‘VC Funded Start‑Ups in India: Innovation, Social Impact, and the Way Forward’

Journal: International Journal of Global Business and Competitiveness

The paper examines the overall impact of the start-up valuations and VC funding on the components of the entrepreneurial ecosystem – and its repercussions on the overall economic situation in India.  Venture Capital (VC) is regarded as one of the most powerful financial innovations of the 20th century. Although in the early 2000s, VC funded start-ups in India faced challenges of scaling up, off late, both Initial Public Offerings (IPO) and Mergers and Acquisitions (M&A) have emerged as viable options for growth and international expansion. Given this context, this article tries to understand the recent state of start-up valuations and ascertains the implications of losses being carried forward by the funded start-ups. It further contemplates on the influence of current business models followed by the VC funded start-ups on the society and labour market, as well as examines the impact of VC funding on wealth creation at the Bottom of the Pyramid (BoP) and on innovation.

The analysis of the VC funding patterns over the past two decades revealed that consumer technology sector has been receiving the majority of investments. Although their market valuation has breached the $1 billion mark, these start-ups are currently operating under huge losses. A case in point is that as of 2020, the joint losses of just top 12 start-ups combined amounted to ~ 14,000 crores. The authors infer that in absence of a parallel revenue model, the economic repercussions on these start-ups will be very severe and catastrophic, if markets do not reciprocate favourably to their new products and services in the medium-term. In India, the VC funded tech start-ups are considered to be supporting 3x indirect jobs for every direct job created (NASSCOM, 2020). Should these tech start-ups cease business, then, the impact on the employment rate, aggregate income of these sectors will be severe, particularly given that majority of these start-ups are in the consumer-tech sector.

In terms of impact of VC funding to the labour market, the authors note that most of the VC funded start-ups hire personnel in a contractual mode and are not assured of minimum quantity of work. Their compensation structure is largely incentive-based, and their incentives are often at the mercy of erratic customers who might rate them poorly, many a times for factors outside the latter’s sphere of control. Thus, the optimism and positivity of the booming consumer-tech sector must be necessarily tempered by the above parameters, when the outcomes are assessed from the lens of social protection and employment. The authors also contend that in some cases, aggressive pay packages to labour force to pre-empt talent might crowd-out valuable human capital from the bootstrapped start-ups that may be working on more relevant societal problems.

Next, the authors assess the target audience of the start-ups who have received VC funding and note that currently, not many of them are serving the needs of the socially disadvantaged population in the country, often identified as ‘Bottom-of-Pyramid’ population. They however note that off late, some progress is made due to ‘impact investing’ focus from select VCs in India. In terms of advancing innovation, the authors note that there is uneven focus from the VC funded start-ups in this aspect. While there have been some service delivery-based innovations that have emerged in the country, most of these are incremental innovation in nature and most start-ups are not focused on radical innovations as yet.

Based on these observations, the authors propose that policy makers and VCs need to deeply contemplate on how to de-risk their businesses, particularly in the early stage and tech-driven investments. They note that absence of a viable and sustainable business and revenue model in most of the funded unicorns is the major risk that needs mitigation in the immediate and medium term. The founders of new economy ventures, as the authors note are more focused on building businesses to sell. They contemplate that this could be the single-most important reason why we do not see any global giants emerging out of India.

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