A Start-up Warning

Strategies anchored in incubators fail to foster entrepreneurship

Written by Krishnamurthy Subramanian | Updated: February 8, 2016 1:04 pm
Krishnamurthy Subramanian Prime Minister Narendra Modi with Finance Minister Arun Jaitley during the launch of “Startup India” action plan at Vigyan Bhawan in New Delhi on Saturday. (PTI Photo)

The government’s “Start-Up India” initiative is laudable. In its action plan, a public venture fund is conspicuous by its absence. This is an excellent move. But while the government has avoided one misstep, it seems to have taken another: As part of the action plan, it intends to create a policy and framework for setting up incubators across the country in PPP mode. The plan envisages setting up 35 new incubators in existing institutions, where 40 per cent of funding shall come from the Centre. This does not seem prudent. Research by the Kauffman Foundation demonstrates that the incubation centre strategy is ineffective at promoting entrepreneurial activity.¹ Strategies anchored in incubators fail to foster entrepreneurship because the tactics are not suited to the experiential and collaborative process that characterises entrepreneurship.

Incubators are set up to provide start-ups with office space and basic services, which will free up funds and allow them to focus on core business functions. Office space and overheads, however, are hardly effective or vital, and research shows that this support will not necessarily lead to a surge in successful entrepreneurial ventures. Unless a start-up requires capital-intensive equipment, the incubator does not help it significantly, and may only serve to harbour businesses that would otherwise not survive. Some incubators purport to go beyond office space and provide more diverse support services, such as accounting and bookkeeping, legal and management advice, and intellectual property assistance. Research, however, provides no evidence to suggest incubator firms perform better than non-incubator firms.

Instead of focusing on incubators, there must be a long-term emphasis on entrepreneurs as individuals who learn by doing and interacting with others. States seeking to promote entrepreneurship must create communities characterised by dense connections among entrepreneurs and organisations that support them. Research indicates local connections are far more important to the success of entrepreneurs than national or global contacts because entrepreneurs in the same business environment are the best sources of specific information and knowledge for those starting new businesses. Also because entrepreneurs need to interact and learn
frequently and on an ad-hoc basis to meet emerging challenges.

While books and courses may inform continuous learning, there is no substitute for advice from local business owners as entrepreneurs navigate the complicated decisions they face at each stage. Other entrepreneurs can offer the most effective advice specific to the new business’s situation and locality. These connections, however, are not easy to make. It is often difficult to find other entrepreneurs or meet investors; and investors have trouble identifying local entrepreneurs. State governments can facilitate networking between entrepreneurs and entrepreneurship support organisations by bringing them together in an environment that catalyses learning and the formation of relationships, and offers opportunities to discuss challenges candidly and receive feedback and advice. Events that bring entrepreneurs together to learn and connect create vibrant entrepreneurship ecosystems and with minimal investment.

Among other steps that the government needs to take to make the Start-Up India initiative successful, is simplifying taxation for start-ups after their three-year holiday. Taxes matter, but what entrepreneurs are most concerned about is tax complexity. Simplifying tax codes and payment systems so they are easier to understand will relieve what many entrepreneurs feel is a burden on them. Also, land-use and zoning regulations are consistently flagged as significant concerns of entrepreneurs. Surveys consistently find that start-ups identify rules relating to zoning and land-use as the ones that create the greatest difficulty for them. This concern is likely to be significant because about half of all entrepreneurs start their firms within their own homes, while only 40 per cent rent or lease space. One immediate action states can take is to establish transparent criteria for zoning approvals and institute quick and transparent decision-making processes by local bodies. Both are crucial to start-ups, especially those in the earliest stages. Cumbersome and long decision-making processes are detrimental to entrepreneurs who have business ideas, operating cash, and customers, but must wait months to find out where they can locate their businesses.


¹ Yasuyuki Motoyama and Jason Wiens, 2015, “Guidelines for Local and State Governments Entrepreneurship,” Kauffman Foundation Research Paper | - Subramanian, a board member at Bandhan Bank and NIBM, is associate professor of finance at ISB, Hyderabad