisation/go-to-market assistance through resident sector experts and case studies taught on campuses should focus on Indian startup successes as well. If the government takes the right steps at the right time, then it can help reverse this exodus and accelerate the growth of the Indian technology sector.