Birth of an ideas economy: Kiran Mazumdar-Shaw

The global economy is faced with the spectre of rising unemployment. According to the International Labour Organization (ILO), the world economy will need to generate nearly 280 million new jobs between 2015 and the end of 2019 to make up for the ground lost during the last recession and ensure that new entrants to the labour market can
find work.

It is this realisation that is driving policymakers the world over to increasingly recognise the job creation potential of startups. Germany is looking at a startup initiative to create more than 100,000 new jobs by 2020. The UK has an Entrepreneurial Action Plan which has seen tech startups increase from 200 in 2010 to 1,200 in 2013. Israel is running a ‘Startup City Tel Aviv’ programme to create an early stage innovation ecosystem that can extend to Europe and beyond.

India, on its part, needs to create 10 million jobs per year for the next 10 years to sustain acceptable gross domestic product (GDP) growth. To generate such a large volume of employment, the job market of the future will not be able to solely rely on the traditional pillars of lifetime employment in large companies and the public sector. Clearly, there needs to be an alternative channel that creates these multiple jobs. The recent success of some of the startups in India indicates that more of such enterprises can lead to the creation of millions of job opportunities. In order to unleash this entrepreneurial potential, however, we need a robust ecosystem, which is currently at a very nascent stage, primarily because culturally we are a risk-averse nation. The need of the hour, therefore, is to create an enabling ecosystem that encourages a ‘startup’ culture in the country.

As a first-generation entrepreneur who started my own business in response to an unsuccessful job pursuit, I can attest to the advantages of self-employment. I turned to entrepreneurship by accident and became a job creator rather than a job seeker. Instead of the one job that I was seeking then, I have created over 7,500 jobs today. If I add the ancillary businesses that my company, Biocon, relies on or supports, it has had a multiplier effect.

In building Biocon, I was a beneficiary of the visionary political leadership in the state. The financial support from the Karnataka State Financial Corporation in the early 1980s to pioneering companies like Biocon and Infosys, which were promoted by first-generation entrepreneurs with no track record of running a business, has led to Bengaluru’s emergence as an ‘IT & BT (information technology and biotechnology) Hub’.

Key differentiators such as the availability of funds through initiatives like the Karnataka Information Technology Venture Capital (KITVEN) Fund and the presence of premier academic institutions such as the Indian Institute of Science (IISc) have also contributed to making the city a fertile field for innovative startups to bloom.

Today, Bengaluru accounts for nearly 30 percent of the country’s startups. The city has an entrepreneurial ecosystem that links research, capital and technology-led ideas to the marketplace. India needs a similar system that enables entrepreneurs to propel ideas into sustainable businesses which, in turn, will have a multiplier effect on job creation and value accretion for the economy.

Beyond traditional metrics
Technology is unshackling innovation through entrepreneurial zeal like never before. No longer is value creation linked to scale, but to the power of the idea. Information technology, communication technology and biotechnology are rapidly and disruptively changing the way we communicate, educate, medicate and eradicate.  

In 2014, the global biotech sector raised $40 billion through venture funds, private equity and initial public offerings (IPOs)—the highest ever to date. Add information and communication technology (ICT) and this number zooms to $200 billion. These ‘technopreneurs’ are all focussed on breakthrough ideas, and money is chasing every one of them. Not everyone will succeed, but we are already seeing fantastic valuations being ascribed to young entrepreneurs who are as smart as they come in terms of innovative business models. Google, Facebook, Twitter, WhatsApp, Amazon and Uber, to name a few, come to mind. This has created the ‘startup’ revolution the world over from Boston to Bengaluru, from Sydney to Singapore, and from Trondheim to Tel Aviv.

Image: Amit Verma

Policymakers across the globe are recognising the job creation potential of startups

We are witnessing the birth of the ‘ideas economy’, where the value of a company is measured by its ‘innovation quotient’ rather than traditional metrics such as revenue, profit, physical assets, etc. The potential of the WhatsApp messaging platform to change the way the world communicates led Facebook to pay an ‘innovation premium’ resulting in a blockbuster deal value of $19 billion. The power of the idea is being reinforced by the dizzying valuations being commanded by companies such as Snapchat ($16 billion), Uber ($40 billion) and Xiaomi Corp ($45 billion).

The fact that this ‘innovation premium’ is getting larger over the years is illustrated by a Bloomberg analysis that traces this through the Amazon and Netflix public offerings in 1998 and 2002 at values of just $450 million and $750 million respectively, followed by the Google IPO in 2004 at a value of $23 billion which, in turn, quadrupled to the $100 billion IPO that Facebook had in 2012. While all these companies have similar risk-return profiles, the investor appetite for new ideas has emerged only recently.  

India is also experiencing the changes being brought about by the birth of the ideas economy. According to market reports, the Indian startup sector received more than $4 billion in funding in 2014, compared to $1.8 billion in 2013 and $760 million in 2012. What’s more, Flipkart (valued at about $11 billion) and Snapdeal (valued at about $5 billion) are now worth much, much more than the total market capitalisation of India’s major brick-and-mortar retailers.

To unleash the entrepreneurial energy, we need to build an enabling ecosystem that relies on the ease of starting a business, availability of skilled workers, reliable infrastructure, and access to capital.

