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Startup Industry Is Generating Many Unicorns And Decacorns, But Who Gains From Them For a developing country like India with a burgeoning population and aspiration, this new wave of entrepreneurship is absolutely essential for its economic growth

By Venkatesh Umashankar

Opinions expressed by Entrepreneur contributors are their own.

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There is a narrative that many startups are based upon business models that look good only on paper, or that they are desperately trying to "solve' problems that either do not exist or are ephemeral at best. Also, as a corollary to this, when one looks at the profit and loss statements of many of the startups, which in the first place is not published as most of them are not public companies, a large number of them are in the red, and they are running on money flowing from investing set-ups sitting on piles of cash with no place to go.

This however is but one part of the story. If we look at the state of startups in India, including graduated Unicorns (companies that are now public or have been acquired by a public company), in March 2022 the number of Indian Unicorns is pegged at 92. From January 2022 till now, there were eleven startups that became Unicorns, ranging from fintech, edtech, SaaS companies, social commerce, logistics, etc.

For a developing country like India with a burgeoning population and aspiration, this new wave of entrepreneurship is absolutely essential for its economic growth. The main narrative should be one of capital formation for a country besieged by massive gaps in resources, infrastructure and services. Capital formation is the only engine of sustained growth for any economy and broadly speaking enhancing both--physical and human/intellectual capital formation--is crucial in providing sustenance and growth for the growing population of India.

Research clearly indicates that private investment has a significant positive association with economic growth along with technical progress and infrastructural development.

Foreign direct investment (FDI) is also a critical driver of economic growth, by strengthening infrastructure, increasing productivity, creating employment opportunities, increasing export and stabilizing exchange rates in the country. As per the Department for Promotion of Industry and Internal Trade (DPIIT), total FDI inflow in to India amounted to $560.78 billion in the period April 2000 to September 2021. Total FDI into India between July-September 2021 alone stood at $19.77 billion, compared to a FDI equity inflow of $13.58 billion in the same period.

In 2021, a chunk of FDI went into pre-IPO financing rounds of startups like Ola, Paytm, Policybazaar, Zomato, etc., with the top 10 deals alone amounting to $5.58 billion. The total investment in the Indian startup sector shot up to $36.1 billion, rising from $11.2 billion in 2020.

The startup ecosystem in India has shown vibrancy in the last decade and has especially helped in mitigating the slump in economic activities due to the damaging externalities of the pandemic in the last two years.

Apart from attracting new capital into the country, the positives of the startups are clearly manifest when seen through the prism of employment generation, export earnings, gender equality and access, ease of living as enhanced by value added services and products and by filling up the gaps in availability of services which conventional businesses were not able to provide for.

In January 2022, the DPIIT reported that more than 60,000 new startups have been registered in India since 2016 and that startups have created more than 650,000 jobs in the country at an average of 11 jobs per startup. Their objective is to create an additional 2 million new jobs via startups alone in the next four years through a forecasted fifty thousand new startups. This clearly has provided a much-needed impetus to organized sector employment growth, which has suffered badly in the last two years of the pandemic. The SME sector which generates the maximum employment to Indians was at the forefront of bearing the brunt of the pandemic. Any assistance therefore in bolstering the employment capacity therefore is unequivocally welcome.

As far as access and equity in terms of capital formation is concerned, interestingly as reported by the DPIIT, 45 per cent of all registered startups have emerged from tier II and tier III towns, and a phenomenal 45 per cent of these startups are led by women entrepreneurs. The spread of the startup culture is heartwarming as 630 out of the total districts of India are on the startup map covering every state and Union territory of the country.

The criticism that is levelled at startups is largely centred upon how they are over-valued, disconnected from their profit and loss statements and the bubble that seemingly represent, which can burst anytime. There's some substance in this complaint but one also has to see that it is not that such ailments are only attributable to startups. One only has to look at the state of NPAs of Indian banks and decide whether the more mature corporations have been completely transparent in how they transact and manage their businesses.

The author's personal assessment however is that the biggest advantage startups bring to the table, especially in the context of a developing economy, is the innovation and animal spirit that they bring in. This provides the essential energy and drive to kick-start new ways of conducting business along with new value propositions which provide for rapid scaling in an unprecedented manner, which is not possible for conventional businesses to match.

Look at what BlackBuck did to trucking in India; what Ninjacart did to the "farm to fork' value chain; how Hasura is simplifying technology development harnessing the "open source' concept; how Zerodha on-boarded 3.4 million active retail investors on its innovative share broking platform in FY21, representing a 2.4X increase in its customer base.

Such stories are jostling for space in India and governance; oversight; lawful behaviour remain the same for all corporations whether they are start-ups or not. The glass is certainly half-full…!

Venkatesh Umashankar

Professor, Great Lakes Institute of Management, Gurgaon

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