With over a thousand start-ups in 2017, India’s start-up ecosystem has never looked better—even though the mortality rate is as high as 35%, a Nasscom presentation points out, India has the world’s third-largest start-up base, almost the same as Israel. Though it is unicorns like Flipkart and PayTM that get the most attention, and funds, the encouraging news is that close to a third of India’s start-ups are focused on the big social problems the country faces; with the average age of founders rising a bit to 32 this year, this suggests professionals are quitting jobs to try and use their skillsets to solve a big social problem. So, according to Nasscom, of the start-ups focused on social issues, 20% are working on healthcare solutions, 18% each on how to improve education outcomes and foster financial inclusion, 15% are in the clean technology area, 12% in agriculture technology, 8% in energy tech and 4% in ways to prevent crime. So, for instance, start-ups are looking at how to use satellite data to map crop production and using this to come up with a model to make farm insurance easier. And while Nandan Nilekani’s Aadhaar stint grabbed the national headlines, his EkStep start-up is focused on raising education outcomes.
Given start-ups are at the cutting edge of technology and innovation, not surprisingly, half the start-ups this year were in the B2B segment—almost all IT majors in India, for instance, have sizeable cheque books to fund start-ups; data analytics, IoT, AI and block chain are the areas most of them are interested in. If there is a dark cloud in this otherwise glorious picture, it is the reduction in the funds available for early-stage start-ups. According to Tracn data, sourced by Mint, while the number of seed-cum-angel funding deals rose from 373 in January-October 2014 to 816 in the same period in 2015 and 894 the year after, this fell to 472 in the first eight months of this year. Much of the reason for this, according to Nasscom, is the tax rules that, despite the government agreeing to change them a long time ago, remain much the same, and thus start-ups get taxed on their funding at the first stage itself—so, if a start-up receives `15 for each of its shares that have a face-value of `10, it pays a tax on the difference immediately; apart from the fact that this reduces the amount of capital coming in, it is especially unfair since there is no certainty that the start-up will even survive; indeed, right now, the mortality rate is a high 35%. Given the amounts involved are not that large, and more so given what start-ups can contribute to in terms of advances in technology or fixing some major social issues India faces, it would be a lot better if the finance ministry agreed to take a notional tax loss to help start-ups access finance easily. Since the capital gains have to be taxed, it would be just as easy to levy it when the original investor is exiting—at least that way, only investors in companies that have survived and thrived will pay the tax. Also, given the government’s own plan to launch a fund to help start-ups hasn’t really taken off, attention needs to be paid to sort out glitches there.