500 Startups, a Silicon Valley venture capital seed fund and start-up accelerator, which has invested in hundreds of internet start-ups in over 50 countries, has been running its incubation and accelerator programme in India since 2011. Its portfolio in India includes companies like MyGola, InstaMojo, ZipDial and more. Pankaj Jain, partner, 500 Startups, talks to Prabhu Mallikarjunan & Darlington Jose Hector about the start-up ecosystem in India.
How do you view the Indian start-up scene?
Certain areas like food delivery and grocery delivery segment have become hot properties. The valuation of companies in this segment has really gone up. B2B enterprises are picking up, but not as much as B2C. Great founders are leaving their jobs and starting companies now or helping others start up. So, a lot has changed. There is great potential in the education space, fin-tech (payment), healthcare, consumer and gaming arena.
How easy is it to do business in India?
Throw everything in the garbage and start from scratch. It is the worst nightmare to make an investment in India, especially for foreign investors, there is so much paperwork involved, and so much of ambiguity, both, for start-ups and the investors. If the government wants to make the market attractive to foreign investors, it has to come up with a very simple and attractive legal structure and make it easier for firms to raise money and deploy capital in India and in companies registered outside India. More and more companies are registering their start-ups in the US and Singapore and firms based in India are not able to invest in these companies. The government needs to re-evaulate and rethink on how round-tripping works in the VC and start-up scenario.
How do you view the legal framework compared to other countries?
Why is everyone going to Singapore? There is a clear and easy structure, easy to move money from one place to another, the framework is something that is acceptable and clear with global legal standards. Whereas, India is at the bottom in terms of ease of doing business.
What do you suggest to improve the investor ecosystem in India?
Tax benefits are the easy one, but frankly, it is the least important one, I think. Everybody wants to talk about it because it is the sexiest thing to talk about, but it is not the most impactful. The most impactful (approach) would be to change the legal framework for money to flow from one place to another. Whether the money is coming from the US, Europe or Singapore, let that flow into India and flow back easily. When that happens, you will find the best deals taking place. The whole legal framework and the Companies Act need to be burnt. It is archaic and it is a shackle. It prevents start-ups from starting out or shutting down. Many times, start-ups will have to shut down in 6 months and there is no easy framework for shutting down a company.
Has there been a change in attitude with the new government at the Centre?
There is zero change. I have gone to the ministry of finance and offered them help and even explained what we as foreign direct investors look for, what I as a founder faced, and even said that I am going to put them in touch with the companies that we have invested in, so that the government can spend time hearing from them how many weeks they spend time doing paperwork filing, instead of concentrating and working on their business.
Where do Indian companies lag and what are the hiccups to venture into rural market?
Indian start-ups lack experience and exposure. Venturing into tier II and tier III cities and rural markets is very hard. The physical infrastructure in this country is crumbling. If you look at the bandwidth in this country, the wireless network is unusable, 3G network is like GPRS. In such a scenario, making payments becomes difficult and start-ups will eventually look at urban areas where the density of customers is more.
Are Indian startups not negotiating well at the funding stage?
Dilution (of stake) is a major problem. I just shut down two start-ups. One of them diluted too much too early. One should dilute as little as possible. If a start-up can raise more money, it is good, but the money should be used wisely.
The focus should be on dilution and not valuation, which is determined by market conditions which are not controllable.
How do you view the Digital India initiative?
The broadband infrastructure has been crumbling in India. A country like South Korea is a thousand years ahead of us in terms of connectivity. They are talking gigabytes! The success of digital India will largely depend on how broadband penetrates the rural areas. The rural broadband experience has to improve.
And how supportive is the Indian government as far as start-ups go?
The government can help by giving them orders that they can do justice to. They have to be made part of the tender process. That will be a huge boost for the start-ups. Once they turn the corner,then will be able to fight an even battle with the big corporates.