Interview: 'The government has no business investing in startups'

On January 16, Prime Minister Narendra Modi unveiled the Startup India Action Plan – a policy that the government hopes will help create a conducive atmosphere for startups to breed and flourish. Among the sops on offer are tax holidays, fewer regulations across operations and a Rs 10,000 crore fund.

Amid widespread uncertainty about how the policy will pan out, Scroll.in spoke to serial entrepreneur and investor Kashyap Deorah. Since graduating from the Indian Institute of Technology-Bombay in 2000, Deorah has started and sold three companies including payments app Chalo, as he splits his time between India and Silicon Valley. Most recently, he authored a book called The Golden Tap – The Inside Story of Hyper-Funded Indian Startups, which released in November. In an interview, Deorah discusses his expectations from the Startup India Action Plan and how he thinks the policy will help new ventures take off. Excerpts:

How do you see the startup landscape changing after the newly announced policy? Has the government checked all the right boxes this time?
The policy does not change much for startups. However, the gesture of celebrating entrepreneurship is a great start. The government acknowledging the role of startups in solving the country’s problems lends the movement great credibility.

Many Indian startups often complain about the ease of doing business (or the lack of it) and set up their headquarters elsewhere. Do you see that changing with the new policy?
No. India remains a difficult place to do business with far more bureaucracy than other countries. The new policy does not change it. The government admitting that they should unregulate, unobstacle and get out of the way is the right intention and mission statement. I am waiting to see how it becomes real.

The startup policy also offers a lot of funding and regulatory support for new ventures. Do you see them as enablers of an easier environment or mere sops which could run out?
The government has no business running a fund if you ask me. I am intrigued by the idea of startup capital gains being tax-free if invested in a government fund. I would like to better understand the structure of the fund and how it returns money.

The government defines a startup in a set 125-word description, which all aspirants have to comply with to benefit from the 11 new initiatives. Is that definition a little too restrictive?
I am not sure how a government-appointed committee can determine what is a startup so they can offer them perks. The very idea smells of a new version of License Raj.

Observers often lament that India’s ecosystem doesn’t have too many manufacturing innovations and that technology startups have overcrowded the space and guzzled up the funding. Would you agree with that observation and is it going to change anytime soon?
I agree. Indians entrepreneurs have traditionally been traders. We are not manufacturers or technology innovators. In the new startup wave, we are trading ideas by importing what has worked abroad and selling it back to global funds who are eager to own the Indian territory. Any further stimulus to this pattern is ill-founded.

A three-year tax holiday on startup profits is one of the incentives introduced under the policy. You have previously written about the importance of disciplined fiscal management for startups and this measure seems to alleviate that concern for three years at least. Do you see it worsening the state of the Indian e-commerce, which is piling up losses at the moment?
Startups, especially in technology, do not make profits in the first three years. Services companies and subsidiaries are different. The tax holiday worked in services companies because they are profitable growth-oriented. This will not have the same impact on the tech startup wave that the government is looking to stimulate.

Another thing that the government is going to do as part of the initiative is to invest in startups through the Rs 10,000 crore fund which will invariably be sourced from taxpayers’ money. We will all effectively be indirect investors then. How do you see that playing out on the ground especially when the venture capital money tap is still largely open for all?
Like I said, the government has no business investing in startups. It is a different ballgame and the India-centric investors are themselves learning how to be good at it and return money to their investors. I am eagerly waiting to hear more about the structure of this fund, how they will invest and how they will return money.

What is your take on the Indian government’s actions so far when it comes to managing internet startups? There’s still no clarity on taxi hailing apps such as Ola and Uber’s future in the country and e-commerce is also loosely regulated. Do we perhaps need a codified startup law in the country or just better provisions under the Companies Act?
It was a shame that the government officials spent an entire day rubbing shoulders with e-commerce and taxi giants without uttering a word about FDI in e-commerce and radio taxi regulations. The elephant in the room was ignored as always. I thought the Minister of State for Finance was pandering to the Flipkart founder.

What was ironic was that just the next day, the Enforcement Directorate put the e- commerce companies under the scanner for policy violation. Uncertainty in e-commerce and taxi app policies does not benefit anyone except the politicians.

If the government is serious about making policies for startups, they would clarify policies with regard to these two markets. These two market spaces drive the sentiment of the entire tech startup ecosystem, and that makes it even more important to clarify policies that have been nebulous for a few years now.