The number of new startups dropped to a nine-year low in 2019, but overall fund inflow jumped to a five-year high
Prime Minister Narendra Modi’s wish to make India the land of entrepreneurship, the government’s StartUp India initiative and policy tweaks to support new businesses do not seem to be paying off. The number of new startups in India has hit a nine-year low in 2019, according to a report in the Business Line.
The number of new startups in 2019 fell to 5,462, a 35 percent drop from 2018. But this decline is not a surprise, it has been the trend since 2016. While there was a lot of fanfare and hype surrounding StartUp India, it has clearly failed to boost the sentiments and health of the startup ecosystem.
That’s mainly because most of the promised Rs 10,000-crore fund support under StartUp India along with incentives of Rs 1,000 crore never came by.
Still, the government is trying to do its bit with new incentives. In Union Budget 2020, the government has proposed seed fund support for early-stage startups and easing tax burden on startup employees among others. StartUp India’s blueprint also has plans for new incubators, accelerators and 100 new innovation zones by 2024 among the 19-point agenda.
So, why did the startup frenzy fade away?
First, the startup ecosystem has matured. Today, not everyone with an idea can get funding. Most of the ideas that might have easily attracted investors back in 2014-15 are unlikely to get any investment now. Investors have burnt their hands numerous times in the past few years and are now cautious. With fundraising becoming difficult every day, the euphoria among aspiring Indian youth to become entrepreneurs is gone.
Second, the angel tax created havoc during the past couple of years. The inflow of seed capital, or angel investments, dropped by more than 20 percent during January-September 2018, compared with that of the same period a year ago.
Third, paperwork and compliance with multiple regulations have always been pain points for startups and entrepreneurs. While India has jumped in the World Bank’s ease of doing business rankings, much work needs to be done to introduce clear and simpler guidelines for emerging businesses.
Fourth, the economy is witnessing a slowdown, not just in India, but also globally. That has squeezed funding for startups, especially at the early stage.
On the other hand, overall fund flow to India’s startup ecosystem has actually grown in 2019. As BusinessLine reported, around $20.44 billion has been pumped into Indian startups. That’s highest in the past five years.The truth is, startups that begun their journey five years ago, or so – and did not have to shut down -- are now raising larger amount of money in each round. Cautious investors are placing their bets on the ones with a tried-and-tested model hoping for better yields. That’s a natural progression, and this will continue to be the trend.