Unleashing Entrepreneurial Energy
Fast-tracking approvals process: Companies today prefer to register their startups in the US and Singapore, where it takes significantly less time to start a business compared to India. A multiplicity of laws and regulations has a choking effect on business, which explains India’s 142nd rank on the World Bank’s ‘Ease of Doing Business’ index for 2014.

The need of the hour is not more regulation, but smarter regulation. The government needs to focus on a number of regulatory reforms that will address the ease of doing business, reduce transaction costs and expedite approval timelines. A time-bound approvals system can help fast track projects, businesses and startups, thus improving the business climate in the country.

Addressing skill deficit: There is also an urgent need to create high-skilled jobs that add long-term value to the economy. So far, our academic institutions have focussed on churning out a large number of graduates with very basic skills. They lack the quality attributes that will make them employable. As a result, manpower in the general unskilled category is abundantly available in India. High-skill areas, however, are facing a talent crunch. It is vital to fix this skill deficit through advanced learning avenues that bridge the gap between industry and academia, science and business.  

Building reliable infrastructure: If businesses are to flourish, there is also a huge need to improve roads, rail, ports, power and other infrastructure. India’s infrastructure could require investment of up to $1.7 trillion by the end of the decade, the World Bank has estimated. Also, low broadband penetration in India means that the country is still some distance away from leveraging the internet for commerce, information and development. We rank a poor 89th among 143 countries on the World Economic Forum’s global Network Readiness Index, far behind China’s 62nd position. It is therefore imperative that we speed up work on the ambitious National Optic Fibre Network that aims to connect 20,000 Indian villages to the internet. We also need a robust regulatory framework to address concerns over privacy and data safety in the digital space.

Creating a virtuous financial cycle for innovation: Indians fail to take ‘ideas’ to the ‘market’ because unlike in the West, capital is virtually inaccessible here. There isn’t enough public funding available for academia to pursue discovery and invention.

Image: Getty Images

Technology is unshackling innovation. Value creation is now linked to the power of the idea

Similarly, critical risk and seed capital needed by entrepreneurs to translate concepts into ‘proof of concept’ is hard to come by. Moving ahead in this cycle, the industry also finds it difficult to obtain private funding from financial institutions, venture funds and capital markets to innovate and commercialise. India, therefore, needs to create a virtuous financial cycle to realise the nation’s huge entrepreneurial potential. This financial ecosystem will work only if all three components—academia, entrepreneurs and industry—work symbiotically and in tandem.

To set the wheels spinning and make the model self-perpetuating, monetisation needs to happen at every stage of this cycle. Academia therefore has to create intellectual property (IP) through its discoveries and inventions that can be licensed to either entrepreneurs or directly to industry with royalty payments upon commercialisation. Entrepreneurs, too, need to create value-added IP that can be licensed to the industry. And the industry needs to monetise through successful commercialisation that enables the payment of royalties.

Laying the groundwork
Recently, capital markets regulator Securities and Exchange Board of India moved to ease rules and allow startups to list and raise capital from domestic stock exchanges through the Institutional Trading Platform. This will open up fresh funding avenues for budding entrepreneurs.

The Narendra Modi government has also shown that it is in sync with the aspirations of a new India and wants to give a big thrust to entrepreneurship in the country. The government has unveiled the National Policy for Skill Development and Entrepreneurship 2015. Among other things, the policy seeks to promote a culture of innovation-based entrepreneurship for generating wealth and employment in the country. Apart from educating and equipping potential entrepreneurs, the policy also seeks to connect them to mentors, incubators and credit markets.

To improve the employability of the nation’s youth, the prime minister has also unveiled an ambitious Skill India Mission that seeks to enhance the skills of 402 million workers by 2022 through vocational training.

The government has also launched an online portal to speed up the regulatory processes required to start and run businesses. It has announced a Rs 10,000 crore ($1.7 billion) fund for startups, a Rs 7,000 crore ($1.2 billion) budget to fund smart cities, and a Rs 500 crore ($90 million) fund for a National Rural Internet and Technology Mission.  

These new measures are well timed as the youth of today has begun to opt for an entrepreneurial journey enabled by the technology of the day.

The path ahead
India’s daunting challenges throw up unlimited opportunities to innovate and create business solutions. Therein lies the entrepreneurial potential. In the economic reality of a developing country like ours, we require innovative startups and businesses that think locally, but have the potential to make an enormous global impact.

The government must realise that encouraging ‘technopreneurs’ in the small and medium enterprises (SME) sector will create a compelling opportunity to take innovative ideas to global markets. In doing so, we will be able to move up the value chain from ‘Make in India’ to ‘Innovate in India’.

For that to happen, we will need a robust ecosystem that allows the flourishing of a vast number of fast-moving companies that are small, nimble and entrepreneurial. This, in turn, will create a vast and vibrant marketplace of millions of small, medium and large enterprises symbiotically interconnected to deliver superior and sustainable solutions.  

A large reservoir of entrepreneurial energy in India is waiting to be tapped. It is by investing in breakthrough ideas and embracing entrepreneurship as an economic model of growth that India will be able to unleash the power of innovation to ensure a better life for its billion-plus citizens.