Startups in India are booming, so why are many entrepreneurs moving to other countries?

Startups

Indian Market
by 5paisa Research Team Last Updated: 2022-09-28T10:28:40+05:30

Ever since Prime Minister Narendra Modi got the top job, he has been incessantly harping on making India the next hub for startups. Modi has even gone on to say that this could be India’s ‘techade.’

To be fair to Modi and his government, there has even been follow-up action, with the launch of the flagship ‘Startup India’ initiative. In 2021, the government committed Rs 1,000 crore as seed capital to the program.

This week, the government said that a fund-of-funds launched in 2016 by Modi under the Startup India initiative has backed startups such as Dunzo, CureFit, FreshToHome, Jumbotail, Unacademy, Vogo, and Zetwerk.

The amount committed under the fund-of-funds, managed by Small Industries Development Bank of India (SIDBI), has recorded an annualised growth of over 21% since the launch of the scheme, the commerce ministry said.

It said that the fund-of-funds has also committed Rs 7,385 crore so far to 88 alternative investment funds such as Chiratae Ventures, India Quotient, Blume Ventures, IvyCap, Waterbridge, Omnivore, Aavishkaar, JM Financial, and Fireside Ventures. These AIFs have a corpus of more than Rs 48,000 crore, the ministry said.

Despite the government’s efforts, there is a big problem.

You see, many serious entrepreneurs do not want to register their companies in India or even want to live here, at least if a recent report is to be believed.

Several recent news and analyst reports including one by Henley & Partners say that, following the Covid-19 pandemic, scores of Indian business owners, new-age entrepreneurs, corporate executives, and skilled professionals have been looking to diversify their assets and even register or move their businesses abroad.

Those with the means to open avenues abroad for themselves, be they for wealth diversification, expanding business operations, setting up alternative residencies, or just pursuing a better life, are gravitating towards a transnational existence, a recent report in the Business Today magazine noted.

Favourite destinations

Business Today said that the latest to join this rend are people from India’s startup community who, keen on multiple residencies, are opting for structured residency investment programmes in countries like Portugal or Malta or the business and talent-based visas offered by the UAE or Australia and Singapore, respectively.

According to the Henley & Partners’ ranking, Singapore and UAE are the top choices for entrepreneurs.

To be sure, even in the past, entrepreneurs have registered their companies abroad. A case in point is Flipkart, which was registered in Singapore.

But, with the passage of time, this trend has only caught on. According to Entrepreneur magazine, the number of startups getting incorporated outside India has only grown.

This list includes some of the companies that became unicorns over the last two years, such as Polygon, Amagi, CommerceIQ, Hasura, Fractal Analytics, BrowerStack, Chargebee, InnovAccer and MindTickle.

But why do startup founders want to move? Simply because they are looking for a friendlier business environment, easier access to cheaper capital and talent, as well as an openness to emerging fields such as crypto, fintech and Web3.

While Singapore and the UAE remain the most favoured destination for Indian-origin startups, some, especially among software-as-a-service (SaaS) companies, have also shifted base to the US as it offers them the most lucrative and the biggest market for their products and services.

Moreover, moving abroad gives Indian startups a chance to list outside the country.

Not only do markets outside India offer startups a large market, better demand, higher margins, and favorable customer behaviour, the companies can also get access to capital as well as a highly talented workforce, significantly more easily than they can locally.

Moreover, it makes more sense to have their headquarters in a particular country from where they get a bulk of their business, as it makes their day-to-day working much simpler.

Having their headquarters locally in a country from where they generate most of their business also enhance trust in the eyes of their customers, access technology ecosystem partners, and create pathways for realizing IPO aspirations, enabling them to enhance shareholder value significantly, Entrepreneur notes.

And then there is the question of more favourable taxation and a better and more flexible regulatory environment.

Crypto crackdown, other crises

A recent case in point is the clampdown by the Indian government on crypto trading in the country. Following the clampdown and imposition of a prohibitive tax, co-founders of India's largest cryptocurrency exchange WazirX, Nischal Shetty and Siddharth Menon, reportedly moved to Dubai with their families.

And they are not alone. Multiple Indian entrepreneurs and developers in the Web 3.0 space are moving out of the country in a bid to shift base to more crypto-friendly destinations.

For instance, Ethereum Layer-2 scaling startup Polygon was started in India, but it is now based out of the Middle East and has developers in countries such as Switzerland, Belgrade, US, among others, Entrepreneur notes.

And then there’s the case of the golden visas being offered by several countries. Investment visas or golden visas—where a couple of million dollars of investment in another country buys you a permanent residency—is increasingly the pick among wealthy Indians, notes Business Today.

Experts say that people are wary of the next big crisis that may hit India, for which the country might be totally unprepared, as they point out the deadly second wave of the pandemic in April-June 2021. Rich people and entrepreneurs, therefore, want to have a fall-back option that they can exercise if the next disaster strikes.

Experts say that as many as 70-80% of such individuals have created an alternative residency option for themselves and are ready to move if a major disruption occurs.

Not just startups

To be sure, more established businessmen too have relocated abroad in the past, so startup founders are not unique in this regard. If anything, they are doing exactly what bigger business tycoons have done, only much sooner in the entrepreneurial journey.

For instance, Apollo Tyres Vice Chairman and MD Neeraj Kanwar relocated to London in 2013 when the company wanted to acquire the American firm Cooper Tires. Overseeing global strategic operations from there has helped de-risk the business and worked out also as an alternative residency for Kanwar, the Business Today report notes

Eicher Motors MD and CEO Siddhartha Lal relocated to London in 2015 to be close to Royal Enfield’s new R&D centre in Leicestershire. Hero Cycles Chairman and MD Pankaj Munjal also spends nine months a year in London to focus on the European e-bike market. Serum Institute of India CEO Adar Poonawalla shuttles between London and Pune, while Mahindra Group Chairman Anand Mahindra is also known to spend much of his time abroad, the report says.

But does it mean India has ceased to be an attractive destination for venture capital money chasing the next big startup?

Not quite. India remains one of the fastest growing big economies in the world. Not too many countries can match the scale of the market that India can offer, as indeed the cost arbitrage. So, the country will continue to offer excellent opportunities for startups looking to build their business from scratch.

Having said that, experts say that to stem the flight of talented entrepreneurs, the country does need a regulatory overhaul. Experts believe that it is vital to create a favourable business environment in India to entice startups to incorporate as well as list in India. It is also important to have a good pool of investors and mentors in a mature capital market.

While Startup India aims to do just that, it has clearly only seen limited success thus far. Here’s hoping that the Modi government wakes up in time and smells the coffee, before it is too late and the next tech opportunity bypasses India just as the manufacturing boom of the 1990s did.

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