At a time when the bright future of Indian startups is being repeatedly discussed, the country, on New Year’s eve, woke up to a disheartening survey that claimed that a huge number of Indian startups are going to flee abroad. So much for Make in India.
According to iSPIRT (Indian Software Product Industry Round Table), a software product industry think tank, 75 percent of new technology startup firms that intend to raise capital will be stationed outside the country. These firms deal with technologies ranging from data analytics to cloud.
“There is an exodus taking place. It is projected that three of four new technology startups that focus on the global market and plan to raise seed or venture capital will be domiciled outside India this year,” Sharad Sharma, co-founder of iSPIRT, says in the report.
A major challenge which Indian startups face pertains to tax and other rigid legal regulations. The enterprise ecosystem in India still shies away from investing in home-grown startups.
“Indian entrepreneurs are starting very disruptive companies that in many cases are global leaders today. They seek risk capital to grow rapidly and such capital finds it very hard to go through the maze of regulations regarding entry and exit,” Sudhir Sethi, founder and chairman, IDG Ventures India, says.
There are two main reasons why startups that get founded in India have a tendency to setup domicile elsewhere. The first is related to investors and the second is related to customers.
Accessibility to a large investment community with a higher risk tolerance and an ability to provide significant early-stage funding becomes a lot easier if the startup is incorporated in the same region as investors.
“Several startups founded in India have global customers as their target market and these customers too trust locally setup companies more. While there are several industry bodies, accelerators, VCs, and institutions actively supporting startups in India, cumbersome regulatory requirements and paucity of seed funding may encourage startups to incorporate abroad, raise funds there, and only run the research and development activities from India,” Subhranshu Banerjee, co-founder, RightCloudz Technologies, says.
Resonating with Banerjee, Sethi says that many companies prefer their global risk capital to be structured outside India. He added that the most successful of these companies structured outside India will then get listed there, thus, depriving Indian investors of investing in them.
“RightCloudz is currently in a very interesting stage after the recent Beta launch of our Cloud Evaluation and Ranking system. Our plans are fast evolving as we recognize that our biggest markets are North America and Europe. We will soon need to establish presence in those regions,” Banerjee says.
“I agree to the fact that Indian startups will at some point—this year or later—move out of the country. The tax norms are strict here, but more importantly, the people and the processes involved in it are an issue,” Kameshwaran Subramanian, founder, ParaBlu, says.
Pointing towards another hurdle, Subramanian said that unlike Europian countries, the duration of a startup company becomes of vital importance to the people. He also stated pricing to be another problem as Indian companies demand big discounts on services.
In a nutshell, it can be safely assumed that startups will setup base either where their investors require them or where their customers need them to be.