WHY DO INDIAN STARTUPS QUIT INDIA?

IS IT
EXTERNALIZATION?

Authors Prof. Anusha Iyer, Caren Susan Joseph, Aarti Kothari, M.Moshmee

INTRODUCTION

A startup is a budding company that is beginning to grow and develop in market.

Such companies are generally small in scale,that are being financed initially by a
handful of founders, investors or an individual. Startups offer services or products
that are unique, innovative and completely new in the targeted market. In the past 6
years our country has seen a huge growth in the global market and number of
business opportunities in every sector due to the emerging startups and their
innovation. Looking into the importance and contribution of startup to the success of
the economy the present Indian government introduced Startup India programme.
The main objectives of this programme is to attract more innovative entrepreneurs,
creating jobs, a pump to Make in India programme and foreign earnings in the long
term, hand holding and most importantly providing support through funding and
incentives to the approved/ eligible startups. The recent exposure and hype of
startups in India hasled to many youngsters and graduates coming up with infinite
business ideas. It’s true that most of these ideas are unique and exceptional but fail to
be executed due to lack of strong groundwork. The impulsive attitude of the youth
and their lack of experience in the real business world lead them to a dead end. On
the other hand numerous Indian startups like Flipkart, Oyo, Ola and Redbus have
proved to be accomplished in Indian and global market. Many such startups have
captured technology and innovation as an effective tool for India’s transformation.
The southern city Bengaluru popularly known as the silicon valley of India is starting
to evolve as a startup hub attracting massive investments. We come across a new
startup everyday but not every startup ends up being successful this can be due to
various reasons such as lack of innovation, lack of funds so on. As youngsters who
are about to graduate and face the real world the idea of startup excited us as well. We
realized that startups did not really need an age or experiences to kick start it, but only
the existence of innovation and resources. Thus knowing about startup, its revolution
in India and to further analyze whether it is being progressed or failed is important
LITERATURE REVIEW:

