February 22, 2024

Lukmaan IAS

A Blog for IAS Examination

TOPIC : STARTING THE STARTUP- CHALLENGES AND SOLUTION

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THE CONTEXT: The number of startups recognised has surged more than 20-fold in five years. India recognised 14,000 new startups in the first nine months of fiscal, according to the Economic Survey 2022. That compares with 733 recognised in 2016-17. As a result, India has become the third largest startup ecosystem in the world after the US and China. Further, a record 44 Indian startups have achieved unicorn status in 2021 taking the overall tally of unicorns in India to 83, most of these are in the services sector. Despite the current statistics, the startup ecosystem has been free from challenges. Despite the government focus on enhancing the startup ecosystem faces various challenges. This article goes into analysis of the challenges and its solution of the startup ecosystem.

BACK TO BASICS

WHAT IS STARTUP

Startups are nothing but an idea that manifests into a commercial undertaking. A startup venture could be defined as, a new business that is in the initial stages of operation, beginning to grow and is typically financed by an individual or small group of individuals. It is a young entrepreneurial, scalable business model built on technology and innovation wherein the founders develop a product or service for which they foresee demand through disruption of existing or by creating entirely new markets.

Recognition of startups:company must meet the following criteria to be considered eligible for DPIIT startup recognition.

•    Period of existence and operations should not be exceeding 10 years from the Date of Incorporation.

•    Incorporated as a Private Limited Company, a Registered Partnership Firm or a Limited Liability Partnership.

•   Should have an annual turnover not exceeding Rs. 100 crore for any of the financial years since its Incorporation

•   Entity should not have been formed by splitting up or reconstructing an already existing business

•   Should work towards development or improvement of a product, process or service and/or have scalable business model with high potential for creation of wealth & employment

BENEFITS OF STARTUPS

Startups in India as in many other parts of the world, have received increased attention in recent years. Their numbers are on the rise, and they are now being widely recognised as important engines for growth and jobs generation. Through innovation and scalable technology, startups can generate impactful solutions, and thereby act as vehicles for socio-economic development and transformation.

SCOPE AND CHARACTERISTICS OF THE INDIAN MARKET

There are some important factors that can help in not only setting up a company but running it successfully.

•    Youth Oriented Demography: India is a country with a huge number of youth work forces . They are educated and can be easily trained. These resources can be used for ones benefit and not only generate profit for oneself but also make a meaningful impact on the society by generating jobs.

•   Large Population: The economy works on the policy of demand and supply. With its large population, India is already is a huge market that has a diverse demand, which needs to be catered.

