Caught in an extended funding winter that shows no signs of abating, lay-offs, infra woes, bureaucratic red tape, and unexpected policy shifts, Bengaluru-based startups are in a bind. Ahead of the Karnataka state Assembly polls, they expect the new government to give the industry a booster shot and urgently address their mounting infrastructure-linked complaints.
The funding crunch has hit the industry hard. Independent analysts have estimated that funding to city-based startups declined by over 45% year-on-year between 2021 and 2022. They fear the trend will continue, jeopardising their sustainability. Left high and dry, startup founders are looking at government support in multiple forms.
This decline runs counter to the Karnataka government’s own growth estimates for the sector. In December 2022, the state had unveiled a Startup Policy for the next five years, pegging the anticipated average annual real Gross Domestic Product (GDP) growth at 9.9% over the 2020-2024 period. It had cited Bengaluru’s impressive performance to justify this — of the USD 41.7 billion funding raised by Indian startups in 2021, Bengaluru accounted for 62%. Then came the big fall.
Startup mentor and influencer V Shakti notes that the funding has almost dried up. “Post-pandemic, the investor outlook has changed quite a lot. Unless a startup idea is unique, they are not going to open their purses anymore. On top of it, the local government has not made it easy for anybody to start anything. There is a lot of bureaucracy. While big promises are made about startup India, single window system, etc., there isn’t much ease to do anything on the ground,” he explains.
Access to finance has always been a prime need for all startups across sectors, and a new government should give a big push to drive the ecosystem’s growth, says Uma Reddy, a seasoned woman entrepreneur and vice-president of the Ubuntu Consortium. She elaborates, “We do have success stories in startups and unicorns, but this is the right time for the government to facilitate money flow through banks, state financial institutions, or the private sector venture capital (VC) funding. This is no time to slacken.”
Most startup founders, says Shakti, want better governance or another government. “Bengaluru, once the startup capital of the country, is now in shambles. The infrastructure is the biggest challenge. One rain and people can’t even get to work. One power outage and people can’t work. So, a lot of things have gone down the drain in the last three years,” he notes.
Big on potential, the Karnataka Startup Policy was designed to stimulate 25,000 startups over the next five years. The Policy also stressed on setting up a Rs 100-crore venture capital fund to support deep-tech startups engaged in artificial intelligence, machine learning, robotics, drones, electric vehicles, and disruptive technologies in multiple fields. Startups were also assured a one-time grant-in-aid up to Rs 50 lakh.
Are these actionable? Will a change in government force a policy shift? Are the financial commitments viable? These are questions with no easy answers.
Nothing can work if the bureaucratic hurdles are not removed, contends Shakti. “Deep-tech startups find it even more challenging because the business model is different. Even to get an initial VC interested is a big challenge. They need the support. Quite a lot was promised but not much was delivered. One, because there was a musical chair of chief ministers. When the chief minister changes, obviously the outlook changes because the advisors change. There should be consistency,” he stresses.
The need is to adopt a bipartisan approach in supporting startups. Shakti says, “It shouldn’t be that when Congress comes in, they will do ABC, and when the BJP comes in they will undo ABC and start doing EFG. It will just take us back every time there is a change of government.”
For any government, the stakes are high. Bengaluru was ranked eighth in the Global Startup Ecosystem Index 2022 by Startup Blink, the only Indian city in the top 10. It was also ranked 22nd in the world by the Genome Startup Ecosystem Report 2022. Of the 104 unicorns (USD 340 billion) in India, Bengaluru houses the lion’s share of 40.
Political parties are acutely aware of this reality. In its manifesto, the BJP has promised a range of reforms, the key one being a Rs 5,000 crore Fund of Funds (FoF) to boost investment in startups engaged in sunrise sectors. Included are green energy, electric vehicles, and healthtech.
Funding, translated as grants, loans, and tax incentives are but only one side of the startups’ wish-list. As Venu Kondur, chief executive officer (CEO) of the Bengaluru-based lorry fleet aggregator Lobb Logistics points out, regulatory support is also a key issue. Startups face multiple regulatory hurdles, and the government could help streamline regulation and reduce bureaucracy, he says.
On the infrastructure front, Venu talks about the need for more incubation centres, subsidised co-working spaces, and credits on major cloud platforms such as AWS, Google and Azure. Startups are also looking at an enhanced role for the government in skill development, sponsorship internships, and industry-ready courses led by industry leaders. Another ask is for boosting access to grow beyond India. The government could give a greater push for showcasing local startups abroad.
Uma Reddy draws attention to the dire need for industrial infrastructure to boost innovation among startups. “We need more plug-and-operate systems, industrial parks, and incubation centres. Currently, we have one incubation centre in Electronics City and another is just coming up. We need much more to cater to the growth that is being projected. We need more business parks, more testing and calibration centres. The government can collaborate with startup and industry associations,” she says.
Quality power is another key demand. “We waste too much money trying to put equipment that ensures quality power. We could use that money for better production and innovation,” believes Uma.
Inevitably, the need to upgrade Bengaluru’s road infrastructure for better intra-city commute is paramount. Articulating this, Venu emphasises also on fast-tracking the smart city and Namma Metro extensions. Greater public-private partnerships could be a viable mode.
As part of its ‘Beyond Bengaluru’ programme, the state government wanted to incentivise startups that set up their bases outside the capital. But this too, as Venu says, depends a lot on access to talent, better roads, railways, and internet infrastructure. “Setting up outside Bengaluru would also mean larger expenses. The government should provide incentives,” he says.
Shakti agrees, “The biggest challenge Karnataka has from a startup founder’s point of view now is the infrastructure. If Bengaluru, the most connected and most tech-savvy city has a pathetic infrastructure, what can you expect from a Mysuru or a Belagavi? People in tier-2 cities are moving to Bengaluru if they want to start something, unless their business model and supply chain is tied to the local location. To decentralise, the next government will have to do a lot of investor summits in tier-2 cities too.”
Mohit Jain, CEO and co-founder of FloCareer, a business-to-business human resources practice, flags another concern — ecosystem maturity. He says, “Bengaluru has established itself as a thriving startup ecosystem with a concentration of talent, investors, mentors, and support services. Startups considering setting up outside Bengaluru may face challenges in finding a comparable ecosystem maturity level, including access to mentors, networking opportunities, and industry-specific infrastructure.”
Besides, non-metro cities may have limitations in terms of physical and digital infrastructure. “Availability of quality office spaces, robust internet connectivity, and other support services can be comparatively limited outside Bengaluru,” he notes.
To address these challenges, the government needs to take a multi-pronged approach. This can include investing in infrastructure development, building a supportive ecosystem, facilitating access to capital, promoting skill development, and fostering collaboration between startups, educational institutions, and industry bodies. By focusing on these aspects, the government can create an enabling environment that encourages startups to set up their bases outside Bengaluru and promotes inclusive growth across the state.
The message is clear — to appeal to the vast startup ecosystem, election-bound political parties will have to first understand the industry concerns and put in place systems and actionable policies that drive growth. Investment, infrastructure, innovation centres… The list is long.