Despite sudden burst of public incubators in India, why it’s tough to stem high start-up failure rate

For start-ups to be successful, it is important to go beyond the seed money model. The onus is on the government to create a complete entrepreneurial ecosystem

It is the assistance service, popularly referred to as mentoring, that is the hallmark of an incubation programme

Is time really ripe for those with a sound business plan? That is what the Department of Industrial Policy and Promotion, or DIPP, which has put in place many start-up assistance schemes and incubation centres, wants us to believe. For instance, under its Start-up India Action Plan that was unveiled in January 2016, the department established 35 incubators in various institutions with a funding support of up to 40 per cent (subject to a maximum of Rs 10 crore). These incubators are managed and operated by public and privately run institutions. And according to the status report of Start-up India, issued by the Ministry of Commerce and Industry in January this year, 6,096 applicants have been recognised as start-ups by the DIPP till date. Also, 74 start-ups have been approved for availing tax benefits by Inter-Ministerial Board set up by the DIPP. This is just the tip of the iceberg. The government agency has also approved 941 Tinkering Labs, of which 374 have received grant of Rs 12 lakh each. The department also conducted pre-incubation training through mentorship sessions.

While the start-up culture is well entrenched in India for quite some time now, publically funded business incubators are starting to make their presence felt. Says Hemendra Mathur, venture partner at the Bharat Innovation Fund: “The public incubators in India have played a huge role in seeding ideas and hand-holding start-ups at an early stage. Incubators such as CIIE, iCreate, A-Idea and T-Hub are working with many start-ups to make them investment ready. Some of them are also investing seed capital to assist them in prototyping models. These incubators can be instrumental in connecting start-ups with mentors, policymakers and investors, which are essential for the scale-up of early stage companies.”

Typically, when a business plan is adjudged as feasible by an incubator, the entrepreneur is given the help they need, both monetary as well as in the form of networking. One such incubation centre, the AUD Centre for Incubation, Innovation and Entrepreneurship (ACIIE), is at Ambedkar University in Delhi. Its executive director Mohammad Sharique Farooqi says: “We support the incubatee financially for one to 1.5 years and grant them a fund of Rs 10 lakh. Thereafter, they have to grow on their own, as only networking and links are provided to them once they get out of the incubator.”

Limits of hand-holding

Does this mean all is hunky-dory for those who have smart business ideas? Not quite. Says a hardware entrepreneur L K Prasad, managing director at Acceleron Labs and incubatee at Amrita TBI, Bangalore: “Even though some good policies and initiatives are coming from the government, they remain less accessible for the non-tech start-ups. For instance, we as a non-tech start-up cannot avail technology development funds, as the process to avail it is very difficult. If the government does not support start-ups like us that are dealing in hardware ‑ which need intensive initial funds in buying the components and manufacturing the products ‑ we will not mature.” According to him the help should be extended further to even ensuring that whatever products are manufactured have good sales outlets.

Hemendra-Mathur-M-S-Farooqi-SME Futures

This is where the gap between reality and theory starts to gape at us. While, on the one hand, start-ups are seen as the need of the hour, on the other, the government is not deepening its efforts, which is required for creating a conducive entrepreneur ecosystem. For instance, Prasad points out, how when the government invites tenders, the clause and design are such that automatically established brands are preferred. “Even the government does not want to take risk when large investments are involved. The government should remove such funding eligibility barriers, so that start-ups can compete on equal ground.” In fact, he insists that the government should frame policies and programmes to smoothen things for start-ups. A step in this direction, he says, is what the Kerala government is doing with his start-up Acceleron Labs. “We have a joint venture with UST Global, which provides end-to-end IT services and solutions to manufacture laptops and servers exclusively for the Kerala government.”

AICs-shortlisted-for-grant-in-aid-in-different-states-PHASE-2 - SME Futures

For Mudit Narain, manager at the Atal Innovation Mission (AIM) at the National Institution for Transforming India, or NITI Aayog, incubators are a recent phenomenon in India and need time to establish themselves. He says, “The success stories will start coming out in the next few years. If we take the AIM incubation scheme alone, it has successfully catalysed the innovation and entrepreneurship ecosystem in the country. With 19 operational incubators till date and 82 incubators in the process of being established, AIM has been able to take innovation to the most distant parts of the country. Till date, more than 350 start-ups have been incubated in these 19 incubators, creating over 5,000 jobs and delivering technologies in different sectors and industries.”

