How Does India’s Start-up Ecosystem Affect MNCs?

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By: Dezan Shira & Associates
Editor: Melissa Cyrill

India ranks third among global start-up ecosystems, behind the U.S. and U.K. This presents a huge opportunity to both investors and entrepreneurs alike, especially as the government has signaled the need to reduce regulatory hurdles for start-ups. However, some executives at multinational companies (MNCs) have expressed concerns over how the growing start-up culture impacts new market entrants and established businesses. In many ways, India’s start-up ecosystem diversifies the resources available to MNCs.

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India’s Start-up Ecosystem

The momentum behind India’s start-up culture builds on the strong foundation established by the information technology (IT) sector. An estimated 1,200 technology start-ups were initiated in 2015 alone, and more than 50 percent were in the e-commerce, consumer service and aggregator domain. Between January and September 2015, angel investors and venture capitalists injected US $7.3 billion across 639 deals for early stage start-ups and late stage companies. Moreover, funding in the third quarter doubled over quarters one and two, and grew over 200 percent from the fourth quarter in 2014.

The pace of this growth can be explained by the excitement over India’s economic prospectus as well as the quality of the pitches coming from young Indian graduates and professionals. Across India, entrepreneurs and investors find a vast consumer base, rapidly developing technology infrastructure, expanding internet connectivity and an immense talent pool. Though the main start-up hubs are Bangalore, Mumbai, and the Delhi National Capital Region, several other parts of India are catching up fast, including Hyderabad, Chennai, Goa, Kerala, Coimbatore. Each region has its own start-up make-up depending on the level of infrastructure, proximity to concerned industries, entrepreneurial climate and access to talent.

The bulk of India’s start-ups offer business-to-consumer (B2C) services and have adopted a two-sided marketplace model. According to Professor V Sridhar at the International Institute of Technology Bangalore, many start-ups “have built platforms that connect sellers, hotels, hospitals, restaurants, and drivers on the one side, with buyers, travelers, patients, foodies, and passengers on the other”. Further, the start-up revolution has even benefited the blue collar workforce and unorganized sectors of the economy – cab drivers, delivery people, cooks, maids, plumbers, electricians, local artisans and craftsmen alike.

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Start-ups Diversify Resources

India is the youngest start-up nation in the world – 72 percent of Indian start-up founders are less than 35 years old. This makes sense as young entrepreneurs are not as risk-averse, and provide the level of energy and innovation required to fuel start-up development. They are flexible, use new-age technology, experiment with bold business models, and target high growth projections, despite the long-term survival uncertainty. In India, creative entrepreneurs have innovated technology based solutions in health care, education, social platforms, hyper local services, e-commerce, transport, logistics and analytics – creating opportunities out of old challenges afflicting the Indian economy.

Start-ups have also become exciting work opportunities for fresh graduates as open-minded places to test new ideas and come up with flexible solutions in the absence of hierarchy and rigid systems. However, the growth trajectory of start-ups is volatile, which mean a lot of start-ups fail. Yet, they expand and diversify the labor pool in meaningful ways.

Young professionals at the start of their careers gain invaluable experience in such firms, which necessarily require creativity, initiative, and digital technology expertise in multi-task roles. In the present dynamic business environment, their growth over a short span in a start-up can become the equivalent to the knowledge, skills and abilities of mid-career and senior professionals. For instance, employees from start-ups may have already developed new technologies and services, and tested their ideas in the market. Established companies can do well by targeting professionals with start-up experience for recruitment.

In terms of business strategy, start-ups present additional opportunities for both MNCs and small & medium enterprises (SMEs). International Business Advisory Manager Adam Pitman says MNCs and SMEs can benefit from capabilities and resources developed at start-ups. “MNCs can source talent or business units engaged in technologically advanced fields from start-ups, and integrate their skills to diversify their business. MNCs and SMEs can also acquire under-performing start-ups to obtain physical assets – like infrastructure and employees – as well as new clients and revenue streams”.

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Government Support

The transforming digital and start-up landscape in India has triggered key government campaigns promoting economic development, inviting foreign investment and job growth, the latest being Start-up India. As part of this ambition, the India Aspiration Fund (IAF) has been launched as an aggregator of funds under the Small Industries Development Bank of India (SIDBI) to boost the start-up ecosystem. Indian start-ups will also benefit from tax breaks, incubation centers and easier approval and exit processes in the near future.

Flush with investor funds, the pace of growth is expected to accelerate in the Indian start-up community. Although the rapid growth of the start-up community does pose some challenges for established businesses, this growth also creates a number of opportunities for established businesses to realize and convert.

 

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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