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The global economy is today faced with the spectre of rising unemployment. According to the International Labor Organization, the world economy will need to generate nearly 280 million new jobs between 2015 and the end of 2019 to make up for the ground lost during the last recession and ensure new entrants to the labor market can find work.
It is this realization that is driving policy-makers the world over to increasingly recognize the job creation potential of start-ups. Germany is looking at a start-up initiative to create more than 100,000 new jobs by 2020. UK has an Entrepreneurial Action Plan which has seen tech start-ups increase from 200 in 2010 to 1,200 in 2013. Israel is running a ‘Startup City Tel Aviv’ program to create an early stage innovation ecosystem that can extend to Europe and beyond.
India, on its part, needs to create 10 million jobs per year for the next 10 years to sustain acceptable Gross Domestic Product (GDP) growth.
To generate such a large volume of employment, the job market of the future will not be able to solely rely on the traditional pillars of lifetime employment in large companies and the public sector. Clearly there needs to be an alternate channel that creates these multiple jobs. The recent success of some of the start-ups in India indicates that more of such enterprises can lead to creation of millions of job opportunities. However in order to unleash this entrepreneurial potential we need a robust ecosystem, which is currently in a very nascent state, primarily because culturally we are a risk averse nation.
The need of the hour therefore is to create an enabling ecosystem that encourages a flourishing ‘start-up’ culture in the country.
As a first generation entrepreneur who started my own business in response to an unsuccessful job pursuit, I can attest to the advantages of self-employment. I turned to entrepreneurship quite by accident and became a job creator rather than a job seeker. Instead of the one job that I was seeking then, I have created over 7,500 jobs today. If I add the ancillary businesses that my company relies on or supports, it has had a multiplier effect.
In building my company Biocon, I was a beneficiary of the visionary political leadership in the state that led to the creation of an enabling context for the incubation of successful start-ups in Bangalore.
The financial support lent by the Karnataka State Financial Corporation in the early 1980s to pioneering companies like Biocon and Infosys, promoted by first generation entrepreneurs with no business track record, has led to Bangalore’s emergence as an ‘IT & BT Hub.’
Key differentiators such as the availability of venture capital funds through initiatives like the Karnataka Information Technology Venture Capital Fund (KITVEN) and the presence of premier academic institutions such as Indian Institute of Science (IISc) have also contributed to make the city a fertile field for innovative start-ups to bloom.
Bangalore today accounts for nearly 30% of the country's start-ups. The city provides a conducive entrepreneurial ecosystem that links research, capital and technology-led ideas to the market place.
India needs a similar innovation ecosystem that enables entrepreneurs to propel ideas into sustainable businesses, which in turn will have a multiplier effect on job creation and value accretion for the economy.
The Ideas Economy
Today technology is unshackling innovation through entrepreneurial zeal like never before. No longer is value creation linked to scale but to the power of the idea.
Information technology, communication technology and biotechnology are rapidly and disruptively changing the way we communicate, educate, medicate and eradicate.
In 2014 the global Biotech sector raised $40 billion through venture funds, private equity and IPOs - the highest ever to date. Add information and communication technology (ICT) and this number zooms to $200 billion. These “technopreneurs” are all focused on breakthrough ideas and money is chasing every one of them.
Not everyone will succeed but we are already seeing fantastic valuations being ascribed to young entrepreneurs who are as smart as they come in terms of innovative business models. Eg. Google, Facebook, Twitter, WhatsApp, Amazon and Uber to name but a few. This has created the 'start-up' revolution the world over from Boston to Bangalore, from Sydney to Singapore and from Trondheim to Tel Aviv.
We are today witnessing the birth of the “ideas economy,” where the value of a company is measured by its “innovation quotient” rather than traditional metrics such as revenue, profit, physical assets etc. The potential of the WhatsApp messaging platform to change the way the world communicates led Facebook to pay an “innovation premium” resulting in a blockbuster deal value of US$19 billion. The power of the idea is being reinforced by the dizzying valuations being commanded by companies like Snapchat (US$16 billion), Uber (US$40 billion) and Xiaomi Corp (US$45 billion)!
The fact that this "innovation premium" is getting larger over the years is illustrated by a Bloomberg analysis that traces this through the Amazon and Netflix public offerings in 1998 and 2002 at values of just US$450 million and $750 million respectively, followed by the Google IPO in 2004 at a value of US$23 billion, which in turn quadrupled to the US$100 billion IPO that Facebook had in 2012. Whilst all these companies have similar risk-return profiles, the investor appetite for “new ideas” has emerged only recently.
India is also experiencing the changes being brought about by the birth of the “ideas economy.” According to market reports, the Indian start-up sector received more than US$4 billion in funding in 2014, compared to US$1.8 billion in 2013 and US$760 million in 2012. What’s more, Flipkart (valued at about US$11 billion) and Snapdeal (valued at about US$5 billion) are now worth much, much more than the total market capitalization of India’s major brick-and-mortar retailers.
In order to capitalize on the evolving trend, we need to build an enabling ecosystem that unleashes the entrepreneurial energy. An ecosystem that relies on: the ease of starting a business, availability of skilled workers, reliable infrastructure, and has access to capital.