Incubation by definition is a lot more than just making seed funds available to a start-up. In fact, it is the assistance services, popularly referred to as mentoring, that are the hallmark of an incubation programme. But, Farooqi of ACIIE says that such hand-holding might lead to start-ups being mollycoddled. “Most start-ups do not know what they actually want to do and certainly do not know how to do it. They are doing just what they have been told to do. And, so, the major challenge lies in providing mentorship to them. There is a dearth of good mentors.”

It may be a thin line that separates hand-holding from mollycoddling, but private incubators like Goa-based Prototyze identify good mentoring as a key to the success of incubatees. Mohan Krishnan, chief planning officer of Prototyze, says: “Venture studio models such as ours are more deeply involved with start-ups in trying to find answers to their problems. We think that this helps the start-up sharpen and validate faster its reason to exist than it would be otherwise. Our model is a hybrid approach to venture building, where we continue to remain actively involved for far longer than is usually the case with the classical incubators and accelerators. As a venture studio, we help in the critical aspect after funding: which is hand-holding and coaching a venture through its journey. This enables us to ensure higher success for the start-ups. Accelerators and incubators focus on this for a very short duration of around six to 12 weeks.”

Uneven competition

It is not just the NITI Aayog and the DIPP that have chosen start-ups to be a focus area for the government, state governments too are getting in the act by offering stiff competition to private incubators. In 2017, the trade association National Association of Software and Services Companies, popularly known as NASSCOM, ranked states in India on their approach to promoting start-up culture with sound policies. It found Karnataka, Maharashtra and Telangana to be the leading states in terms of start-up initiatives. Uttar Pradesh, Madhya Pradesh, West Bengal, Odisha, Kerala, Rajasthan, Uttarakhand, Gujarat, Bihar, Jharkhand, Chhattisgarh and Assam were seen as the medium-focus states, while Jammu and Kashmir and Tamil Nadu were seen as low-focus states.

According to Narain of NITI Aayog, thanks to the various initiatives by different state governments, there is an increase in the number of entrepreneurs in India. “The Indian start-up ecosystem witnessed the mushrooming of a significant base of start-ups building solutions for various grassroots-level problems in sectors like healthcare, education, clean energy, agriculture, etc. A handsome number of start-ups are now blooming, which are trying to solve India-centric problems with the use of modern, innovative and indigenous technologies.”

However, according to the NASSCOM report “Indian Start-up Ecosystem: Traversing the Maturity Cycle”, which is mentioned above, the efforts of state governments may not bear fruit uniformly. Bangalore, Delhi and the National Capital Region and Mumbai continue to be the leading start-up hubs in the country. The report states that around 80 per cent of start-ups are concentrated in Tier 1 cities.

Leading start-up hubs in the country - SME Futures

Tier 2 cities, like Pune (five per cent) and Ahmedabad (two per cent) have barely any presence of start-ups. Moreover, despite state governments launching competitive schemes, cities in the Northeast have hardly any takers for state incentives. For instance, Assam Agricultural University’s NEATeHub, the Northeast’s first agri-incubator set up under AIM, proposes to support entrepreneurs by connecting them to potential new markets. The plan is to create 50 agri-businesses with a turnover of 100 crore in five years. “The major constraint for us would be convincing people in the Northeast [to come onboard]. Everyone wants a job, but nobody wants to become an entrepreneur,” says, Vijay Pratap Singh Aditya, mentor at both NEATeHub and the ACIIE.

The NASSCOM report also points out a consistent one per cent increase in the participation of women entrepreneurs since 2015, even when the overall number of women-led start-ups continue to be small. The NITI Aayog, however, feels that it has enabled a lot many women entrepreneurs under AIM.

Participation of women entrepreneurs since 2015 -SME Futures

Narain says, “The Women Entrepreneurship Platform launched by NITI Aayog provides women entrepreneurs complete hand-holding support with special coverage. Further, one of our incubators, AIC Bansathali Vidyapith University in Jaipur, is working only for women-led start-ups delivering social innovations. Also, there exist a sizable number of start-ups led by women in other incubators, and AIM constantly encourages its incubators to promote women entrepreneurship in all sectors.”

