Create entrepreneurs, jobs will follow

“India needs to create 1-1.5 crore jobs per year for the next decade to provide gainful employment to its young population. Accelerating entrepreneurship and business creation is crucial for such large-scale employment generation. Moreover, entrepreneurship tends to be innovation-driven and will also help generate solutions to India’s myriad social problems, including high-quality education, affordable health care, clean energy and waste management, and financial inclusion. Entrepreneurship-led economic growth is also more inclusive and typically does not involve exploitation of natural resources.”

A Planning Commission report on “Creating a vibrant entrepreneurial ecosystem in India”, which makes this point, also highlights the fact that neither the public sector nor the private sector in India has “generated significant employment in the past few decades.” They are unlikely to do so in the coming decade or two, it adds.

For the country to generate jobs of this scale, there is a growing realisation that fostering entrepreneurship is the only way to do it.

Though there have been numerous efforts focussed on entrepreneurs and small and medium enterprises, the Planning Commission report is the first cohesive attempt to look at all issues – availability of funds, including angel investing and early-stage venture capital investing; creating the ecosystem, including incubation centres; easy access to equity capital and debt; and making it easy for investors to exit their investments.

The committee recommended establishing a Rs 5,000-crore fund-of-funds to seed early-stage venture funds. It suggested setting up a national entrepreneurship mission to establish a vibrant entrepreneurial ecosystem in the country.

Jayant Sinha, Partner & Managing Director, Omidyar Network India Advisors, who was a member of the committee, says of the proposed fund-of-funds: “These kind of funds have been extremely successful in other countries such as Australia, which has an innovation investment fund, Israel and the US.”

Access to capital is one issue that seriously affects entrepreneurs, especially when they need to scale up. Seed funds, angel investors, venture capital firms and private equity companies are all active in the country, but the need for funds is so huge that a lot more needs to be done, for these investors to raise funds within the country and have more clarity on tax issues when investors exit their investments.

Sinha says the country badly needs a domestic venture capital industry, one that is not dependent on foreign capital to raise its funds to invest in ventures. “All of the early stage venture capital in India comes from external sources, from offshore money. We are not driving our own innovation,” he adds.

Once domestic venture capital funding becomes available, says Sinha, entrepreneurs will see entrepreneurship as genuinely something that is worth doing, as a risk worth taking, The US thrives in entrepreneurship and innovation mainly because of the ease of availability of funding, at all stages.

As the Planning Commission committee has suggested, regulatory hurdles that inhibit domestic fund raising need to be removed. Pension and provident funds, and insurance companies should be allowed to invest a small part of their corpus in early-stage venture funds. Special incentives such as tax credits need to be provided to wealthy individuals, corporates and institutions that invest in early-stage venture funds or to incubators and to angel investors. Banks, the committee has said, must also be encouraged to invest in early-stage venture capital funds by treating such investments as priority sector funding without capital market exposure and provisioning norms being applied.

Gopal Srinivasan, Chairman and Managing Director, TVS Capital Funds Ltd, a venture capital firm that recently raised a Rs 500 crore top-up fund from within the country, says a few stroke-of-the-pen changes and a few heavy lifting changes need to be made to enable more domestic funds to be raised. TVS Capital managed to raise the money despite banks not investing and insurance companies were reticent to invest.