Monday, June 25, 2018

Startup India - Right intentions Wrong semantics

Whoever drafted the Startup India Policy for Startup  

I am an Engineer from HBTI & an MBA from IIM Calcutta. I was one of those guys who gave up a 1+ Cr job offer to start up, yeah one of those idiots.

As a founder I have persisted for 6 long years to reach operational breakeven have generated more than 35+ jobs, most of them for fresh candidates, right out of college.

Over the last 6 years, I have raised capital from angel investors that has helped me not only build my product (a Software) but also survive. Every single time my startup has raised capital, however small it may be, we have got an IT scrutiny notice on valuation (some say I am very lucky J)

Somehow the IT Officers in India believe that only the companies that have Land/buildings/Machines are real businesses that are worth of premium valuations and companies that are built around Intellectual Property are just frauds laundering money.  

We have dealt with one such notice. We are dealing with one currently. And we will certainly face it again as we will continue to grow using external capital. 

As a consequence, IT folks have harassed us in past, they are harassing us now and I assume that shall continue as well. 

It came as a breadth of fresh air when I heard about Startup India program encouraging startup ecosystem. What an intelligent move, I thought, to encourage aspiring entrepreneurs to startup and generate tons of employment.

However, going through the hoops and tons of IFs and BUTs in the process, I realize it is not helping; instead it is burdening a startup more than anything. 

I present my learning’s here for the powers that may be to see the pain of a founder in going through the simple process of obtaining a simple DIPP certificate for IT exemption (read saving some harassment from IT folks)  

Step 1: The Registration Process
Registering on startup India was a breeze. 
Good job!
Startup India certificate too came quickly. Kudos for that too!!

Step 2- Requesting DIPP IT certificate:
This step is like a landmine filled path designed in a way that you get amputated if not killed before you make it to the other side. 

How you wonder?

First requirement for DIPP request submission is that EACH incoming investor should
-       Have a minimum average returned income of 25 Lacs Rupees as returned income in INDIA for last three FY 
-       OR Have a net worth of 2 Cr in last FY. 


You see the issue here? 

No? Pls now consider these points -
a. A startup that is just raising Rs 5-10 lacs may attract investment from friends and family. They are not only investing their hard earned money but also their immense faith. 

GOI expects only those who have that much income to invest a few lacs? Cant a father invest 5 lacs from his life long income in his son's startup ?

b. Even in the case of an outside angel investor coming in the company, you expect them to share their complete financial health with every company (& its founder) they invest in and overexpose themselves? 

If GOI it bothered it has investors PAN in ROC filings and can chase them, why ask startups to do the tough work of belling the cat? 

c. God forbid if you have a NRI friend/family member :
            - Who is stationed outside (temporarily) India and earns his present income there
            - Who has his past income languishing in Indian accounts
            - And who is willing to invest

He/she wont qualify, as he has to earn average returned income of Rs 25 Lacs in India for last three years. So even incase he meets this condition for 2 years and not for any 1 year (remember he is outside India), he wont and thus your startup will not qualify.

d. Even if one of the incoming investors doesn’t meet the stringent criteria, the company suffers. Tell me of any one startup that would reject incoming money from a known source for the love of DIPP certificate? It’s a choice between survival and good health. You can’t have good health if you don’t survive. Simple. 

The second requirement is that startups should get a valuation certificate from SEBI registered Category-1 Merchant banker. 

Now suppose a startup raises Rs 20 Lacs from friends, family & some angel investor, GOI expects company to spend upwards of Rs 50,000 to 100,000 (almost 2.5-5%)of this vital surviving capital on just obtaining a merchant banker certificate?  Really? When a CA account or a Cat-3 merchant banker can do the same work for Rs 5,000-10,000 at most.
Not to mention the company ends up spending equal amount of money for services rendered by CA, Company secretary & auditors for each transaction. 


My humble suggestions -
a.     Remove this Rs 25 Lacs / Rs 2 Cr criteria for seed investments - Typically capital raised is less than Rs 1 cr (typically by a pool of people) and ticket sizes are in the range of Rs 5-50 Lacs. If a startup is raising 2 Cr, it can afford Rs 1 Lac expenditure.

b.    Trust our CA’s and their valuation because if a CA is not qualified then would a Merchant Banker be (both are CA’s/MBA Fin right?).  At the end of the day they are JUST validating and endorsing projections of a founder. They can’t, and I repeat they cant, value a startup independently without looking at founder’s vision and projections. Why bring them in process then?

c.     Why insist on SEBI registration for a merchant banker/CA ? We are dealing with startups that are unlisted and raising small money and SEBI’s stringent guidelines may be a tad too much for them to meet.

We somehow have to make life of a startup founder easier as they are the ones who create new jobs and create wealth.  

Please nurse us today and we promise to feed as many as we can tomorrow! 


5 comments:

Unknown said...

Excellent post. I run a small company, too, and got a scrutiny myself, too. They met me once, and despite my explanation (I got the entire money from an NRI, in dollars, so anyway it is tax-exempt), insist on keeping the issue alive. And now I do not even think about raising money from big sources since feels so dangerous thanks to the past experiences - I just try of think of ways and means to circumvent things.

Ashish Chaturvedi said...

I agree. You cant run a startup with so much restrictions.

Hrusikesh Panda said...

Nice writeup!

Also, post it to https://www.reddit.com/r/startups/. They don't allow links so I couldn't post the blog but as the content creator, you should post this.

Ashish Chaturvedi said...

thanks for the idea hrusi! will post.

AVINASH said...

Wonderfully scripted.