Pedestrians walk past stores in the Zaveri Bazaar at night in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Startup Street: Mumbai, Rakesh Jhunjhunwala And Government Show No Love To Startups

This week on Startup Street, we have a study that shows rising costs are hurting startup expansions in India’s financial hub. India’s veteran market investor Rakesh Jhunjhunwala is staying away from investing in startups; and the central government is said to be considering increasing the investment limit for angel tax concessions.

Here’s what went on.

Great To Start-Up, Not So Much To Scale-Up

India’s financial capital has become a breeding ground for startups, only next to Benglauru and Delhi-NCR. It has great funding availability with the presence of some of the biggest financial institutions and venture capitalists in the country. Being the second-most densely populated city in the world, Mumbai also provides a huge customer base to startups. It also boasts of a few of the biggest startup incubators such as IIT-Bombay's SINE.

Yet, a number of concerns about rising costs have made it harder for startups to expand business in the maximum city, according to a KPMG report.

“Overall operational cost for startups in Mumbai is higher due to high real-estate prices, leading to high rentals. This in turn increases the cost of talent acquisition in the city,” Snehaal Dhruv, co-founder of startup, was quoted as saying in a new KPMG report. “Additionally, Mumbai, with its vast geographical spread coupled with transportation and infrastructure issues, leads to challenges in scheduling meetings with clients and stakeholders, and increases operational difficulties.”

KPMG noted that high real estate prices have led startups to migrate to other cities such as Bengaluru for scaling up business. It cited the example of a few transportation and fintech sector startups that launched in Mumbai but had to move out in order to sustain operations. And while the city itself has an abundant talent pool, much of tech talent moves away to Bengaluru due to the presence of giants like Microsoft, Infosys and Wipro.

“Mumbai faces the issue of limited-availability of tech talent, as most of the potential employees shift to cities such as Bengaluru due to more opportunities, especially in the IT/ITES sector,” Vijay Talreja, co-founder and director at Adapty, said in the report. “However, talent which stays back demands a higher package, which escalates the cost base, creating a challenge for the startups to scale.”

This comes at a time when smaller cities are becoming increasingly attractive for startups due to their low operational costs, favourable state government policies, and a rise in the number of government-backed incubators and accelerators, KPMG said.

The percentage of startups now operating out of India’s tier-II and III cities has gone up to 40 percent last from 20 percent in 2017, according to a joint report by NASSCOM and Zinnov.

These include cities like Pune, which benefits from its vicinity to Mumbai and, Jaipur, Kochi, Kolkata and Ahmedabad. In Maharashtra, Nashik too has witnessed a rise of healthcare startups while Nagpur has emerged as an “ideal location for renewable energy”, the KPMG report said. Aurangabad, on the other hand, is attracting agri-business companies.

Source: KPMG
Source: KPMG

“Favourable startup policy coupled with factors such as incubation support, funding support and simplified regulations have helped in developing a conducive environment for startups to grow in these cities,” KPMG said. “Other major factors such as availability of tech talent at low cost, as well as low operating costs have contributed towards the growth of startups in tier-II and III cities.”

Still, that doesn’t mean Mumbai has lost its sheen. It has over 650 active investors that own over 800 funds—the highest number among any other Indian city. And it has produced a number of successful startups that have made it big including Ola Cabs, Nykaa, Pepperfry and and Quikr. Most, though, have high-profile backers like Masayoshi Son, Lighthouse Funds, Goldman Sachs, Tiger Global and Warburg Pincus.

Rakesh Jhunjhunwala Is Losing His Appetite For Startups

Rakesh Jhunjhunwala. (BloombergQuint)
Rakesh Jhunjhunwala. (BloombergQuint)

Investing in startups has lost whatever little charm it may have once held for billionaire investor Rakesh Jhunjhunwala.

Speaking at the TiECON Summit this week in Mumbai, Rakesh Jhunjhunwala cited two reasons for that.

1. Many of them are me-toos, lacking any real innovation, he said.

Many of them talk about innovation, [but] there is little uniqueness in them and many of them are like ‘me-too’ companies.
Rakesh Jhunjhunwala

Not much is publicly know about Jhunjhunwala’s investments in startups but in December 2017, he invested $27 million in Nazara Technologies which has gaming rights to popular intellectual properties such as Virat Kohli, Hritik Roshan, Chhota Bheem, Chacha Choudhary and more.

In 2015 he had joined VC firm Exfinity Venture Partners - run by former Infosys board members V Balakrishnan and TV Mohandas Pai among other big names - as a limited partner, according to a report by TechCircle.

Jhunjhunwala has never been a venture funding cheerleader. Last year in an interview to Economic Times he expressed his concerns regarding start up business models and valuations.

“I am worried about emotional entrepreneurs. Entrepreneurship is too popular and what is too popular is good to be with but not always very profitable. I get so many proposals for investments, but where is the differentiator? Second, most of these ventures start with "father-in-law’s" money. I start with a loss but the greater the loss, the greater the valuation! ,I do not know what kind of mathematics is this. I cannot understand anything and it is also a matter of attitude.

When I start with the idea that I incur a loss and build a business, where are the economic efficiencies? Do I go with the idea that I must create efficiency first and remember that the world’s great businesses have never been built with investors money? I do not believe so. I have the right to be wrong. I do not believe valuation of any Uber or any stock because I do not know that economic model. When I keep incurring a loss of $15 billion or $10 billion a year, that means I am subsidising my customer. I will know my true consumer when I charge the true price. I am living in a capitalist society. So I don't believe this whole scheme of entrepreneurship with two ideas and father-in-law’s money.”

2. The other reasons Jhunjhunwala seems to be slowing his investments in young companies is that his risk appetite has reduced with age. The veteran investor is now focused on setting aside a part of his wealth in saving schemes.

The only savings the big bull has now is a fixed deposit of Rs 50,000 in a bank and Rs 1 crore in public provident fund, while rest of his investments are in equities, he said.

Also read: Rakesh Jhunjhunwala Thinks Modi Will Be Back In Power With A Surprise Tally

Angel Tax Investment Threshold May Be Hiked

The central government is considering a hike in the investment limit for availing income tax concessions by startups, news agency PTI reported citing sources, as India’s startup ecosystem continues to battle angel tax notices.

Angel tax is the tax levied by the government on any private company that raises equity capital at a price above its fair market value. Over the past few months several startup and their angel investors have complained of aggressive tax demands.

More recently the tax department set up a working group to look into the matter. Officials from the Department for Promotion of Industry and Internal Trade are holding meetings with those in the Central Board of Direct Taxes to find a solution to the tax controversy.

"We are considering several things, including hiking the limit to avail the tax concessions. A clear definition is also required for this," the sources said as per the PTI report.

In a previous effort to reduce the incidence of such tax demands the government raised the tax threshold - allowing startups to avail tax concession from such angel tax demands if their total investment -- including that from angel investors -- did not exceed Rs 10 crore.

An increase in this limit will exclude more startups from the purview of angel tax.

Though startups are demanding complete exemption from this tax, the government may increase investment limit for tax exemption to Rs 25-40 crore, the sources added.

Meanwhile, over the weekend more startups complained of angel tax-led harassment, including seizure of bank accounts and funds there in by the tax department. The CBDT contested one such claim saying it had repeatedly asked for information from the company which failed in providing it.