March 3, 2016 12:00 pm JST

Creating a startup ecosystem means making business easier for every one

KEN KOYANAGI, Editor-at-large, Nikkei Asian Review

REDWOOD CITY, California   On a sunny day in late February, hundreds of entrepreneurs, engineers, venture capitalists, angel investors and "biz-dev" representatives from large corporations gathered to meet and network in the city some 40km south of San Francisco.

     It was the annual Startup Grind global conference, and it was the prototypical Silicon Valley gathering.

     A string of prominent figures took the stage, including Guy Kawasaki, Vinod Khosla, Marc Andreessen, Clayton Christensen, Steven Chen and Ron Conway. Their talks and panel discussions touched on a wide range of topics, from their latest projects to lessons for startup founders and chief executives regarding fund raising, recruiting, goal setting and more.

     One of the speakers asked the non-U.S. citizens in the audience to raise their hands, and about half of the 500 or so crowd did. Most of them looked to be Asian or of Asian descent. This highly international mix was hardly surprising, given the demographics of the Silicon Valley engineering and entrepreneurial community.

     The startup companies that had come to pitch their businesses and technologies, on the other hand, were mostly local. The founders of an Iranian startup and some Southeast Asian companies were also present, but they made up just a tiny fraction of the total.

     This combination of international talent and local companies underscores the persistent concentration of technology-based startups in the U.S. compared with other parts of the world -- including India.

     Venture capital investment in Indian startups surged in 2015 to $7.9 billion from about $5 billion in 2014, but that was a mere one-ninth of the $72.4 billion in venture capital invested in North American startups, according to a KPMG/CB Insights report. It was also just 29% of such investment in Chinese startups that year.

     India's economy is continuing to grow at a rate of more than 7% annually, and its population of 1.3 billion is steadily increasing. On top of these factors, the country is plagued by bureaucratic inefficiency and an underdevelopment of both hard and soft infrastructure. All of this translates into massive business opportunities, which is why it may seem counterintuitive that Indian startups are receiving so little venture investment relative to their counterparts in the U.S. and the already aging and slowing China.

     But the reality is that India has a long way to go to really ignite a startup expansion cycle. Among scores of major venture capital firms in Silicon Valley, only a handful, including Sequoia Capital, Accel Partners and Lightspeed Venture Partners, have an office or managers in India.

     A founding partner of a major venture capital firm who has abundant experience investing overseas, including in China and Southeast Asia, said India's underdeveloped infrastructure and massive amounts of red tape mean the country is still "far behind where China is today" in terms of venture investment.

     How long will it take for India to become a major destination for startup investment from overseas? "In 10 years? Probably. In five years? Maybe," said a senior partner at another major Silicon Valley venture capital company, who himself immigrated from India. "Just look at the difficulty in payment. It is still very hard to build a business there," he said.

     The reluctance among experienced venture capital professionals to invest in Indian startups points to another reality: What Prime Minister Narendra Modi's "Startup India" campaign needs to succeed is not really something specific to startups. What must be addressed is the country's basic business environment, including regulations at the central and state levels, the availability of financial services, the development of transportation, communications and other infrastructure.

     Unless Modi, his cabinet members and their successors come up with effective measures to tackle these fundamental issues, many of the graduates from the prestigious Indian Institute of Technology will continue to go to Silicon Valley to join startups there instead of putting their talent and energy to work in their homeland.

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