The following paragraphs throw light on the reviews on startup revolution,

mergers and acquisitions of startups, reasons for failure of startups, the
policies introduced by the Government of India to benefit the upcoming
entrepreneurs and externalization of startups.
Entrepreneurs follow their passion trying to address the issues and change the world
and a hope for creating the wealth for themselves and being the leading entrepreneurs
in the world even after they are aware of the risks associated (Jolly,2009). Followed by
the reasons for most start-ups who fail that are cash crunch, lack of trust in founders,
weak employees, greediness to achieve more, entering the markets where there is no
demand, no innovation, no opportunities, scared to take risk . (CB Insights 2014) By
studying in detail the postmortems of 101 startups to get an insight into the reasons
for startups to fail. The study concluded with top 20 reasons for such failure they are;
no market need, ran out of cash, not the right team, get outcompeted, pricing issues,
user un friendly product, no business model, poor marketing, ignore customers,
product mistimed, lose focus, disharmony among investors, pivot gone bad, lack of
passion, failed geographical expansion, no financing, legal challenges, do not use
network, burn out and failure to pivot. Adding to the above information (Kim,2018)
an entrepreneur needs to be self motivated to be successful at the same time need to
be curious about the world, with thirst for solving problems. A startup cannot make
millions overnight and everything takes time and thus avoid self- indulgence. Further
focusing on the fact that an entrepreneur can never procrastinate, should work with
commitment to acquire the profitability in long run. A team in very important for a
startup and one cannot find a dream team as it is but can work hard and evolve as a
desired team. Around 80% of startups fail, which doesn’t make for great odds thereby
an entrepreneur should learn from the missteps and give up on their ego. According
to the same study being an entrepreneur can be tough, but the rewards are worth it.
Once the startup thrives its hard to really comprehend the sheer joy and satisfaction.
Apart from the failures and stumbling blocks (Myers 2016) India is in the midst of a
start up boom. India is the 3rd largest tech-start up location which surpasses Israel and
china, whereas United Kingdom and United States stands ahead. Indian startup are
now entering the global market, fundings are concentrated mainly in Bengaluru,
Bombay, Delhi and the rest in 11 different cities. 66% of start-ups are from the cities
of Bengaluru (26%), Bombay (17%) and Delhi (23%) and India is the youngest start
up hub in the world where 72% of the entrepreneurs are below the age of 35.
(Borpuzari, 2018) adding to this, as per the Nasscom –Zinov report India has added
over 1000 tech start-ups to 5000-5200. India is witnessing a rapid growth in the tech
startup landscape. Providing with the new information about how there is no boom in
the Health care sector where as agriculture sector start-ups are doing some amazing
work.
Not all start-ups on the list would succeed and go on to become the Billion – dollar
companies. A great innovation automatically does not translate into a great Business,
as it matures it would succeed and solve the emerging problems, and latch on the
opportunities to change the world.
India saw an opportunity of growing startups and its benefits, the scheme introduced
by Government of India “Startup India Stand up India” addresses the issues of
entrepreneurs in India and thereby provides various benefits which increases the
efficiency and speed of the work which will lead the entrepreneurs to come up with
new ideas and increase the employment opportunities, thereby building a strong eco-
system. The components of this scheme are simplification and handholding, funding
support and incentives, academia partnership and incubation which intend to address
all aspects of startups. Government of India believes that start-up, technology and
innovation are the instruments for India’s transformation. “Make in India” and
“Startup India”(Chatterjee2016) not all new companies are startups and the working
of the Startup India app and how a startup can register itself in India. Many startups
are yet to benefit from Startup India. (Variyar, 2017) The survey by local circles that
states that large number of startups in India feel they have not benefited in any way
from the government’s startup India programme along with that 39% say they have
been receiving frequent tax notices due to change in valuations. About 80% of the
2830 respondents stated their business had not benefited at all. Exploring into Indian
startups taken over by foreign companies the Flipkart-Walmart deal is a big lesson for
Indian startups. The development is a positive one for entrepreneurship. Thus
answers the question of how foreign investors get their cash back from Indian
startups. India cannot support companies beyond a level and thus Flipkart could not
have repaid their foreign investors unless they were sold to a foreign company. India’s
exit scenario which is compared to US.In 2015-2017 India had over 280 exits while
US saw 3358 tech exits in 2016. IPO is not as welcome in India as it is in US example
30-40 US startups have been listed recently without even revenue. (Nair,2018). It
signals the availability of a new class of strategic exit options for investors- global
players who want to enter India but choose buy over build. In the coming days many
startups will start looking for exits and merger & acquisition just like Flipkart did. The
author also talks about a lesson in investment regulations and suggests that FDI have
to ease a bit for more startups to be registered in India and make a mark as Flipkart
itself is registered in Singapore as the country’s corporate laws are easier. More
favorable and stable tax regulatory regime in India will help in minimizing
externalization of holdings. The article concludes by saying that government can
address critical issues to discourage Indian startups going abroad. One such issue is
the lack of IPO accommodation in India. Partnering with Indian startups provides
new opportunities for foreign investors foreign investments in India in the past 3
years, in 2015 Indian startups received estimated $9 billion for more than 1000 deals,
this can be because of internet access among India’s 1.3 billion people.
(Dunseith2018)B2C startups are the ones majorly experiencing such funding. Indian
startups have yet to prove to be truly disruptive, Indian professionals lack skills to
activate technologies full potential. Foreign companies bring in new technologies,
domestic startups assist in localizing business strategies: forging game changing
products that will succeed throughout subcontinent. The benefits of an Indian
partnership. Foreign companies not only gain new market access, they will also access
new funding opportunities, India-directed startup funding at a massive $25billion
recently.
Apart from investing in Indian startups the progress of Mergers and Acquisition in
the Indian corporation is analyzed year wise and industry wise variance in the number
and amount of M&A deals. (Singh,2010) conclude that 1) total amount of M&A has
increased by 615 percent during 2001-07 2)the amount of M&A deals of
manufacturing sector increased by 272 per cent, in service sector it increased by
1218%. 3) In case of financial services it increased from Rs.1375 Crore to Rs.17205
Crore during 2001-07. 3) However the total number of M&A deals have decreased by
18.5% and in 47.manufacturing sector it has decreased by 5 per cent and in financial
services its fluctuating. Venture capitalists typically invest in industries that have
substantial growth opportunities and a defensible intellectual property position. When
difficult investment conditions are given, venture investors are paring back their
portfolios and are hesitant to make new commitments. (Gilbert,2009).

