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 country’s 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 growth—manufacturing