Public sector start-ups?

That is, one could either lose every rupee invested or gain multiples of it. One of the recipients of our money was a venture-capital fund that also counts Iconiq Capital as a co-investor.

Written by Praveen Chakravarty , Rajeev Gowda | Updated: January 16, 2016 8:31 am

You, us and Mark Zuckerberg have something in common — we are all joint investors in a venture-capital fund, albeit indirectly. The prime minister is expected to announce a “start-up policy” today in the form of a Start-up and Entrepreneurship Bill, which, among other things, will use taxpayer funds to spur investments in start-ups. The government of India had announced an “India Aspiration Fund” in August 2015. Essentially, this meant investing Rs 2,000 crore of taxpayer money in venture-capital funds that will then be used to invest in various start-ups. Venture-capital funds are well acknowledged to be on the extreme “high risk-high reward” payoff matrix.

That is, one could either lose every rupee invested or gain multiples of it. One of the recipients of our money was a venture-capital fund that also counts Iconiq Capital as a co-investor. Iconiq Capital is a US-based investment vehicle popularly known as the “secret billionaire fund” that manages the wealth of billionaires such as Facebook founder Mark Zuckerberg, Twitter founder Jack Dorsey, Linkedin founder Reid Hoffman, etc.

When there is no apparent dearth of private money for such “aspirational India” initiatives, why should a government that still has to feed, clothe, educate and skill a vast majority of its citizens fritter away scant tax resources on such risky investments? The start-up policy is a rightful recognition of the importance of start-ups to the country’s economy and job creation. There are certainly some unique characteristics of these new, innovative start-ups that make a policy impetus in areas such as intellectual property rights, net neutrality, ease of shutdown, etc, very useful.

However, government funding of start-ups, either directly or indirectly, in the midst of a thriving venture-capital industry, is ill advised. It is claimed that the inspiration for this initiative is Israel’s “Yozma” programme, which helped catapult that country to having the second largest technology start-up industry in the world, after the US.

Except, the Israeli government used taxpayer funds to launch Yozma in 1993 to give birth to a new venture-capital-backed start-up industry. In India, this is already flourishing. Over the last 10 years, in India, $60 billion has been invested in more than 3,000 new start-ups. Indian start-ups received nearly 50 times more venture capital in 2015 compared to 2000. In 2015, venture-capital investments in India were higher than net foreign investments in stock markets for the first time in history, leaving out the global financial crisis years.

Venture-capital financing for Indian start-ups has grown at a compounded rate of 30 per cent over the last 15 years. India already has the third largest start-up ecosystem in the world, boasting of more than 12,000 active start-ups. That there is a thriving and growing private venture-capital industry for providing risk capital to start-ups in India is quite evident. It is then inexplicable that the government should seek to squander away scarce tax rupees in the garb of providing a funding impetus to the start-up ecosystem — when, clearly, there are worthier claimants such as issues of rural distress, bad loans in the banking sector, and distraught power sector finances.

The need for state intervention in any economic activity is either to kick start it, or to step in when private markets have failed. Neither is the case with venture-capital funding for Indian start-ups. While it is an entirely laudable objective to multiply the number of start-ups in India, it cannot be done through taxpayer funds, which will need to be protected against investment losses. It is also understandable if the government’s investments are in the realm of social-impact investments that funnel money into sectors such as education and agriculture, where private capital may not tread. However, there are no such sectoral restrictions in this initiative.

The argument that India cannot be reliant on foreign venture capital and needs to cultivate a domestic pool of capital is also valid. But even that does not justify direct government co-investment with other foreign investors into risky venture-capital funds. Tax incentives for investors are a more rational response to further boost venture-capital activity. Taxpayer funding of risky venture capital is neither justifiable as an attractive investment opportunity nor as a policy tool to generate jobs when there is a well-functioning private funding market. Surely, the party that rode to power on a “minimum government, maximum governance” promise cannot be serious about contemplating a new class of “public-sector start-ups”?

Chakravarty is a visiting fellow at the IDFC Institute and co-founder of Mumbai Angels. Gowda, a Congress MP in the Rajya Sabha, is former professor, IIM Bangalore

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  1. A
    Ameya Dahale
    Jan 16, 2016 at 6:15 am
    The writer forgets about the fact that the money from tax revenue to be invested for start-ups is for the stat-ups that are innovating to solve India's age long g challenges ,i.e, poverty, education, health etc.
    1. w
      Jan 16, 2016 at 3:18 pm
      1. B
        Jan 16, 2016 at 3:14 pm
        I love Modi. All the 77000 crores will be given for brahmin only startups. Not many people know that. Hey brahmin guys, keep that a secret!
        1. K
          K SHESHU
          Jan 16, 2016 at 6:02 am
          The 'over-enthusiasm' on start-ups in private sector is pulling down the public sector morally as well as financially. More and more unemplo are moving towards risky private adventures rather than safety low risk low return public sector. The flourishing of new start-ups depends upon the capability of management, risk absorption of the enterpreneurs and their ability of capturing market share.
          1. A
            Jan 16, 2016 at 6:09 am
            Is it possible for a common man without a friend or relative working in a nationalized bank in high position in the level or manager and above, or political connection, to get a bank loan in India for start-up ? Impossible. The loans are reserved only for these people. First this should stop. Will it stop ? Never. Conclusion: A common man in India would never get loan for start-ups from any nationalized bank.
            1. A
              Jan 16, 2016 at 2:32 pm
              This government of the UCVH is for the UCVH. Not for others, who are 81% of the Indian potion. ( UCVH - upper caste veg hindus ).
              1. R
                rahul mayank
                Jan 16, 2016 at 3:09 pm
                So the writer is a congresi no wonder he can't see any thing good happening in country. Gst is the biggest example and now add this.
                1. R
                  Ram Sekhar
                  Jan 15, 2016 at 11:57 pm
                  What is wrong in the government providing financial istance to startups with great ideas? It appears that the author did NOT do his homework. South Korea, Chile, South Africa - Governments in all these countries are 'very actively' funding startups. They expect to gain compeive advantage for their respective economies in global commerce. Is such an advantage not desired for our country, India??? As the co-founder of an Angel Investment firm, the first author seems to be worried about his azz as the govt obviously has deep pockets that his tiny firm can never match. It is a very well known fact that startup funding in India has a serious dearth of capital. All the capital has traditionally gone 'only' to the mega Tech startups that will only benefit the VCs like Mr. Praveen Chakravarthy.
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