ISSUES AND CHALLENGES OF STARTUPS

  1. Financial resources Availability of finance is critical for the startups and is always a problem to get sufficient amounts. Many finance options are available, including family members, friends, loans, grants, angel funding, venture capitalists, crowd funding etc. The requirement starts increasing as the business progresses. Scaling of business requires timely infusion of capital. Proper cash management is critical for the success of the startups .
  2. Revenue generation Several startups fail due to poor revenue generation as the business grows. As the operations increase, expenses grow with reduced revenues forcing startups to concentrate on the funding aspect, thus, diluting the focus on the fundamentals of business. Hence, revenue generation is critical, warranting efficient management of burn rate which in common parlance is the rate at which startups spend money in the initial stages. The challenge is not to generate enough capital but also to expand and sustain the growth.
  3. Supporting infrastructure There are a number of support mechanisms that play a significant role in the life cycle of startups which include incubators, science and technology parks, business development centers etc. Lack of access to such support mechanisms increases the risk of failure.
  4. Perception challenge– People who want to start a venture face.challenge that is understanding the creditworthiness of start-ups. Many point out that banks and other funding entities look at start-ups from a very traditional business point of view. Start-ups are evaluated from the variables of debt-to-equity ratio, profits and other profit and loss and balance sheet items. The point they miss is unlike traditional businesses where the bank takes risks like equity contribution risk, project risk, operational risk and market risk most of the start-ups already have achieved a reasonable scale and have large equity financing upfront before they reach out to traditional lenders. . But venture capitalists and other strategic investors such as private equity firm look at the scalability of business.
  5. Exceed customer expectations The next most important challenge is gauging the market need for the product, existing trends, etc. Innovation plays an important role, since, that the startup has to fine-tune the product offerings to suit the market demands (Skok, 2016). Also, the entrepreneur should have thorough domain knowledge to counter competition with appropriate strategies. Due to emerging technologies, the challenge to provide over and above an earlier innovation is pertinent.
  6. Team members Startups normally start with a team consisting of trusted members with complementary skill sets. Usually, each member is specialized in a specific area of operations. Assembling a good team is the first major requirement, failure to have one sometimes could break the startup.
  7. Creating awareness in markets— Startups fail due to lack of attention to limitations in the markets. The environment for a startup is usually more difficult than for an established firm due to the uniqueness of the product. The situation is more difficult for a new product as the startup has to build everything from scratch.
  8. Tenacity of founders —Founders of startups have to be tough when the going gets tough. The journey of starting a venture is fraught with delays, setbacks and problems without adequate solutions. The entrepreneur needs to be persistent, persuasive, and should never give up till he/she achieves desired results.
  9. Regulations- Starting a business requires a number of permissions from government agencies. Regulations pertaining to labor laws, intellectual property rights, dispute resolution etc., are rigorous in India. Although there is a perceptible change, it is still a challenge to register a company.
  10. Lack of mentorship: Lack of proper guidance and mentorship is one of the biggest problems that exist in the Indian startup ecosystem . Most of startups have brilliant ideas and/or products, but have little or no industry, business and market experience to get the products to the market. It is a proven example that a brilliant idea works only if executed promptly. Lack of adequate mentoring/ guidance is the biggest challenge which could bring a potentially good idea to an end.
  11. Lack of a good branding strategy— Absence of an effective branding strategy is another issue that prevents startups from flourishing at a faster pace. Hemant Arora, Business Head-Branded Content, Times Network opines that branding demands paramount attention as it gives an identity and occupies a space in the consumer minds.
  12. Cyber Security – This is the digital age. And surviving the challenges in this age requires small startups – especially the ones operating online – to be super agile to counter the so called online security threats. Startups that are active online do face online security threats. Be it unauthorized access to startup’s sensitive information, employee records, bank accounts’ information, or any other related information deemed important for a tech startup’s survival, they are at risk.
  13. Winning Trust of Customers- Customer is the king. And that’s absolutely right. Winning a customer’s trust is one of the most important challenges that businesses in general – and startups in particular – face today. With a highly satisfied and loyal customer base, startups can scale and make progress towards excellence.
  14. Value creation vs valuations-

Value creation

  • It refers to the value created by startup in the society through their products and services. Startup create the value through problem solving in the society
  • value creation should be the focus of the entrepreneurs

valuation

  • It refers to the market value of the companies.
  • Valuation should be the focus of market

The problem exists in the startup ecosystem is shifting of the focus of the startups from value creation to valuation. In this game startup’s inflate their valuation artificially to get the investment from the investors

SOLUTIONS TO THE PROBLEM OF STARTUPS

Lack Of Finances–: A solution to this challenge is finding ways in which cost can be minimized. Entrepreneurs can make use of accounting software to keep track of their inflow and outflow. It’s also not a bad idea to go the digitalized way.

Fund Raising-The startup needs to assess why the funding is required, and the right amount to be raised. The startup should develop a milestone-based plan with clear timelines regarding what the startup wishes to do in the next 2, 4, and 10 years. This would enable these startups to graduate to a level where they will be able to raise investments from angel investors or venture capitalists or seek loans from commercial banks or financial institutions.

Support by the Government–

  • Income Tax Exemption on profits under Section 80-IAC of Income Tax Act:. A DIPP recognized Startup shall be eligible to apply to the Inter-Ministerial Board for full deduction on the profits and gains from business.
  • Startup India Seed Fund Scheme (SISFS) aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization.
  • Fund of Funds for Start-ups (FFS) was unveiled in line with the Start-up India Action Plan. Introduced with a focused objective of supporting development and growth of innovation driven enterprises, FFS facilitates funding needs for Start-ups through participation in capital of SEBI registered Alternative Investment Funds. It has approved corpus of Rs 10,000 crore for contribution to various Alternative Investment Funds (AIFs) registered with SEBI.

Business Planning–Before launching a business, it is important to carry out proper research by investigating necessary details such as competitors’ prices, suppliers and the rest. This approach builds a solid foundation for a successful business. Also, writing an effective business plan helps startups to define their business, target audience, operational conduct and the amount of money that it will generate and spend.

