Around the world, companies and governments are working to create an environment in which innovation can foster growth through start-ups. Platforms and applications are transforming both B2B and B2C. India has also been a hive of activity for local and global companies. While some platforms like Zomato and Swiggy are transforming traditional industries locally, other platforms like Nykaa and MamaEarth are making their mark globally.
The Venture Capital (VC) ecosystem is an important driver of entrepreneurship and innovation, providing financing for early-stage companies that may not be appropriate for the risk profiles of larger corporations. VC financing is designed to generate returns on these inherently risky investments through exit strategies that depend on building a business over a few years to the point where it is attractive to a buyer or (less often) able to go public. bag. These exits then allow new rounds of venture capital investment in other companies and young entrepreneurs.
Venture capital money is becoming more global as investors seek returns, and India is no exception. One factor when choosing between options (Silicon Valley, Toronto, London, Tel Aviv, Bengaluru, Delhi, Mumbai, Singapore, Shanghai, etc.) is the regulatory environment. Given the inherent risks that are already present in the venture capital ecosystem, the less hospitable the regulatory environment, the less money will be invested relative to other regions. Enforcement rules and actions that treat almost any acquisition as a nascent competitor, rather than a potential add-on, or that punish companies for their success when consumers are better off and a platform or app creates value for its users, are likely to make investments and acquisitions. more difficult and costly, so they present a serious risk of discouraging an important source of investment for entrepreneurs.
Venture capital investment has a local impact. This generates benefits for consumers within the same dynamic ecosystem which, in turn, leads to social benefits such as job creation, a higher standard of living, and overall economic growth due to spillover effects and because entrepreneurs are serial. This cycle of investment, development, exit and reinvestment, a kind of multiplier effect, can create a more dynamic and diverse market that is the engine of even greater competition, innovation and opportunity. When an entrepreneur’s business is acquired, there are at least three possible multiplier effects. First, the entrepreneur and associated backing venture capital investors can use the proceeds from the acquisition to move away from that company and fund additional ventures. The capital invested and generated from the original company continues to fund ideas and companies, generating further innovation in the space. Second, the entrepreneur’s company may have valuable employees, and the acquiring company may tap into this talent as part of its own expansion. This practice, known as ‘procurement’, has been increasing in popularity. Third, the acquisition may give rise to spin-offs. A spin-off company refers to a company carried out by a former employee of a large company. Such an employee will leave a large and successful company and start a new company completely separate from the parent company. The recent success of the television show Shark Tank India, where successful entrepreneurs invest in and advise budding startups, is an example that illustrates these multiplier effects.
Given India’s strong university system that fosters both domestic and foreign talent, India enjoys a favorable global position that attracts venture capital investment. This is evident in the significant advantage that India has over other Asian countries in terms of levels and recent growth in venture capital investment in various sectors. This favorable position could be threatened by regulation that penalizes companies that compete effectively. This has a particular impact on certain parts of India that are part of a second wave of entrepreneurship beyond Bangalore and Hyderabad. For example, recent reports suggest that some of the recent schemes, such as the Production-Linked Incentive Scheme (PLI Scheme), are showing early promise, at least in some sectors, and illustrate how active policymaking can make a difference. for industries to grow to scale. global standards. Now, when companies can take advantage of such schemes with all the multipliers that modern technology brings, the boost to the entrepreneurial mindset could be huge.
For India to succeed in entrepreneurship and innovation, a healthy domestic regulatory relationship that fosters growth and works in partnership with foreign venture capital and technology companies is required. Indian consumers lose out without platform innovation, such as lower participation from disadvantaged groups and lower prices. Indians have done very well as leaders of high-profile global tech companies, including Arista, Alphabet (Google), Twitter, and Microsoft, among others. For India as a whole to grow, the need of the hour is a robust system that rewards investment particularly in critical areas such as digital health, e-commerce and supply chain. While the recent rise of unicorns is a great thing, much is still required, especially as China closes itself off from tech competition.
Views are personal. Sokol is a professor of law and business at the University of Southern California and Pingali is a faculty member in economics at the Indian Institute of Management, Ahmedabad.
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