Startups Need Easy Exit Terms

Finance Minister of India Arun Jaitely will be presenting the Union budget for the year 2016-2017 on 29 February 2016. In this run up to the budget, there is palpable excitement in the startup community in anticipation of the announcement of Startup India Action plan.

Startup is a challenging task with its own teething troubles during the initial stage. Team, tools and tech you need money for everything. Startups usually work on a bootstrapped budget and don't have extra money to splurge. Startups need to closely track and monitor the account book. A startup can hire professional consultants to scan their expenses and help cut the corners wherever possible. It is not necessary to buy everything, prioritizing funds is absolutely essential for a startup entrepreneur. Make a check list of stuff you need, omit the optional stuff. Employ freelancers to minimize costs, co-working can save costs too. Manage your overheads, monitor your projections and create a realistic budget. Check for Government subsidies and grants which can help establish your business.

The Prime minister addressed many startup expectations in the 'Start Up India, Stand Up India' and a lot of curiosity has been around the 2016-2017 budget and what it has in store to benefit the startup community. Now is the time for the Finance Minister to outline the details of the budget and adopt, accommodate and implement policies in favor of the startup community.

Funds of Funds: As per the policy announcement during the Startup India, government has made certain announcements, now they are expected to walk the talk and implant the same in the forthcoming budget along with tangible deadlines. As per the announcements made, a FoF (Fund of Funds) would be earmarked and in turn invested in private venture capital funds, which will further invest in various startups. Startups would rather want these funds (FoF) to be directly deployed into the startup which could be an amount equal to the amount raised by the startup, thus safeguard them from the complications arising thereof once they get into the clutches of the VCs. This has now become relatively easier since a startup has been clearly defined for the government to recognize, thereby eliminating any large scale misuse.

Banks play a vital role in funding startups in smaller cities and towns where VCs and angel investors are not present to incubate the startups. Lending these startups is also usually considered to be a risky preposition. The Credit Guarantee mechanism which the government wants to provide through National Credit Guarantee Trust Company (NCGTC)/SITBI for debt funding to startups is imperative for such startups. The said fund of Rs. 500 crores marked for this purpose should also be made available at the earliest.

Incubators/Accelerators: In the past decade we have come across few exemplary feats achieved by startups in the Silicon Valley and Tel Aviv. Here, Incubators and accelerators have played a crucial role in guiding these young budding entrepreneurs who need guidance and a lot of hand holding. The government target is to set up 35 new incubators in existing institutions and 35 new private sector incubators with the support of government funding. The government should ascertain the implementation of these announcements in order to make sure they do see the light of the day and not just remain on paper.

Abolishing unwarranted taxes: Year after year the governments has failed to repeal the absurd Angel Tax in their budgets. It is known to everyone that this taxation has been the major source of annoyance to the investor and has fallen flat in serving the purpose. In the Startup Action Plan, while the government tried to address various other issue to determine the reason behind startups shifting their base from India, they have overlooked Capital Gains Tax which has been one of major deterrents and the core reason for startups shifting their base from India and getting registered in countries like Singapore. The actual revenue thus generated from the Capital Gains Tax is next to negligible and strategically it does not make sense to carry on with it.

Tax Break: Most startups do not make any profit in the initial years, rather they are constantly striving to break even. Hence, a 3 year tax break provided by the government for the startups is certainly a welcome gesture but the viability in terms of a meaningful impact is debatable, since 3 years is too short a time span. The government definitely needs to relook into this and reframe the time span of the tax break to make it more effective.

Exit Load: It would be pretty much in the interest of the investors as well as the entrepreneurs to have a law in favour of easy exit in terms of winding up a startup. We are well aware of the fact that chances of falling flat are much higher for startups as compared to chances of going north because of the risk involved. The current prevailing winding up laws in India are outdated and not favorable for startups which make it difficult to exit a company/venture.

Digital India: There are various measures the government can take to provide an impulse to the overall commercial ecosystem of the nation apart from the above mentioned direct steps which would help the startup community. The government should promote the other flagship schemes such as Digital India which are capable of providing the much needed throttle to the startups. Startups tend to benefit a lot from schemes such as Aadhar where they get to play a substantial role in the ancillary support.

Budget is an opportunity for the government to act proactively and take some concrete actions to propel the growth in the startup ecosystem. Most budgets in the past have been populist, however we stand at a junction where it's time to seize the opportunity and make a tangible impact.