All of this has paved way to externalization of Indian startups. Many Indian
startups are choosing to have their holding entity outside India. (Bhat,2018). Startups
face issues in doing business, without any ease. Factors that are leading to
externalization are registration number with RBI, secondary sale of shares, taxation,
restriction on exit price, investment by Indian angels is subjected to valuation.
CONCEPTUAL MODEL

STARTUP
INDIA
STANDUP
INDIA To understand if
indian startups are
externalized

The choosen dimension

HAS THE To examine the

DOWNFALL
REVOLUTION reasons for
CLOSURE OF EXTERNALI-
ACTUALLY ZATION externalization
START UPS/
CLOSUREOF STARTED?
STARTUP

To view the perception

of startup owners
regard to
externalization
STUMBLING
BLOCKS

RESEARCH GAP

As we can see from the above literature, reviews have been done on startup revolution,
mergers and acquisitions of startups, reasons for failure of startups and the policies
introduced by the Government of India to benefit the upcoming entrepreneurs.
However, not much literature is available on externalization of startups and hence this
study.
STATEMENT OF PROBLEM

As we can see from the literature, we boast about many startups getting germinated
owing to the startup revolution through their innovative and unique business ideas.,
we can also see that externalization has been happening as the foreign companies are
attracted to expand their market in India.
Externalization is a scenario when the holding entity is outside India, or when an
entrepreneur chooses a business exit strategy whereby he sells his company to
investors or another company outside India.
Hence it persuaded us to study whether start ups are being externalized and the
reasons for such externalization.

OBJECTIVES

1. To understand if Indian startups are being externalized.

2. To examine the reasons of externalization.
3. To view the perception of startup owners with regard to externalization.

OPERATIONAL DEFENITION

 START UP –It is an entity which is registered in India which works towards

innovation, development and commercialization of new products and services
driven by technology and intellectual property.

 EXTERNALIZATION - Externalization is a scenario when the holding entity is

outside India, or when an entrepreneur chooses a business exit strategy whereby
he sells his company to investors or another company outside India.

 PERCEPTION- notions,feelings and mind set of startup owners.

METHODOLOGY
The study is predominantly qualitative in nature. It would be conducted using two
methods namely literature review and personal interview.
To understand if Indian startups are being externalized, secondary data sources will be
used. Data will be gathered from various journals, reports and other websites. For
understanding the perception of startup owners with regard to externalization 20 in
depth interviews from startup owners will be conducted to know about their ideas,
views, experiences and overall perception with regard to externalization. An interview
guide will be used. Data gathered will be analyzed through dedoose software.
SCOPE OF STUDY
This study focuses on startups that started in India only. The interviews conducted
limit itself to the states of Kerala, Karnataka, Tamil Nadu, Goaand Maharashtra.

EXPECTED OUTCOMES

On completion of our research we are expecting to understand the various reasons

that lead Indian startups to leave India (externalization).
We also wish to get insights of various Indian startup owners ideas and perceptions
on externalization. Further know if they would externalize given a chance.

REFERENCE

 Ashwin, B 2018, ‘India: Externalization: Many Indian Startups Are

Choosing To Have Their Holding Entity Outside
India,http://www.mondaq.com/india/x/713768/Corporate+Commercial+Law/
Externalisation+Many+Indian+Startups+are+Choosing+to+have+their+Holdin
g+Entity+Outside+India

 Bradley, D 2018, ‘partnering with indian startups- new opportunities for foreign
investors’, https://www.india/briefing.com
 Larry, K 2008, ‘The ugly truth about being an entrepreneur’,
https://medium.com/
 Mugdha, V 2017, ‘Many startups say yet to benefit from startup India’,
https://economicstimes.indiatimes.com/small-biz/startups/newsbiz/many-
startups-say-yet-to-benefit-from-startup-india
 www.india.gov.in
 Mohanjit, J 2009, ‘top 10 reasons why startup fail’, https://www.vccircle.com
 Pranbihanga, B 2018, ’50 startups to watch out for in 2018’,
http://economictimes.com

 Titly, C 2016, ‘leading misconceptions about startup revolution’,

http://yourstory.com/2016/03/misconception-startup-revlolution-india/