Proper Marketing Strategy–Technology today has practically made a lot of things easier as it has opened a broad spectrum of avenues for marketing in the form of electronic, print, online etc. Therefore, startups need to seek out ways in which they can create innovative marketing plans, advert placing, to let people know the worth of their product or services.

Competition–There is, in fact, a whole lot of opportunities existing for entrepreneurs because switching costs for most customers are low and many are willing to try new, relatively untested products or services. To overcome the challenge of competition, startups need to research and analyze their niche industry; should be unique and different in approach.

Framework to reduce the regulatory burden on startups  To create a document listing all compliance requirements for all products and services in one place. For instance, if an entrepreneur wants to open a restaurant or a school etc. There is no common source of information, and the entrepreneur is at the mercy of intermediaries. A standardised document withholding all the important information will make the process and business transparent.

Setting up a single-window system – For example, a person needs 12-16 approvals from multiple government agencies to set up a warehouse. While some can be obtained simultaneously, others require much going back and forth, making it a cumbersome process that takes about six months. But in the single window system – one can simply apply for all the approvals on an online portal. The platform will be responsible for running the operation, administration and oversight of the entire process. The inbuilt intelligence system will direct all the information to the appropriate authorities, and the service agreement will bind them to respond within a timely manner.

Introducing an ease of implementation score (EIS) will rate all the government schemes/programmes/information sources. The EIS will hold a minimum performance standard in implementing a service/scheme. A high EIS will mean that service can be programmed to ensure automated decision making. The government may appoint someone to calculate the EIS for a government agency. A high EIS will be the point of pride and, therefore, promote all online services to enhance, starting an improvement race that needs no oversight.

Simplification of legal language will decrease discretionary powers, reduce litigation and allow easy online processes.

Using technology, outsourcing rule making and mutual recognition Agreements (MRA) –  Using technology will make the process transparent, maintaining the integrity of all transactions, and MRA’s will promote foreign trade in goods and services.

SOME INITIATIVE FOR THE STARTUPS

There are numerous government and semi-governmental initiatives to assist startups.

  1. Start-Up India
  • This initiative provides three-year tax and compliance breaks intended for cutting government regulations and red tapism.
  1. Mudra Yojana
  • Through this scheme, startups get loans from the banks to set up, grow and stabilize their businesses.
  1. SETU (Self-Employment and Talent Utilization)
  • Fund Government has allotted Rs 1,000 Cr in order to create opportunities for self-employment and new jobs mainly in technology-driven domains.
  1. E-Biz Portal
  • Government launched e-biz portal that integrates 14 regulatory permissions and licenses at one source to enable faster clearances and improve the ease of doing business in India
  1. The 19-point Action Plan
  • Organized by the Department of Industrial Policy & Promotion (DIPP), focuses both on restricting hindrances and promoting faster growth by way of:
  • Simplification and Handholding
  • Funding Support and Incentives
  • Industry-Academia Partnership and Incubation

Launch of Startup India Action Plan Startup India’s 19-Point Action Plan consist of following steps–

  1. Self-certification compliance,
  2. single point of contact via Startup India Hub
  3. Simplifying processes with mobile app and portal (for registration, filing compliances & obtaining information)
  4. Legal support, fast tracking & 80% reduction in patent registration fee
  5. Relaxed norms of public procurement
  6. Easier & faster exit
  7. Funding support via a fund of funds corpus of INR 10,000 crore
  8. Credit Guarantee Funding
  9. Tax exemption on capital gains
  10. 3-Year income tax exemption
  11. Tax exemption on investments above Fair Market Value (FMV)
  12. Annual startup fests (national & international)
  13. Launch of world-class Innovation Hubs under Atal Innovation Mission (AIM)
  14. Set up of country-wide incubator network
  15. Innovation centers to augment incubation and R&D
  16. Research parks to propel innovation
  17. Promote entrepreneurship in biotechnology
  18. Innovation focused programs for students
  19. Annual incubator grand challenge

THE CONCLUSION: India is evolving fast and what is needed is not innovation that is ‘cut and paste’, but creative solutions using thinking that is ‘out-of-the-box’ to produce star innovators, startups and entrepreneurs to handle current problems in India. With over three thousand plus startups working nonstop to address India’s problems, entrepreneurs will need a support system that helps free up their time and focus on their business efforts.

Mains Question

  1. Startups in India have large scope however, there are various challenges that affect their future prospects. Analyse.
  2. What are the reasons for the dismal performance of the startups in creating employment despite various schemes of government?
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