Are Indian startups not scaling up on innovation?

We have to be bigger, better, bolder: Union Commerce and Industry Minister Piyush Goyal message to Indian Startups

Commerce and Industry Minister Piyush Goyal on Thursday asked the Indian startup community to shift their focus from grocery delivery and ice cream making to to high tech sector like semiconductor, machine learning, robotics, and artificial intelligence.
He also said there is a need for more Indian investors into the startup ecosystem.
“Are we going to be happy being delivery boys and girls… Is that the destiny of India… this is not startup, this is entrepreneurship… What other side is doing — robotics, machine learning, 3D manufacturing and next generation factories factories,” Goyal said here at the Startup Mahakumbh, comparing the nature of Indian startups with that of Chinese.
The minister said the new startups should focus on preparing the nation for the future.
“Do we have to make ice cream or chips?” he asked.
He also underscored the evolving role of startups in driving India’s economic and technological growth.
He assured that the government will handhold and support those who face challenges in their startup journey, encouraging them to persevere and try again.
The minister stressed the need for increasing domestic capital investments, stating that a strong foundation of indigenous investment is crucial to reducing dependency on foreign capital and ensuring long-term economic resilience.
Goyal emphasised on the need to attract more domestic investors to strengthen India’s capital base and ensure self-reliance.
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Do you agree with Piyush Goyal’s remarks?

P.K. Jayadevan: I think it has started a debate and the timing of the debate is great. We can disagree on the substance of his statement and a lot of people have taken sides. But I think those add to the discourse and that is a positive sign.

Thillai Rajan: Startups thrive where the ecosystem helps them. Startups are engines of innovation, but are they innovating enough? That means, are they looking at commercialising science and technology-based innovation? If you consider innovation as a spectrum, people always consider science and technology as the highest order of innovation. I’m not saying that is right or wrong; I’m merely stating a fact. From that perspective, data shows that a healthy share of startups qualifies under the deep tech sector. So, there is adequate activity and interest among startups to venture into deep tech sectors.

But the question is, are they scaling up? The capital requirements of the deep tech startups are higher in the initial phase. No revenues come in during that phase, where the level of risk is very high. So, who can provide this amount of capital? The Startup India Seed Fund scheme gives about ₹50 lakh (for activities such as market entry, commercialisation, and scaling up), but that’s not adequate; there has to be follow-up funding. Today, there is realisation that there has to be private sector capital provided after the initial government support.

How do venture capitalists define innovation for the purpose of funding?

P.K. Jayadevan: In the early days, innovation meant just being able to order stuff online. Venture capital firms made large bets on the Indian consumer story and that was the era until 2017. We saw large companies come out of it, such as Flipkart. That was the e-commerce era. Now, we are seeing smaller funds going into deep tech, which are not nearly enough, but you could argue that venture capital is betting on the future. Now, venture capitalists will look at AI, block chain-based innovation, electric mobility, etc.

Thillai Rajan: By innovation, we mean the benefits it will give to users. Are users going to benefit? Are they going to get a new experience from using this product? Will the consumer pay a premium for accessing the products and services? It is to assess the impact that it can create on people. In this regard, there are two points to be made. The first is to ask whether the innovation gives any competitive advantage that can be sustained over a long period of time. For example, a patent gives a competitive advantage. If that is not available, it will not attract investors’ interest because the capital will not get returns. The second could be in terms of the market. It may be a great innovation, but unless it addresses a need in a growing market, there will not be many backers for it. So, these largely determine which innovations get commercialised and which ones do not.

What has been the result of the Startup India push? Has it borne fruit?

Thillai Rajan: The emphasis on a startup policy is possibly the most wide-reaching policy focus of independent India. The facts speak for themselves. First, there are at least 20 Ministries of the Central government which have a dedicated policy or a programme targeted at startups. Second, we can also be proud of the numbers: there are about 1,65,000-1,70,000 startups, if we go by the numbers of the Department for Promotion of Industry and Internal Trade. This indicates that startup policies have been able to encourage many people to start ventures. Third, the capital that has flown in is not only restricted to equity; we are also seeing significant amount of debt capital going into startups. Getting banks to invest in startups is really something. That shows that the startup focus is here to stay and is going to play an integral role in India’s ambition of becoming a developed country. Apart from the Centre, large States too have startup policies.

P.K. Jayadevan: Yeah, absolutely. Everyone wants to start a company these days, which is a huge shift in mindset compared to earlier.

But if you compare India to the U.S., you will find that the U.S. shifted manufacturing to China when it had trouble with Japan. China was where it could find cheaper labour. China saw that as an opportunity to create employment, grow its own market, and also learn from American companies. It built its own telecom networks, micro-satellites, etc. China had a very nationalistic view of technology. Because it’s a closed ecosystem, it always wanted to be more self-reliant with respect to technology. So, the ecosystem matured much faster. China’s consumption economy also grew in a big way. About $12,000-15,000 per capita GDP is really good for a digital economy. We are still around $3,500. We don’t have that kind of money to spend. We have cash-rich companies but they hesitate to invest, which is not the case in other ecosystems. That’s where we are lagging. The India consumption story has to move forward. For that we need some enabling criteria.

Are you speaking about some sort of an import substitution for capital?

P.K. Jayadevan: Not necessarily. If the market is promising, capital will come from anywhere in the world. But yes, there is a need for more Indian home-grown venture capital firms.

What prevents startups from going up the value chain or becoming bigger?

Thillai Rajan: There is a natural selection process that works in the economy. But the issue is whether we should give small amounts to a large number of startups or large amounts to a small number of startups. In India, by and large, the government has been trying to give small amounts to a very large number of companies. Most of the major support that the government has provided has also been used by larger companies. The quantum of support needed has to be substantially higher. The risk capital available is very low and much of it flows from external markets, primarily the U.S. Till we are able to find domestic capital, a good amount of support needs to be provided so that we can find a few winners.

Do you think governments in India have not started taking startups seriously?

Thillai Rajan: No, of course they have. Every sector has been opened up to engage with startups. But the whole process has to be made smoother. There is a lot of bureaucracy, which makes life difficult. In addition to its intentions, if the government has appropriate implementation measures, many startups will find it a lot easier to operate.

India is a very unequal country. The upper middle class in urban areas want quick deliveries, domestic helps, electricians, etc. But the first wave of tech in India saw more broad-based growth. Have startups benefited only a few?

P.K. Jayadevan: The difference with the IT services business was that it was labour-intensive and it worked out at that point in time because of outsourcing. But were we building the foundational products? No. And did we get there? We did. Thanks to venture capital, we had Freshworks, the first Indian software product company to go to the NASDAQ and list. It changed the game. Now there are many startups that were launched by those groomed in Freshworks. Once we have successful startups, founders and others will similarly spread out and build more.

Thillai Rajan: The first wave of entrepreneurship was more unidimensional. Much of it was IT, software. But today, there is an emphasis on all sectors.

For every Aether, there is a Byju’s. What do startups have to do to make sure they become an Aether?

Thillai Rajan: They should continue to be innovative because this is a competitive marketplace. One cannot rest on the laurels of the past.

P.K. Jayadevan: I would say set a very high bar of corporate governance and innovation.

Listen to the conversation in The Hindu Parley podcast