Why Many Indian Startups Are Headquartered Overseas

Among other reasons, having the headquarters in a particular country simplifies the day-to-day operations of the startup, say experts

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India's burgeoning startup ecosystem has lately been getting worldwide recognition.

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According to a report, India ranked 19th in the list of top 100 startup hubs of the world in 2021 as against 48th position in 2020.

Additionally, when fintech startup Open became India's 100th unicorn last month, it was a moment of celebration for one and all. Since then, two more startups including Purplle and Physicswallah have joined the unicorn club.

However, the number of startups getting incorporated outside India is also increasing. In fact, some of the companies that turned unicorns in 2022 and 2021 are headquartered overseas. This includes Polygon, Amagi, CommerceIQ, Hasura, Fractal Analytics, BrowerStack, Chargebee, InnovAccer, MindTickle, among a few others.

Why is this trend picking up?

Saas startups in particular have been moving out especially to the US, as it is the largest market for these companies. It also gives them a chance to list outside India.

"Many of the technology startups from India, especially in the B2B space, are naturally inclined to sell their products and services in the US market as it offers them a large market, better demand, higher margins, and favorable customer behavior. While the engineering or product development traditionally leverages cost-effective, skilled talent pools that are abundantly available in India, access to capital and availability of customer-facing talent has been relatively higher in the US," Baskar Subramanian, co-founder and CEO, Amagi, a cloud-based media Saas technology company that raised $95 million in April this year to join the unicorn club. The company was originally based in Bangalore, but it is now headquartered in New York.

Further, having the headquarters in a particular country simplifies the day-to-day operations of the startup in some cases because the startup has many customers from a particular country. Subramanian believes that having headquarters in the US helps Indian startups enhance trust in the eyes of their customers, access technology ecosystem partners, and create pathways for realizing IPO aspirations, enabling them to enhance shareholder value significantly.

"Other startups choose foreign countries due to their favorable regulations and taxation regulations in relation to their area of operations. Also, incorporation overseas facilitates the process of listing overseas and gaining access to foreign capital," said Ankur Mittal, co-founder, Inflection Point Ventures.

It also depends on the nature of the business. "This happens when there isn't clarity around the sector startup is in or the regulatory framework if it applies and to what extent - that's why a lot of gaming and crypto startups are based on Emirates, Gibraltar and other favorable destinations," said Bhaskar Majumdar, managing partner, Unicorn India Ventures.

For instance, Ethereum Layer-2 scaling startup Polygon was started in India, but the founders felt that the way it is built in its compliance structures makes it a global company and that is why today it is based out of the Middle East and has its developer base in multiple countries such as Switzerland, Belgrade, US, among others. "Initially, Indians were there and then few early developers came from India, but then it's much of a larger phenomenon. So that's why most of the companies in the blockchain world are always set up in a way to keep away from this regulatory uncertainty. And secondly, the nature of the companies is like they are technically a global company from day zero. So it's very hard for any local geography to apply their laws to it like, for example, VAT or GST or local laws," said Sandeep Nailwal, CEO and co-founder, Polygon said in an interview with us as part of our monthly feature, The Incredibles.

"The feeling of bharat never goes away from many of us, wherever we are," he added.

Making startups incorporate in India

Experts believe that it is vital to create a favorable business environment in India to entice startups to incorporate as well as list in India. It is also important to have a good pool of investors and mentors in a mature capital market. "India today has a Government that recognizes the importance of startups in the overall ecosystem. Domestic investors - funds, individuals, family offices etc. - have shown a strong appetite to back startups that have also considerably improved the business environment," said Mittal.

"The Indian Government has made changes in the listing norms which saw a number of startups going for IPO in India. With this, it is encouraging startups to incorporate in India. Also, the government made a strategic change in overseas IPOs, which has enabled India-incorporated startups to go for direct foreign overseas listings," said Majumdar.

However, when it comes to going public, it also depends on the growth aspirations and strategy for using that cash. In many cases, startups today are quite content with raising funds through PE or venture capital routes as well. "India already has a vibrant stock market and investment community. We think that it is already becoming attractive for startups, even B2B tech companies, to list in India. It's an easy decision when you are serving local customers at scale- we have seen several examples of that in the last 3-5 years," said Subramanian, while adding that if Amagi decides to list, it will be in India.

The benefits

From an investment and employment perspective, having overseas incorporated companies doesn't impact the environment much and still provides the same impetus to the economy, believe experts. "A startup can be incorporated outside India and yet continue to operate in India and yield benefits to Indian citizens and the ecosystem," said Mittal.

Having said that, we are today also seeing many businesses and startups incorporated outside India looking to enter the country to benefit from the vibrant ecosystem and opportunity we have here which in turn will also provide investment and employment opportunities.

Subramanian believes that for startup ecosystems to benefit, it is more about the affinity to a city, which is true for other countries as well. For example, Bangalore, Hyderabad, and NCR are home to successful startups, compared to other Indian cities. Therefore, where a startup is headquartered depends on access to infrastructure, talent, and capital, supported by favorable government policies. However, experts vouch for the fact that the place of incorporation may have very little direct contribution to supporting an ecosystem and startups would come together and support each other irrespectively.