Budget 2021: Policy changes startups need in the post-coronavirus world

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The world faced an unprecedented year in terms of changes and challenges. Hit by a nationwide lockdown and the market slump that followed, businesses—both big or small—had to bear the brunt of the pandemic’s impact. All of them had to review how to keep their financial wheels turning due to less revenue churn amid the ongoing crisis.

Unfortunately, the impact on start-ups or small businesses was way more brutal. This is because they typically have limited cash reserves and a smaller margin for managing steep slumps such as this. The pandemic led to layoffs and furloughs as well. India's GDP contracted by a record 23.91 percent in Q1 2020.

Responding to the situation, prompt measures were taken by the government by announcing economic packages. They helped in reinvigorating the economy while providing much-needed support to startups and MSMEs.

In the wake of pandemic-induced slowdown, Indian start-ups have also been working hard to regain momentum and get back on track. They have stepped up their business game by embracing the new normal, understanding the shift in consumer behaviours and adapting to newer models.

There is a need for India to unlock domestic capital for innovative startups. They can grow much faster with local monies. Hence, creating an enabling ecosystem for angel investors, family offices, corporates and institutional monies will ensure a larger number of entrepreneurs starting up and able to fund their companies quickly. These will need some changes in the tax and regulatory framework of the country.

In the US, pension funds are active investors in early stage, and have, to a large extent, catalysed the startup ecosystem. In India, we can create the same impact if pension funds can invest in VC funds that invest in startups. This is very synergistic as both startup investing and pension funds have long gestation periods, and yet the return on startups can provide a kicker to the pension fund’s low-return model. Similarly, insurance funds in India can be enabled to invest easily by just tweaking the Insurance Regulatory and Development Authority of India (IRDAI) Act. National Bank for Agriculture and Rural Development (NABARD) could be encouraged to set up a sizeable fund: this will bring in the much-needed innovation, bring technology and create value in the agriculture space.

The world is looking at Indian innovation and entrepreneurial talent. Venture capital and private equity funds are a large component of India’s foreign direct funds. It is therefore critical that India welcomes foreign investments in the startup ecosystems—simplifying processes, enabling hassle-free remittances of investment returns and more. This will make India a global destination for innovation and entrepreneurship.

The pandemic did teach key learning—focused and resilient teams were still standing at the end of the Covid-19 tunnel. However, startups do find it difficult to pay market salaries to high-quality teams and employee stock ownership plan (ESOP) is the best currency to attract talent. Hence, not taxing ESOP holders before they actually monetise is imperative. Enabling ESOPs advisors will allow experienced mentors to engage.

While Indian entrepreneurs are world-class, it is imperative that India continues to invest in research and development especially in deep tech and specialist domains (like biotech, etc). Therefore, it would be a good idea to establish a corpus to continue to create innovation and talent.

India is one of the largest markets in the world. However, the government (and PSUs) is the largest procurer in the country. Therefore, while the government has eased some procurement for startups to create a market for Indian companies, the help these companies required is with on-time payments. Cashflows of these young companies and a focus on these by the procuring organisations would go a long way to breed sustainable and growing companies in the country.

Startups need two resources—funds and talent. The pandemic put a sharp spotlight on India to become Aatmanirbhar (self-reliant). The Indian startup ecosystem is on a cusp—what is needed today is innovation and not incremental thinking by the policymakers. In fact, if we can do this to unlock funds domestically, attract global capital and create a truly enabling startup ecosystem, we will have the duniya nirbhar on India.

The writer is a Founding Partner of IAN Fund

The thoughts and opinions shared here are of the author.