Fast-tracking Approvals Process
Companies today prefer to register their start-ups in the US and Singapore, where it takes significantly less time to start a business compared to India. A multiplicity of laws and regulations has a choking effect on business, which explains India’s 142nd rank on the World Bank’s ‘Ease of Doing Business’ index for 2014.
Therefore, the need of the hour is not more regulation but smarter regulation. The government needs to focus on a number of regulatory reforms that will address the ease of doing business, reduce transaction costs and expedite approval timelines. A time-bound approvals system can help fast-track projects, businesses and start-ups, thus improving the business climate in the country.
Addressing Skill Deficit
There is also an urgent need to create high-skilled jobs that add long-term value to the economy. So far, our academic institutions have focused on churning out a large numbers of graduates with very basic skills. They lack the quality attributes that will make them employable. As a result, manpower in general unskilled category is abundantly available in India however high‐skill areas are facing a talent crunch. It is vital to fix this skill deficit through advanced learning avenues that bridge the gap between industry and academia, science and business.
Building Reliable Infrastructure
If businesses are to flourish then there is also a huge need to improve roads, rail, ports, power and other infrastructure. India’s infrastructure could require investment of up to US$1.7 trillion by the end of the decade, the World Bank has estimated. Also, low broadband penetration in India means the country is still some distance away from leveraging the Internet for commerce, information and development. We rank a poor 89th among 143 countries on the World Economic Forum's global Network Readiness Index, far behind China’s 62nd position. It is imperative, therefore, that work on the ambitious National Optic Fibre Network to connect 20,000 Indian villages to the Internet via broadband is speeded up. We also need a robust regulatory framework to address concerns over privacy and data safety in the digital space.
Creating a Virtuous Financial Cycle for Innovation
Indians fail to take ‘ideas’ to ‘market’ because unlike in the West, capital is virtually inaccessible here. There isn’t enough public funding available for academia to pursue discovery and invention. Similarly, critical risk and seed capital needed by entrepreneurs to translate concepts into ‘proof of concept’ is hard to come by. Moving ahead in this cycle, industry also finds it difficult to obtain private funding from financial institutions, venture funds and capital markets to innovate and commercialize. India, therefore, needs to create a virtuous financial cycle to realize the nation’s huge entrepreneurial potential. This financial ecosystem will work only if all three components – academia, entrepreneurs and industry – work symbiotically and in tandem.
To set the wheels spinning and make the model self-perpetuating monetization needs to happen at every stage of this cycle. Academia therefore needs to create intellectual property (IP) through its discoveries and inventions that can be licensed to either entrepreneurs or directly to industry with royalty payments upon commercialization. Entrepreneurs need to create value-added IP that can be licensed to industry with royalties upon commercialization. Industry needs to monetize through successful commercialization that enables the payment of royalties.
Laying the Groundwork
Recently, capital markets regulator Securities and Exchange Board of India has moved to ease rules and allow start-ups to list and raise capital from domestic stock exchanges through the Institutional Trading Platform. This will open up fresh funding avenues for budding entrepreneurs.
The Narendra Modi government has also shown that it is in sync with the aspirations of a New India and wants to give a big thrust to entrepreneurship in the country.
The government has unveiled The National Policy for Skill Development and Entrepreneurship 2015. Among other things, the policy seeks to promote a culture of innovation-based entrepreneurship for generating wealth and employment in the country. Besides educating and equipping potential entrepreneurs, the policy also seeks to connect them to mentors, incubators and credit markets.
To improve the employability of the nation's youth Prime Minister Modi has also unveiled an ambitious Skill India Mission that seeks to upskill 402 million workers by 2022 through additional skills and vocational training.
The government has also launched an online portal to speed up the regulatory processes required to start and run businesses.
Moreover, the government has also announced a US$1.7 billion (Rs. 10,000 crore) fund for start-ups, a US$1.2 billion (Rs. 7,000 crore) budget to fund smart cities, and a US$90 million (Rs. 500 crore) fund for a National Rural Internet and Technology Mission.
These new measures are well timed as the youth of today has begun to opt for an entrepreneurial journey enabled by the technology of the day.
The Path Ahead
India’s daunting challenges throw up unlimited opportunities to innovate and create business solutions. Therein lies the entrepreneurial potential.
In the economic reality of a developing country like ours, we require innovative start-ups and businesses that think locally but have the potential to make enormous global impact.
The government must realize that encouraging technopreneurs in the small and medium enterprises (SME) sector will create a compelling opportunity to take innovative ideas to global markets. In doing so, we will be able to move up the value chain from ‘Make in India’ to ‘Innovate in India.’
For that to happen, we will need a robust ecosystem that allows the flourishing of a vast number of fast-moving companies that are small, nimble and entrepreneurial. This, in turn, will create a vast and vibrant market place of millions of small, medium and large enterprises symbiotically interconnected to deliver superior and sustainable solutions.
A large reservoir of entrepreneurial energy in India is waiting to be tapped. It is by investing in breakthrough ideas and embracing entrepreneurship as an economic model of growth that India will be able to unleash the power of innovation to ensure a better life for its billion-plus citizens.