A realm full of opportunity and test Among the countries considered to be hotbeds for startups, India consistently makes the top ten; much of it has to do with the policy-making and cultural shifts the country has gone through to advertise itself as startup-friendly.

Among the countries considered to be hotbeds for startups, India consistently makes the top ten; much of it has to do with the policy-making and cultural shifts the country has gone through to advertise itself as startup-friendly. The country has a unique mix; a large market, a growing economy, and an ecosystem that is largely considered supportive.

Although things seem straightforward, startups do face a bit of a hurdle when it comes to setting up a full base in the country. The country has about 325000 startups, and boasts 114 'Unicorns' to date, according to Tracxn. This alone makes up for an exciting prospect for emerging businesses to set up shop in India.

Current climate

With a population of over 1.4 billion, the opinion is that there's a piece of the pie for everyone to take. Not to mention the diversity it holds and offers along with the fast internet adoption across the depths of the country.

The cost of doing business has been one of the major talking points when businesses look at India. Sera Arora, Partner at Bharat Founders Fund says, " The cost of human capital is lower than most countries, with a massive workable population. Technology is rapidly changing and is permeating every segment of our lives, allowing startups to change the status quo of how and what type of businesses can thrive in the country."

Startups have raised close to $2.77 billion in Q1 2024, showing promising trends across sectors such as fintech, health care, and AI-related markets.

No stake no gain

Prospects are great. But risks are greater as with all lucrative things. Companies that are well-associated with the Indian business communities such as PhonePe, Groww, Pinelabs, and Zepto among others have been in the news for shifting their base to India. Stakeholders think while the risk is perpetual, moving to the largest country in the subcontinent is the logical thing to do.

Brijesh Damodaran, Partner at Auxano Capital opines, "The capital structure and the flow of money of the majority of investors, does play a role. Also if the revenue for the business primarily may come from outside of India, it does make sense to look into the place where the company is being formed."

So what makes it lucrative? The Indian economy has seen an upward trend in most metrics over the past few years and is recognized to have made its cities as hospitable as possible for startups to thrive.

The Startup India initiative launched in 2016 has come with features such as tax exemptions and simplified compliance procedures. The country has also made significant strides in the 'Ease of Doing Business' ranking, holding the 63rd position currently thanks to a significant jump from the 77th position of 2019.

Harsha Mundhada, Principal, Inflexor Ventures says, "Overall, India's supportive policies, abundant talent, technological infrastructure, and increasing consumer spending make it an attractive base for startups aiming for growth and innovation."

Furthermore, the Fund of Funds for Startups (FFS) that provides funding support, managed by the Small Industries Development Bank of India (SIDBI) has brought more fuel to the cause. Sectors like Fintech also enjoy 'Regulatory Sandboxes' to allow startups to test new products under the umbrella of a controlled regulatory environment. Efforts have been put towards creating 'Single window clearance systems' to reduce bureaucratic jargon and streamline regulatory approvals.

"The lock-in period for investments by Alternative Investment Funds (AIFs), Venture Capital Funds (VCFs), and Foreign Venture Capital Investors (FVCIs) has been reduced from one year to six months, offering greater flexibility for investors and potentially attracting more funding to startups," added Mundhada.

However, organizations moving to India might find it daunting as they face diverse regulatory changes. Sera Arora opines that the country is still a complex place to navigate as startups have to rely on CA/CSs to make their way through complex systems and compliance frameworks.

"Foreign inward remittances from global clients or investors remain a massive problem statement; the plethora of paperwork required and to be maintained creates time delays which are detrimental to business progress. Further, shifting regulatory landscapes are a fear for most foreign investors looking to enter India. Complicated taxation and regulatory paperwork prerequisites still need to be addressed to poise the startup ecosystem for growth," Arora believes.

Challenges galore

Taxation is a big part of scaling a business and in India, startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) are eligible for a 100% tax rebate on profits for three consecutive years within the first ten years of incorporation.

'Reverse Flipping' however, a process that involves shifting a startup's domicile to India can be proven as a very costly affair. For Instance, PhonePe famously paid INR 8000 Cr in 'Capital Gains Tax' while moving bases from Singapore to India.

Harsha Mundhadha believes that operational hurdles, such as convincing employees to reset their stock option vesting periods and managing accumulated losses during the transition, further complicate the process.

Arjun Malhotra, General Partner at Good Capital claims that there are multiple startups in the 'Private to Public' pipeline and are unable to take this route due to the high costs involved.

"Only the ones that can justify the short-term tax hit can make the move. The appetite of the local consumers even makes it worthwhile for these companies to do so but long-term, smarter incentives are needed to help India attract more startups to set up shop at home without penalizing them," Malhotra adds.

Some sectors are consumer-facing that enjoy many of the advantages the country has to offer. Technologies that promote digital transformation, encompassing AI and IOT; agri and climate-tech to name a few experience an opportunity that no country offers. However, the complexity involving compliance policies in a country where the regulatory approach can change overnight has made the country both exciting and intimidating.