Why the Indian Startup Ecosystem is Broken, and How We Can Fix It
The Problem – A Tale of Two Buckets
Startup ecosystems the world over can be divided into two separate but connected Buckets, divided only by their role with respect to the innovation function. Bucket 1 holds a singular breed – the risk-takers, impressarios and crazy ones – the Startups – who deal directly with the creation of innovations that address our world’s most pressing problems. Bucket 2 is a mixed bag of Enablers, and contains those who facilitate, incubate, accelerate, nurture, evangelise and invest in members of Bucket 1 till those fledgling innovations find a foothold in the real world. The relationship between these Buckets is a delicate yet important one, because it underpins the force of change that has built the world around us and acts as the engine of progress on which we all depend.
But it is broken.
Since its very beginning over 20 years ago, India’s private equity sector (including its venture capital industry) has moulded itself on the structures and make-up of the West. Why wouldn’t it? Our entire model of governance comes from the West, and these are structures that have stood the test of time (for the most part) in those countries for over half a century. But India is a fundamentally different kind of being.
An emerging economy with over 1.3 billion people (700 million of whom are below the age of 27), 2000 ethnic groups, 122 major languages and 250 million people below the poverty line cannot be evaluated, catered to or governed using methods that have worked in the developed world, because the developed world is just that: developed. Their social, educational, financial and legal structures were built around, and have evolved with the realities of their countries over centuries, whereas we adopted the system given to us under Colonial rule, a system not really made with the long term needs of a sovereign nation in mind. The fact that we abide by several of those laws even to this day, 70 years later, is testament to the inertia that our country is facing. These inherited structures have failed us, and have prevented the evolution of one of the key ingredients every innovative economy needs: social mobility.
It is through social mobility that grassroots level needs and ideas reach policymakers, industry bodies, investors and academics, and only through the interactions between these groups is systemic change brought about. The India of today is still one that dismisses large brackets of the population based on educational, financial and social backgrounds, and with them, their individual ideas for change. In other words, entrepreneurs within these brackets never get to enter Bucket 1, the Startup Bucket.
The Enabler Bucket (Bucket 2) operates like a fairly well-oiled machine, but its failing comes in the way it interacts with those in the Startup Bucket. Again, it’s a numbers game. For Enablers to perform their chief function – enabling innovation – effectively, surely the first order of business should be to cast as wide a net as possible over the ecosystem so that they can connect with every worthy Startup that fits their criteria? It can be argued that while this is almost certainly what Enablers would like to do, the logistical realities of managing such a massive filtering process makes this infeasible.
And yet, is infeasibility acceptable? If India’s largest problems (read: largest markets) lie at the base of a pyramid that has been sectioned off from the change agents (entrepreneurs and enablers), isn’t it, if nothing else, in the financial interest of these change agents to find a way to bridge this separation? Admittedly, there are Enablers who have always made efforts to chase such “impact” opportunities, but one could argue that since a bulk of these efforts still rely on the same old sourcing methods (such as individual referral networks), their effectiveness could be further improved. Even for innovations higher up on the pyramid, the ones that have an easier route into the Startup Bucket, the time has come for Enablers to reach down and unearth every worthy Startup using an unbiased, scalable method of filtration. The current methods that Enablers use to reach out to Startups simply aren’t sufficiently customized to India’s realities and as such, are at best ineffective, and at worst, destructive and discouraging.
The jump to an ideal Startup ecosystem requires a new kind of innovation framework altogether, a paradigm shift. We need a sort of Super Bucket that brings a quantum leap in the number of connections between the previous two, while establishing a surrounding environment that provides the supportive infrastructure necessary for implementing change. It would boast perfect information symmetry, accessible communication channels between all stakeholders and, most importantly, a firm focus on promoting innovative thinking within all disciplines and across social strata.
All talent should be able to connect with worthwhile ideas, every idea should have the opportunity to start up, every Startup should have equal ability to communicate with the Enablers they need to grow, every Enabler should have an informed, scalable and efficient method of identifying those opportunities most worthy of exploring and finally, every idea not worth exploring currently should be given the guidance and support it needs to lead it to its logical end, whatever that might be. Opportunity, Communication, Identification, Support. That’s what it’s all about, and there is only one bridge between all of these concepts: Data.
A Data-driven Approach
It boils down to this: just like every other industry in the world that needs to make optimal decisions in the face of an endless avalanche of relevant information and resource constraints (in the form of time, money and manpower), the early-stage investment industry needs to leverage data to separate the signal from the noise.
How can an industry so focused on scalability potential and efficiency when it comes to portfolio companies not see that its own methods aren’t scalable? If early-stage investors the world over recognize the reality that out of 10 investments, 5-6 are likely to lose capital, where does the inertia to move to a better system come from?
This is what a data-driven approach to early-stage investing could achieve:
- All-encompassing reach for all investors, not just the big-wigs with extensive referral networks. A data-driven discovery platform will mean all investors will be equally capable of finding truly valuable investment opportunities, while making it possible for all good startups to be discovered, regardless of whether that startup is in a current “hot” industry or not.
- Investment decisions, and by extension investment processes, terms and exit strategies, will be built on top of the insights that the data provides, therefore counteracting problems such as investor horizons being unrealistically short for a specific startup. In other words, early-stage industries the world over will be optimized for the local market and economy.
- Transparency in investments and the efficient flow of information. By finding a method to score and assess a startup, investment decisions are made transparent. A startup would know exactly what an investor is looking for in terms of teams, market sizes, or other investment-related factors, and would be able to tell instantly if it makes the cut. Investors would have the same advantage, and would be able to hyper-optimize their time management to focus on only the best opportunities and activities.
- Analysts and Associates would see their responsibilities re-aligned to include true value adding activities such as supporting portfolio companies, building their networks and contributing towards thought-leadership in their firms’ focus areas.
Startups and entrepreneurial ecosystems are the engines of growth and progress in the world, and with data increasingly governing every decision made by businesses, governments and individuals alike, its time these engines went in for tune-ups of their own.