Startups & the Financial Crisis
The financial crisis has deep implications for Startups even though it may seem unlikely.Read the survival guide and decide for yourself if you need to take those steps
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Jasmann Said,
October 31, 2008 @ 11:04 pm
In the current global economic crisis, venture capitalists and angel investors are retracting from making new investments in start-ups, preferring to hold on to their liquid capital. SMEs will need to be ahead of the game and ensure business proposals are more lucrative than ever to attract investment for expansion. Start-ups will need to give up more equity of their business to gain an investor’s interest. Having spoken to private investors, I have found that the general opinion is that due diligence at a high level has become mandatory and investment criteria has changed from retail and technology sectors to clean-technology.
Although emerging markets have not yet felt the pinch of the recession hitting the US and Europe, it is only a matter of time before the lack of credit and debt finance begins to affect countries like India ad China, which are currently showing resilience in enterprise efforts.
We have known for a while now that investment trends are moving towards the clean tech sector. This may work in favour of China which has a better distribution network for bio-fuels than India, which still has many years to go before infrastructure is improved, impacting on India’s clean tech entrepreneurs. Nevertheless ample opportunity in clean tech still exists with the wind energy sector booming in India, placing the country fourth in the world for generating wind power. India’s oil import bill has risen substantially with energy demands of the high middle class population of 450 million impending an energy gap of 30 GW per year. SMEs working on energy generation form waste, water filtration and building wind farms will be most successful in attracting foreign funds, which doubled to $300 million from 2006 to 2007.
Tech startups still have huge opportunities in the mobile applications and VOIP sector but to enter the global market Indian startups need to consider distribution to Europe and the US from day one. Most startups lack knowledge in this field and without the know-how of distribution networks in the West, they face their biggest challenge in competing with startups in the US.
2008 has been a relatively good year for India’s startups with the high success rate of obtaining funding. This has been the result of a growing number of angel investor groups and an increasing number of universities across India setting up incubation centres with foreign VC groups. The biggest challenge still remains in changing the mindset of Indian graduates. It is still evident from my interviews of students at various universities in Delhi, Mumbai, Chandigarh, and Ahmedabad, that approximately 80 percent of them prefer to apply for a corporate job after graduation. Family influences in India still dictate that job stability is a priority even if one is over-qualified for the job, rendering it more difficult for startups to recruit a quality team.
The changes to the Finance Act enforced in May 2007, which were largely scorned upon by VCs across India (due to the pass through taxation benefits being restricted to eight sectors only) have had little effect on slowing down India’s economic growth. This is because the majority of funds raised by domestic VC groups come from foreign investors who will simply redirect their funds to India via foreign VCFs which are unaffected by the new regulations and still benefit from pass through taxation. My view remains that it is essential for entrepreneurs to thrive to boost India’s economy and its not for the government to decide which sectors will determine future economic growth. The exclusions of telecom, healthcare, agriculture and services are just a few areas that may sadly decline as funding is discouraged as a result of the changes implemented to the Finance Act.