Calling the angels

Written by fe Bureau | Updated: Jan 4 2013, 09:07am hrs
Proactive steps to attract early stage funding is critical to developing a vibrant entrepreneurial ecosystem

India is an entrepreneurial country, but its entrepreneurs still have to struggle to create and grow their business ventures. The countrys entrepreneurial growth can be sped up through policy and regulatory measures.

A recent Planning Commission report has estimated that India has the potential to build about 2,500 highly scalable businesses in the next ten years. Going by the probability ratio, 10,000 start-ups will have to be nurtured to get to 2,500 large-scale businesses. These businesses could generate revenues of R10 lakh crore ($200 billion)contribution to GDP and creation of employment at the same scale as projected for the IT and ITeS industry.

The committee on angel investment and early stage venture capital, which prepared the report, says R3 lakh crore (or around $55 billion) of capital would be needed over the next decade, with around half of this in debt, for creating a vibrant entrepreneurial ecosystem in India.

Considering the required massive capital flows to entrepreneurial ventures, the current early stage investing in India is woefully inadequate. Early-stage investments in countries with high entrepreneurial activity are driven by angel investors. By providing funds, mentoring and network access to entrepreneurs, angel investors play a critical role in scaling up businesses to make them attractive for institutional investors like venture capital funds.

But angel investing is at a nascent stage in India. In 2011, Indian angels, constrained by regulations that make both investing and exits cumbersome, invested only about R100 crore (about $20 million) in around 50 deals. Contrast this with the situation in Canada, where angels invested R2,000 crore ($390m). Even as a proportion of early-stage investing, angel investments in India comprise around 7% against around 75% in the US.

India also lags in early-stage venture capital investing. Annual investments are around R1,200 crore ($240m) as against R29,000 crore ($6.3 bn) in the US and R3,000 crore ($700m) in China. Around 90% of the early stage venture funds in India come from offshore sources rather from domestic investors.

The committee has identified sectors with relatively higher potential for rapid entrepreneurship-driven growthmanufacturing (IT hardware and electronics, auto components, food processing), software, technology and telecom, affordable healthcare, clean technology (including clean water, and sanitation) and personal careand marked out major drivers for creating a vibrant entrepreneurial ecosystem.

Some of which are:

Catalytic government policy and regulatory framework: The government and its agencies could play a proactive role in facilitating entrepreneurship. They could facilitate investments by early stage investors such as angel investors, venture and seed funds, and impact investors.

There is a need to enhance and scale up venture incubation programmes, since incubators are a critical part of the entrepreneurial ecosystem. Currently there are only 120 incubators in India, and almost all are government-sponsored and largely affiliated to educational institutions. The aim should be to have 1,000 incubators In the next decade, covering most of Tier- I and II cities. Private sector can be roped in, through public-private partnership or a stand-alone basis.

Also, since regulations and processes for setting up, operating, and exiting a business are time-consuming and complex, governments and their agencies should try at all levelscentral, state, and localreduce transaction time and costs through measures such as single-window clearance and access to developed industrial clusters. A model along the lines of Software Technology Parks of India (STPI) could be created for early stage ventures which could get affiliated to entrepreneurial hubs that enjoy similar facilities as STPI units.

Similarly, policy framework for easier exits, fiscal incentives on capital gains and simplifying IPO requirementsincluding foreign listing, exclusion from lock-in period, ete.will encourage early stage investments in India. Giving preferential treatment to early stage investment in liquidation, and easy procedures for winding up units will also help.

Easy access to equity capital and debt: It is important to remove regulatory hurdles that inhibit domestic fund raising. Permitting pension funds, insurance funds and provident funds to invest a small part of their corpus in early-stage venture funds could significantly improve capital flows. Special incentives such as tax credits could be provided to HNIs, corporates and institutions that invest in early stage venture funds or to incubators and to angel investors. Banks must also be encouraged to invest in early-stage venture capital funds by treating such investments as priority sector funding without capital market exposure and provisioning norms being applied.

The government could also establish a fund of funds (FOF) to seed other early stage venture funds. It could have a corpus of R5,000 crore. This FOF could then invest as an anchor investor, in a number of Alternative Investment Funds. These AIFs could raise capital from other sourcesdomestic and foreigncreating a multiplier effect. This could result in capital flows of up to R25,000 crore over the next ten years. The India Opportunities Venture Fund, set up under Sidbi, should also play this role, the committee suggested.

Businesses as entrepreneurial hubs: There should be greater engagement between established businesses and emerging ventures. The private sector could participate in setting up and operating incubators in PPP or other models. Industry bodies and chambers could drive greater collaboration between established and emerging businesses to foster greater collaboration both as a buyer and supplier. Established businesses could work with small businesses to source innovation and technology, and look at entrepreneurial ventures as sources of inorganic growth.

Adequate and effective collaboration forums: A vibrant entrepreneurial ecosystem needs forums, virtual or physical, where all stakeholders can come together to share experience, expertise and develop symbiotic relationships. There are several models of developing such forums, like TiE and Mentor Square, to build collaborative networks of entrepreneurs.Setting up a network of 15-20 innovation labs (iLabs) to serve as the focal points for collaboration across the region would also be useful. Such iLabs could also serve as a hub for incubators, accelerators and other enablers in the region.

The lack of an entrepreneurial eco-system is an inextricable part of systemic complexities that impede business growth in India. Proactive measures to facilitate early stage funding would go a long way in remedying the situation.