The Symbiotic Relationship Between VCs and Startups: A Critical Analysis

A question we are often asked in the startup community is: why didn’t India create global giants like Google, Facebook, Apple, and so on?

The answer is quite obvious. These companies had the luxury of abundant venture capital available to them at every stage of their growth. In India, out of the total venture capital that is available to startups is around 12 billion US dollars. That is a pittance when you consider that we have over a lakh registered startups in the country.

To build technologically exceptional companies, you need two key things: a lot of institutional capital, read venture capital, and a culture of celebrating failures as much as celebrating successes.

The current market capitalization and contribution to US GDP of companies like Microsoft, Netflix, Apple, Google and Amazon are unmatched. They have created jobs not only in their own country but all over the world. This is what success looks like in the VC industry. It can change the purpose of wealth creation, job creation and ultimately lead to human progress.

In India, policymakers believe that the VC industry is separate from the startup ecosystem. The VC business is subsumed under the larger BFSI umbrella, which I think is a misclassification. Without venture capital, there will be no era-defining startups. Without ambitious founders, there will be no VC industry. The two have a symbiotic relationship that is not visible at first glance. Founders like Steve Jobs, Bill Gates, Mark Zuckerberg have been able to build with a courage that is rare in Indian founders and rarely do they have it only because of abundant venture capital and supportive policies. It takes a lot of startups to fail before you see these kinds of mega results.

This brings me to the topic of failure. The past year has been tough for founders, with less capital available forcing many to curtail growth. A narrative has been created that startup founders are either corrupt or have a poor understanding of the true purpose of building a business. Nothing could be further from the truth. Barring a few bad actors — who are damaging every aspect of business and public life in India — most founders are struggling to defy gravity.

The very reason venture capital exists is to help the founder find product-market fit. It is not an easy task. Some of the best products fail the market test and you need venture capital to help overcome these failures. There are always more failures than successes in this endeavor. India has had its fair share of failures too, but instead of celebrating these founders — who, despite the odds, stepped out of their comfort zone to build something exceptional from scratch — they are being looked down upon.

Without failure there can be no startup ecosystem. If fund houses and other stakeholders appreciate this, India too can have its Nvidia, Microsoft, Amazon and so on.

If policymakers created incentives for investors like limited partners (LPs) who participate in venture capital funds, it would help our founders have a kind of capital cushion that helps them build big results. Currently, LPs have to pay capital gains tax if they end up making money on their startup investments.

A growing concern is that productive capital that could be used to support startups, which is crucial for a growing economy like India, is being diverted to pure trading via futures and options platforms.

Startups create jobs, create wealth for employees and shareholders, and add momentum to our capital markets, in addition to the brain development they encourage. If we want our billionaires and other public and private wealth holders to participate in the productive part of the economy, it is even more important that they are properly incentivized.

Capital and founders are a complex whole, not two separate parts of an ecosystem. For Indian founders to thrive, Indian VCs need to thrive and vice versa. If policy is viewed through this lens, we will go from being the third largest startup ecosystem in the world to being the number one startup ecosystem in the world. That is where our focus should be.

– Author
Archana Jahagirdar,
Founder and Managing Director,
Capital Rukam

No VCCircle journalists were involved in the creation/production of this content.