Given that there do exist infinitives mentioned by Narain, what is working against them and their will to succeed? Jigyasa Labroo, a woman incubatee under the ACIIE and founder of Slam Out Loud, a social enterprise to empower children, feels that there exists a conscious gender bias, knowledge deficit, limited access to mentoring and guidance and preconceived or an old-fashioned ecosystem when it comes to women. “The start-up system is a testosterone driven, men-only space and very sexist place. The pitchers and the funders many a times ask sexist questions, mostly regarding marriage and family plans. Moreover, women participation in entrepreneurial ventures has not seen much growth and also, on an average, woman-founded start-ups receive funds that stand around less than half of that awarded on average to the male-founded start-ups. But yes, the only bright point that I see in the system is that the revenue generated by women entrepreneurs is slightly better than that of men, globally. But, in general, there needs to be a special support system and hand-holding for women entrepreneurs, so that an environment is created where they are encouraged,” says Labroo.

Bottlenecks and failures

One would think that with this level of government participation, start-ups should have it easy. And yet, winding up of start-ups continues to be a key problem, with a majority of them dying within two years of their inception. As per the NASSCOM report, while B2B start-ups show higher stability, in 2016, 64 per cent of B2C start-ups failed and it increased to 80 per cent in 2017. The Delhi-NCR remains the top state for B2C start-up failures, with more than 40 per cent start-ups failing, while Bangalore leads the tally in the winding up of B2B businesses (33 per cent).

Farooqi of the ACIIE says that the government needs to craft its policies with care. “Instead of blindly supporting any idea coming its way, it should make policies after understanding why and which of the ideas are going to support the society and how they are going to work. Such policies are missing, which again remains a big contributor to a huge failure rate of the start-ups in India,” he says.

Aditya feels that the government supports start-ups only because there is no real job growth and that it has not built the ecosystem required for the success of such start-ups. “The most critical constraint for start-ups in India is that of survival. Since most start-ups are just copy-cat ventures, there are no real business plans that include revenue and customer retention models. Most of the businesses, particularly in tech, app and web-driven businesses in India, run behind the same illusive ideas of great successes called Twitter, Facebook, Google and WhatsApp. Initially, the government supported and funded many early-stage ventures without knowing much about the feasibility of the idea and depth of their business model. People burn the fund money provided to them and then fail to generate revenue and as a repercussion, their ventures fail. This is discouraging to new business aspirants also.”

The future

For start-ups to be successful, it is important to think beyond the seed money provided by public incubators and develop a viable financing and mentoring mechanism. For this, the government needs to create a complete ecosystem. “By just providing Rs 10 lakh or Rs 20 lakh, the government cannot ensure the creation of a unicorn company. Seed capital, undoubtedly, is a crucial and initial requirement for starting a new venture, which is being fulfilled by us as an incubator,” says Aditya. But, he feels that what an entrepreneur needs goes beyond that. “They need more support from the financing institutions, like banks and non-banking finance companies. These financing institutions are weak in India. Small Industries Development Bank of India itself does not provide a lot of support, although it says that it does. Its conditions for supporting a venture include that it should be a profitable venture for continuously three years and able to provide a collateral. Now, what we fail to understand is that if a venture is meeting all these requirements, then why would it need support in the first place?”

Experts also feel that the government needs to focus less on IT-related start-ups and more on creating an investment-conducive environment. For instance, what is the point of investing in a successful food-delivery app if the core food businesses have no wherewithal to meet the demand created through the app. Says Farooqi of the ACIIE, “Incubators like us, which focus on social entrepreneurship, are not entertained much. Even the Department of Science and Technology has no scope for social entrepreneurial start-ups and incubators; most of the funding, investments and schemes are for incubation mainly working on technologies. Most of the AIM initiatives under the NITI Aayog are also tech-driven incubators. So, the focus is broadly on tech and thus we are the odd people out.”

Agrees Prasad of Acceleron Labs: “The infrastructure, facilities and the funds for hardware start-ups in India are very poor. All schemes for start-ups and the incubators in India generally focus on software-based innovations. Only a few venture into hardware start-ups.”

This lack of understating needs to be tackled if India wishes to improve its standing in entrepreneurship. There is an absolute need to go beyond theory, go deep into research and create an environment conducive to start-ups diversity. In fact, Farooqi insists that more money, fund, time and equipment for research have to be made available. “The research culture has to be intensively cultivated in the Indian start-up and incubation system to make it more realistic and not just theoretical. If we are helped with such inputs, we as an academic incubator can bring out good mentorship programmes that would involve a lot of ground work for the start-ups and help people translate their raw ideas into actions plans,” says Farooqi, highlighting the need to go beyond the current mandate of public incubators in India.

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